Good day, ladies and gentlemen and welcome to the SPS Commerce Q1 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Irmina Blaszczyk. Ma’am you may begin.

Thank you, Jimmy. Good afternoon everyone, and thank you for joining us on SPS Commerce first quarter 2019 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 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 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. We posted strong performance in the first quarter of 2019 continuing to execute on our financial targets while growing our network of customers. For the quarter, revenue grew 13% to $66.9 million, recurring revenue grew 14% and adjusted EBITDA grew 51% to $16.4 million. SPS's Commerce leading technology expertise and trading partner relationships and global reach continue to fuel the growth of our business. Retail trends are making rulebook compliance increasingly complex and the need for automation becomes essential to meet the strict requirements of retailers and trading partners. As we make progress in integrating customers from both the EDIAdmin and CovalentWorks acquisitions made in late 2018, many are starting to recognize the capabilities and scale of our network in SPS platform. For example, ALS, a leading testing and inspection, certification and verification company became a SPS Commerce customer through the acquisition of CovalentWorks. In an effort to streamline operations, ALS want to globally consolidate EDI providers and engage with our SPS Commerce team in Australia. ALS chose to work with SPS as its only EDI provider and leverage our vast trading partner network. This is an example of SPS using its network to expand an existing customer relationship. Belwith Products, a hardware manufacturer was upgrading the ERP system and needed to overhaul the EDI environment. Ultimately they chose SPS's fully outsourced solution over the current provider due to the additional automation capabilities we acquired due to EDIAdmin acquisition. SPS technology allows Belwith to keep their business processes within the current ERP system and our full service approach relieves Belwith for managing this data workflow and eliminates risk associated with business process automation. In addition, they gained a team of experts while still securing significant cost savings compared to the previous provider. Today's consumer demands are also pushing the retail sector to invest in technology to make more data collection possible. After making investments in automation solutions, vendors can leverage the SPS Commerce assortment product to streamline item content setup an ongoing management to meet the in-store, e-commerce and distribution center requirements of all trading partners. For example, Scheels one of the largest sporting retailers in America has partnered with SPS to leverage SPS's fulfillment solution to both introduce and manage all EDI infrastructure and day-to-day operations. Once Scheels automated order fulfillment, they engage to SPS's assortment service to manage their daily collection setup an ongoing management of their vendor's extensive item attribute content that is required for order placement and product management across all channels. This is an active partnership generating ongoing vendor onboarding opportunities to increase the total number of vendors engage on SPS’ assortment and fulfillment services. In summary, as retail trends fuel the need for business process automation and increase efficiency, SPS Commerce continues to redefine EDI solutions with best-in-class technology and full-scale retail change management. With that, I’ll turn over to Kim to discuss our financial results.

Thanks Archie. We had a great first quarter of 2019. Revenue was $66.9 million, a 13% increase over Q1 of last year and represented our 73rd consecutive quarter of revenue growth. Recurring revenue this quarter grew 14% year-over-year. The total number of recurring revenue customers increased 14% year-over-year to approximately 29,500. For Q1 last year was approximately flat year-over-year at approximately $8,500. Keep in mind these numbers taken to account for CovalentWorks which at the time of the acquisition added over 2,000 customers and reduced the consolidated company average wallet share by approximately $500. For the quarter, adjusted EBITDA was $16.4 million compared to $10.9 million in Q1 of last year. We ended the quarter with total cash and marketable securities of approximately $185 million. We also repurchased $3 million of SPS shares in the quarter. Now turning to guidance. For the second quarter of 2019, we expect revenue to be in the range of $67.7 million to $68.2 million. We expect adjusted EBITDA to be in the range of $15.8 million to $16.3 million. We expect fully diluted earnings per share to be approximately $0.33 to $0.35 with fully diluted weighted average shares outstanding of approximately 18 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.51 to $0.53 with stock-based compensation expense of approximately $3.3 million, depreciation expense of approximately $2.8 million and amortization expense of approximately $1.3 million. For the full year, we expect revenue to be in the range of $275 million to $276.5 million representing approximately 11% growth over 2018. We expect adjusted EBITDA to be in the range of $65 million to $66.5 million representing 27% to 30% growth over 2018. We expect fully diluted earnings per share to be in range of $1.39 to $1.45. 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 $2.16 to $2.22 with stock-based compensation expense of approximately $15.5 million, depreciation expense of approximately $11.3 million, and amortization expense of approximately $5.2 million. For the remainder of the year on a quarterly basis, investors should model a 30% effective tax rate calculated on GAAP pre-tax net earnings. We are pleased with our first quarter performance and we’d like to thank all employees for their continued dedication to help SPS to execute on our strategic and financial targets. With that I’d like to open the call to questions.

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

Just wanted to ask on the one-time revenue and enablement campaigns in the quarter it looks like that was fairly healthy. And as of this year you're comping over a difficult comp with the big Walgreen enablement program in the prior year. So maybe you can talk about what sort of driving the strength in enablement campaigns and what your expectations for the remainder of the year?

Sure. So in Q1, we had nice healthy enablement campaign activities pretty much in line with what we were anticipating. The Walgreens which you bring up that happened in Q2 so you will have that compare when we announce our Q2 actual results relative to Q2, 2018.

And just in terms of where you’re seeing the activity - any type of retailers specifically that you’re seeing is kind of permanent I guess just help me understand in terms of how retailers engage on the enablement campaigns. How often would retailers run them and then or does most of the activity come from retailers that haven’t previously run one with you?

Yes, so, there's really two types of enablement campaigns we run, one is just the new what we call it expansion. And so something like Costco every day, every month are adding suppliers. And so we're doing continuous onboarding for them that is the best time to onboard suppliers right at the beginning of the relationship as part of doing business with the retailers. So that's a meaningful part of our enablement campaigns. Then there tends to be different types of change management enablement campaigns one, can be they haven't done EDI before. Two can be they haven't done EDI with all their suppliers and then the third which is a very common is they are doing something that will work. They might have used a purchase order invoice and now they're adding an ASN or other documents. They brought warehouse management system, they are doing something to change that. Typically when they are doing that they also will dig deeper into their vendor base. And so that at any given time there is probably half a dozen to a dozen of those going at any given time, they tend to run out over about 90 days is a typical 90 to 120 days. And that tends to be a very, very predictable part of our business once we have the webcast. We sign a retailer and then there's typically about 60 days and then we do a webcast and then the formal part of enablement campaign begins. But a meaningful part is that just everyday 100 plus retailers to give us their new suppliers.

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

And just two from me, we’ll start off with Archie can you maybe comment about general customer spending trends in the current retail environment. And I asked the question because I think retail spending the last several months is ahead of what most expectations were probably at this point number seem to be relatively healthy. Don't know if you’re seeing any benefit from those trends yet year-to-date?

Well interesting enough, the spend can be both a tailwind for us and a headwind depending on the type of own programs or an accelerate programs. For instance, if some reason the process of a new order management system we’re going to typically trail that. So I'm probably not the best judge to say what's happening in the spend and where they're spending it. But I would say in general sometimes it’s a positive sometimes it’s a negative, sometimes its neutral. The most important thing for us is where we are in a retailer’s priority stack. Are we the next top priority or do we make the top three to five priorities if we do we’re going to go down at 8 to 10 then we’re just going to be in a waiting pattern.

Would you not seeing that priority change at all necessarily in your customers today?

There is any meaningful change for us that we are seeing. Again as customer by customers we kind of have consolidate the data. I mean all the deals we win we went right to the top of their priority list and the prospects that we’re waiting on were not. So it's customer by customer, but in general we’re not seeing a shift.

And then a follow-up for Kim on the margin profile. Your updated guidance for the year at least by my math is just about 23% adjusted EBITDA margins. I think that's kind of where your target range for 2020 next year has been. Any thoughts on updated guidance going forward or should we wait to see how the rest of the year trends first before we get to ahead of ourselves?

Sure. So we've established longer-term EBITDA margins in the mid-30s. We still feel comfortable in our ability to hit the mid 30s. How you should think about that since we’re not there yet. We have nice margins but we’re not up to mid 30s yet. So you should expect on an annual basis the company will continue to make progress as we march towards mid 30s more of our long-term EBITDA margin expectation.

And our next question comes from David Hynes with Canaccord. Your line is now open.

So Archie, obviously really impressive EBITDA margin gains while you've been sustaining growth here nicely in the low teens. I guess, the question is, what's been the biggest structural change in your view that enabled you guys to get more out of your sales team over the last 4, 5 quarters?

Well obviously we made a number of changes Dan came in 2016. We made some changes in 2017, we made some changes in 2018. And obviously on day one they tend to be negative as opposed to positive. I think the territories are helping I think the focus, the focus teams are helping, the retail team is accelerating because of the regions I think that's been really a positive. So I just think the overall structure and we just got into a point where our current structure really wasn't built for the next generation for our best guess commerce had kind of been built from 50 to 200 million. And we need to build a structure from 250 to 500.

It sounds like an alignment and focus kind of. And then a question on analytics and just kind of where we are with that. I know it's not hasn't been as much of the focus of late. I guess, I want to know are you still out advocating with your retail partners for point-of-sale data share or is attack at this point, we realized it's not a priority, let's take more of a wait-and-see and see if that opportunity comes to us somewhere down the line or just kind of where are we in that effort and evolution?

Yes, I would say our strategy always has been with the retail partners to be a trusted advisor to make sure they understand our capabilities. What others in industries are doing and where they can take their journey. So that’s the way we position ourselves with the retailer and I would say the retail team on almost every deal is talking about analytics at this stage or in future states I also think it's a very important part of our discussion with the retailers. The more we can offer retailers the more we - the easier it is to get a conversation started. There are times when we get started on analytics and then they realize that it's just not their priority today, but along the way they learn about our fulfillment capabilities and we’re able to secure some business. And then obviously our goal is to build these long-term relationships that we can have for 5, 10, 15, 20 years.

And our next question comes from Koji Ikeda with Oppenheimer. The line is now open.

I just want to follow-up on a previous question on the EBITDA expansion trends here. It just look like really nice EBITDA number there in the first quarter but my model it looks like it expanded over 600 basis points even when you guys were integrated through acquisitions. I mean by just taking a look at the guidance it looks like it's roughly similar or maybe a little bit below where the first quarter ended up. What's the right way to think about potential margin expansion trends or is the first quarter kind of high watermark for you for adjusted EBITDA just any sort of help that would be helpful?

Sure, so with our business I think it’s the most helpful to look at numbers on an annual basis in any given quarter. There may be some different margins that you see or dollars as a percent of revenue that you see when we think about our business and then we establish the expectations for the year. We start by understanding what are the things that we need in order to support our existing customers, our existing book of business and then we also make sure that we are incorporating appropriate level of investment and stem on things that you’re not necessarily going to see translating into really strong financial results in that year but the investments that you’ll start to see the payoff in two, three years might be two, three, four, five years in future. So the timing sometimes of both stems in those investments are going to be different throughout the year. So I think the proper way to look at it is that we have established an expectation for the year for EBITDA dollars and what you’ve seen as announced today is we have updated that meaning we expect that we will deliver more EBITDA dollars this year partially due to a strong Q1 and partially due to as we look at the remainder of the year we are still absolutely investing for today as well investing for the future but we see the fact that we’re getting a little bit more returns on some of the prior investments that’s flowing through the EBITDA. So to summarize, you look at it on annual basis and then as a business we make sure that throughout the quarters and the year we are appropriately investing not just for the short term, but also for the medium term and long-term.

And I think it plays into my follow-up question here. I'm just looking at your sales and marketing spend, it was down year-over-year, but the revenue growth was still pretty good on the topline. So that seems to imply that sales efficiency is improving over there. I guess how do we - what’s the best way to think about sales efficiency and sales capacity going forward here?

Sure. So how we look at internally is we look to say okay what do we see that’s happening in the market. So where do we see the opportunities and how much yeah new business, new revenue that we’re expecting and then we look internally and we say okay, with our current organization do we feel that we have the appropriate capacity in order to go after those numbers. And lot of this piggybacks on what Archie talked about a little bit earlier in this Q&A session where Dan and his team have made some changes over the last couple of years and those changes has really allowed us as an organization to get more output, get more efficiency and productivity with our existing sales force. So rest assured when we put together guidance and expectation for the year we factor in the appropriate amount of resources and stems that we feel is necessary in order for us to achieve our expectations for the year.

Our next question comes from Tom Roderick with Stifel. Your line is now open.

So, I would ask both of you. I would love to kind of get the numbers, but also sort of the qualitative stuff around the acquisitions CovalentWorks, EDIAdmin you’ve had a couple of quarters to wrap them into the result and get them under your belt. Financial question for you Kim can you talk about the organic results, the organic growth and then how the acquisitions are pacing relative to expectations. And then maybe Archie from a qualitative standpoint I would love to hear what the acquired customers are thinking about as they become part of the SPSC community and are you starting to move any of those customers under your platform what’s the technical integration looking like at this point?

Sure I’ll take the first part of that. So when we announced our results its companywide so in this case it includes both of the acquisitions that we made in Q4. So what I can do is turn you back to comments that we made up the time we made the announcements. So we said that CovalentWorks added more than 2,000 customers and that the impact to the annualized wallet share is sort of minus 500 to our overall wallet share. And the reason for that is they have a lot of smaller size customers then we do, great opportunity for us to continue to grow those customers over time. But at time of acquiring them, they did have a lower ASP. So those are reflected in our overall results for the quarter.

And from a qualitative standpoint two very different acquisitions CovalentWorks where customers we have started to move. Typically the first quarter of an acquisition, kind of planning and getting things setup second quarter is movement of suppliers of vast majority. And third quarter and fourth quarter kind of trailers if you will. So we’re in the close of it right now, we moved a decent number of suppliers over. I would say so far the reaction has been very, very positive. We as you recall couple of years ago we rolled out a new fulfillment product it is clearly, clearly the best in the industry very intuitive, very easy to use, very reliable. And I think those customers are reacting to very positive experience on the new platform. So that is why extremely well, the team is executing extremely well down at Houston. The people that were part of CovalentWorks are doing a fantastic job. So very happy with where that is. That’s on pace. The CovalentWorks - the EDIAdmin was more technology and they are helping us accelerate many of our pass, and Ian Redlin and his team on the technology side are really starting to help accelerate it. It’s very early but we love what they're doing.

And Kim just to follow-up on financials I think I remember that you guys had projected by 4.5 million in revenues and EBITDA from CovalentWorks. Is that still the right way to think about the annualized impact for that contribution to the numbers this year?

That’s correct.

And then Archie I know you had commented last quarter maybe in the quarter before that you’ve been spending a bit more of your own time on the M&A analysis and looking at targets and this is becoming more of a critical focus for the company. I’m curious relative to a reasonably sized deal with CovalentWorks and integrating a few thousand customers. Is that you had a point now where you think you could - we could potentially see one or more deals of that similar size or do you want to take some time to digest what you've acquired here just recently?

We would love to do more. Again we’re out there we’re being active, we’re very disciplined as far as it has to add to our mission vision. It has to be in our focus and we have to pay rate. But as far as the CovalentWorks I mean not to minimize all the hard work the team is doing and they're going a great job. It’s a couple thousand customers. Remember back two years ago we moved 22,000 customers from our old fulfillment product under our new - we have capacity to do a lot of acquisitions like a CovalentWorks. So it's definitely not capacity, we just got to find the right deals at the right price and make sure they’re along that.

Our next question comes from Tim Klasell with Northland Securities. Your line is now open.

Thank you my questions have been answered.

Our next question comes from Jeff Van Rhee from Craig Hallum. Your line is now open.

Couple of questions. I guess just one in terms of the new customers the suppliers coming on, what’s the ratio or percent of those new customers that are coming on that had previously tested and are now migrating to full-blown customers. How is that ratio of migrating prior testers to full paying customers changed. And then secondly just in terms of the size of suppliers that are gravitating to cloud has that changed do you see the larger customers step into the pipeline more so than you had historically or anything to call out there?

Yes, I take two things one that number testers that move into recurring revenue customers is actually fairly small, but they tend to be the larger customers. So it tends to be a meaningful part of our revenue if that makes sense or small percentage but a very meaningful level of activity for the sales team. As far as you know what you've seen over the last really decade as we continue to get larger, and larger customers, more large customers are really embracing the cloud. And they're moving ERP to cloud based ERPs that’s a positive anytime that having a change. I would say that our biggest issue in the midmarket and I’ll say that the small end of the large customers isn't that they don't embrace the cloud if they have. If what they have is working and they don't have a change in their environment or the retailers it’s going to be tough to get them to change. So by making acquisitions that's a great candidate. They begin to have ERP changed any kind of change, but that continue to be an evolution that are higher, higher percentage our business comes from larger than the $100 amount of customer.

Yes, just one last from me it seems in prior quarter we heard quite a bit about channel and channel pulling you through to larger deals and dropship. And it's been sometime since we've heard as much emphasis on those, is it - has that trend sort of peak and is lesser of the driver at this point then say a year or two years ago those two trends I should say?

No, I would say the channel continues to be a very, very important part of the business and they continue to be executing extremely well. So that's not an intentional drop, it just happens I guess we just didn't talk about it, it tends to be a meaningful part. The dropship continues to be a challenged and a discussion point for retailers. We’re getting more and more business there and it brings you and not just the dropship business but the entire book of business. So I would say clearly we talk more about dropship today than we did a year ago then a year ago it just continues to be a louder, and louder piece. But remember I think at the end of the day when we’re all set and done, it's a big challenge it’s a big change event. Channel is probably a dropship it’s probably going to be 10% to 20% of the sales volume of e-commerce but it's a big challenge piece. And so we can fit in, we can jump in and really help our retailer solve their problems there.

Last from me, the international - in terms of international expansion I think historically you always said we should follow our customers where they are pushing us. Has your stance on that changed at all do you find yourself pushing a little more as opposed to being pulled any sort of change in postures to how you approach international?

No, I think we are really using that true viral network part of our business help evolve the business that's been our strategy from day one. I would say the only exception of that is we did jump a little more to fit in with Australia as far as really trying to generate more aggressively retail leads and then be more aggressive there. But Asia is really follow the customers and so is Europe.

[Operator Instructions] Our next question comes from David Gearhart with First Analysis. Your line is now open.

Archie and Kim I just had one question because all my questions have been asked. There's a nice step up in the gross margin from Q4 and Q1 and just wanted to get a better sense of what's driving and I think in the past you said investments in the customer experience and whatnot has pushed it down or kept it kind of in the 60 range - mid 60s plus range. And nice step up here just wondered if that's what's driving it and also can you give us some sense of the cadence for gross margin for the quarters as we go through the year?

So the first thing I had mentioned is similar to how I answered one of Koji’s question which is I think you should really look at cost of goods sold or gross margin more on an annual basis for us than specific by quarter because depending on a particular quarter they maybe a little bit more or less spend relative to some of the longer term investments that we’re making. So really looking at that on a annual basis I think makes more sense. So what you saw in the quarter you are however seeing some of the benefits from prior investments that we made where we can get more efficient. We certainly continue to add resources and we'll continue to add throughout the year as well, but I would focus more on sort of the annual basis of gross margin versus particularly on a particular quarter.

And then your long-term targets of getting in the mid-30s a lot of it has been driven by gross margin expansion as well. So I guess it kind of relates to my last question is how much of a bump should we expect on the gross margin front. Should we expect 100 basis points a year, 150 to 200 just trying to get a sense of how to wherein that versus the other expenses items?

Sure. So we haven’t given that specificity by line item what we said is longer term, mid 30s and with that we had said we do things that we can get up to a mid 70s from our gross margin perspective. On an annual basis, the expectation is that we'll continue to make incremental EBITDA margin expansions how we get there. Maybe a couple 100 basis points or so and as far as how that looks by year, it really does depend by year. So you should expect that we have the opportunity and will make improvements in gross margin over time until we get to our longer term expectation.

Thank you. And at this time I'm showing no further questions in the queue at this time. Ladies and gentlemen, this concludes our call for today, thank you for your participation. You may now disconnect. Everyone have a great day.