Good afternoon, ladies and gentlemen, and welcome to the SPS Commerce Q4 2019 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] I would like to turn the conference over to your host, Ms. Irmina Blaszczyk. Ma’am, please go ahead.

Thank you, Jona. Good afternoon, everyone, and thank you for joining us on SPS Commerce fourth quarter and full year 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 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, Irmina, and welcome, everyone. 2019 was a year of significant accomplishments for SPS Commerce. We continued to deliver on our strategic goals and financial targets as we expand our community of trading partners and leverage the unique lead generation engine fueled by the power of the SPS Commerce network. In 2019, the number of recurring revenue customers reached approximately 30,800, nearly 3x the number of customers since we went public in 2010. We acquired MAPADOC to expand our leadership in full-service EDI and successfully completed the integration of two acquisitions made in 2018, EDI Admin and CovalentWorks. We remained committed to shareholder value and repurchased 418,000 shares at an average price of $49.38 per share. For the full year, revenue grew 12% to $279.1 million, and adjusted EBITDA grew 36% to $69.8 million. Our consistent focus on profitability resulted in an adjusted EBITDA margin of 25% in 2019, up from 21% in 2018 and 16% in 2017. Throughout the year, we have seen retail dynamics continue to stabilize. The need for optimizing fulfillment and increasing collaboration positions SPS to capitalize on ongoing growth opportunities. As the industry evolution and omnichannel retail continues to fuel growth, SPS Commerce experienced another year of strong enablement campaign activity. Early in the year, ALS Limited, a leading testing, inspection, certification and verification company, became a SPS Commerce customer through the acquisition of CovalentWorks. ALS wanted to globally consolidate EDI providers and chose to work with SPS and leverage our vast trading partner network. Belwith Products, a hardware manufacturer, needed to overhaul their EDI environment during an ERP system upgrade and chose SPS’ fully outsourced solution over their current provider due to the additional automation capabilities we acquired through the EDI Admin acquisition. SCHEELS, one’s of the largest sporting goods retailers in America, has…

Thanks, Archie. We had a great fourth quarter. Revenue for the quarter was $72.7 million, a 12% increase over Q4 of last year and represented our 76th consecutive quarter of revenue growth. Recurring revenue this quarter grew 13% year-over-year and adjusted EBITDA increased 35% in the quarter to $18.9 million. For the year, revenue was $279.1 million, a 12% increase and recurring revenue grew14%. The total number of recurring revenue customers increased 5% year-over-year to approximately 30,800, and wallet share increased 4%. As a reminder, in December, 2018, we announced the acquisition of CovalentWorks. At the time, we stated that we expect our customer count to increase by approximately 2,000 and our wallet share to decrease by approximately 500 due to CovalentWorks’ smaller average customer size. In Q4 2019, we lapped the customer adds and we will have lapped the full revenue impact in Q1 of 2020. Adjusted EBITDA grew 36% to $69.8 million. We ended the year with total cash and investments of $214 million. Now turning to guidance. For the first quarter of 2020, we expect revenue to be in the range of $73.6 million to $74.2 million. For the full year, we expect revenue to be in the range of $306.5 million to $308.5 million representing approximately 10% to 11% growth over 2019. For the first quarter of 2020, we expect adjusted EBITDA to be in the range of $19.2 million to $19.8 million. For the full year, we expect adjusted EBITDA to be in the range of $83 million to $84.5 million representing 19% to 21% growth over 2019. For Q1 2020, we expect fully diluted earnings per share to be in the range of $0.19 to $0.20 with fully diluted weighted average shares outstanding of approximately 36.2 million shares. We expect non-GAAP diluted earnings per…

[Operator Instructions] Your first question comes from the line of Scott Berg from Needham. Your line is open.

Hi, Archie and Kim. Congrats on the good quarter here. A couple, I guess, brief ones for me. Kim, let’s start with your last comment there. Confident in 10% organic – or excuse me, 10% annual revenue growth for the foreseeable future. Can you help us maybe unpack that a little? Is that all organic? Is there some impact of potential acquisitions in that? Just trying to understand how you’re kind of sizing up that 10%-plus.

Sure. So when we think about the dynamics that we’re seeing in the retail space, and we recognize that we believe we’re the clear leader in our product offerings to meet the needs of the retail network, we see a nice, long runway ahead of us that gives us confidence in being able to deliver at that 10% or greater. Now as a business, we certainly are open to acquisitions should they make both business and financial sense, but we’re not compelled to do acquisitions. So regardless of that, we are confident in our ability to deliver 10% or greater.

Got it. Super helpful. And then, Archie, I guess you’re coming up on your 10th birthday as a public company here in April, I believe. But over the last 10 years, you’ve really only added one major product category to the portfolio in the analytics space. There’s been some smaller, I know, areas of functionality as well but one major category. As you look out over the next two or three or maybe four years, is there something coming down the pipeline that we can – might expect or something that you’re looking at that might expand the product portfolio maybe a little bit more?

Yes. I think there’s a couple of things, Scott. One is to expand with add-on products to the existing capabilities, especially as it relates to fulfillment and possibly analytics, but primarily on fulfillment. So add-on functions and features that we can add value to our customers and charge more. And then the third leg is assortment item information, which is we think as you move out into 2022, 2023, that can start adding some value and some revenue.

Got it. Helpful. That’s all I have. Thanks to take my questions.

Your next question comes from the line of Tom Roderick from Stifel. Your line is open.

Hi, Kim. Hi, Archie. Thanks for the questions. So Archie, let me just kind of throw you one follow-on question there regarding analytics. And if I heard you right, I think it sounded like analytics grew, I think, 8% for this year. Talk a little bit about that in the context of that line item accelerating a little bit. It seemed like point of sale data hadn’t been something that retailers were sharing as frequently or as often as you had hoped kind of going back a year ago, two years ago. So is that starting to pick up a little bit? Is there a reason to invest more in this analytic side? Talk a little bit more about that mix. And then I’ll come back to the fulfillment side. Thanks.

Yes, we’re clearly feeling better about the analytics side of the business, and I think there’s a couple of things. One, as we’ve been – as we’ve stated in the past, it’s really a prioritization for the retailers. And as retail’s stabilizing, we feel better about where that is. And I think we’re – we have an opportunity to cross-sell as well into our installed base. So I think those two things are helping. I wouldn’t get too far ahead of yourself on growth, but we feel very good about that, where that product is going. And we’ve always believed in the long-term addressable market for that product.

Archie, it’s not the first time you’ve mentioned Europe as an area where you have some sizable retailers and some sizable customers that are leaning into that point-of-sale data a little bit more aggressively. Is that an area that you’d be inclined to invest [indiscernible] aggressively in? Are you seeing some better things out of analytics in Europe? Or is that just still a little anecdotal?

Well, I would say we are investing on a relative basis aggressively in that, but it’s off a very small base. So I mean, when I get excited about the European analytics opportunity, I think if we can continue making progress like we are in 2020, 2021, you get the snowball effect, and then it can become meaningful over time. So we are, on a relative percentage basis, being fairly aggressive in 2020, but it’s still very small dollars.

Excellent, okay. Kim, quick follow-up for you then just in terms of capacity and investment dollars and how you need to invest in the business to support this 10%-plus growth. Historically, you used to give us a headcount of sales. I don’t know if that’s something you could still provide at the year-end or give us some directional commentary as to what’s been happening with your sales head count. But I guess the question is, how fast did you grow that this year? And how do you think about how fast you need to grow the sales head count this year – this coming year to support the growth you’re looking for?

Sure. So when we think about sales, I think capacity is a great way to look at it. And I know you did use that word. So when we think about – we believe that we have done a really good job in sort of optimizing capacity of our sales organization. So what that means is there is an expectation that we will continue to add resources based on the opportunities that we see. That has been factored in to our guidance for 2020, and we certainly did add in 2019 as well. But we – based on changes that we’ve made over the last couple of years in the sales organization, we’ve been able to get a very healthy output based on each salesperson. So feel very good as it relates to the sales organization that we have in place, and we’ll continue to augment that as necessary, based on the opportunity that we see.

Outstanding. Thank you. I’ll jump back in queue. Congratulations on a nice finish to the year.

Thank you.

Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

Great, thank you. And congratulations Kim and Archie. I’m going to ask you two big picture ones. The first one, and I know this is going to be hard, but can you tell or do you have any thoughts on how the coronavirus is going to impact retail and retailers and then how that might flow through to you?

Yes, it’s tough to say, Pat. I think there’s going to be some disruption in supply chains. It feels a little bit similar, on a different scale, to the trade war questions. And I’ll tell you on that, I thought there might be a slight positive because as people shift or add additional trading partners to be able to fulfill, that can sometimes be a slight positive for us. So I don’t – I think it could be a slight positive, but I don’t think it’s going to have a material change.

Okay, good. And then bigger picture, I mean, you’ve been talking about – for about a year, I think, and correct me if I have that wrong, about things having stabilized. And in 2017, 2018, there was a lot of discussion of how the environment was more difficult. I would just love you to sort of step back for us and explain what happened? And how much of it was the environment and how much of it was maybe SPS making some adjustments?

Yes. I think there’s two things, Pat. I think when you look at it, I think the retail environment was in a position of uncertainty. Who is going to survive? How are they going to survive? Can omnichannel retailers really survive what’s happening? So I think that is – that has had an impact. Obviously, we did some pretty significant sales restructuring, which is starting to pay off. But that wasn’t easy. But I think the vast majority of it was the environment. And as I say, the restructuring, which is now paying off in a number of different ways, probably took a quarter of a step back because of that in 2017 and 2018.

Awesome, right, thank you for that perspective.

Your next question comes from the line of Jeff Van Rhee from Craig-Hallum. Your line is open.

Great, thanks guys. A couple from me. One quick housekeeping, I think you gave the channel as a percent of bookings for the year usually, just that figure. And then on the test customers, I’m particularly interested in the 50,000-plus that you’ve tested. Just talk to me about what you’re doing to cultivate those people, stay in touch with them, understand their intentions and really how that program has evolved? And what insights you’re gaining from staying in touch with those that have tested but not yet fully adopted SPS’ solutions?

Sure. As it relates to channel, channel still remains a nice, healthy lead generation engine for us and similar to what you’ve seen historically as it relates to sort of that mix of the business.

And as far as the testing and certification, we do a number of different things. One, the marketing group is trying to hit on – hit those people up. We can also do very targeted marketing campaigns, either against specific competitors and/or specific retailers. Many times, we are seeing a tester multiple times. And in those cases then, we do have the data as to how they’re performing, whether they were efficient on their testing So depending on the size of the account, the sales rep may stay in contact with their individual. But it’s an aggressive marketing push and continuing part of our business. It is a meaningful part of our new business. There’s a leg of it and the customer count isn’t large, but they tend to be larger customers. And so it’s a meaningful part of our lead generation engine.

Got it. And just two other quick ones. On the acquisition front, any change in terms of what you’re looking for? I think earlier, there were some questions about product and product innovation. Just wondering if there’s anything different about what you’re looking for on the acquisition front. And then, on the ALS customer that you’ve mentioned, you said you displaced their existing EDI infrastructure. I’m curious what you displaced.

Yes. No, what we’re looking for is exactly the same as it is in the past, which is either: One, pure customer acquisition; two, product enhancement, in other words, something along the road map such as an EDI Admin or a MAPADOC, which also has revenue or geographic expansion. I don’t have at the tip of my fingers exactly what we displaced in the ALS example.

Got it, okay. Great, thanks. Nice quarter.

Thank you.

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open.

Hey guys can you hear me okay?

Yes.

Yes.

On the 8% analytics growth this year, how should we think about the strength that you mentioned from Europe versus maybe like a new customer, like REI? Are you able to – can you provide us a little bit more color on where that came from?

Yes. So the vast majority of it is in North America. I think it’s still off a small base. So it’s contributing – Europe is starting to contribute, but it’s off a very small base. But like anything, as we’ve seen it, when you get a small base, if you have strong growth after two, three, four, five years, it starts becoming meaningful. So at this point, it’s more of an optimistic look than a mass of contribution to the growth line.

Got it. So if I think about it, as a follow-up, Europe is maybe just behind where retailers in the U.S. might be.

Yes. We also have some very large influential suppliers that are helping us push the European retailers and opening doors for us. So that’s one of our primary lead generators in Europe, it’s the large influential suppliers.

Okay, great. That’s all from me. Thanks.

Thank you.

Your next question comes from the line of Tyler Wood from Northland Securities. Your line is open.

Hey, thanks for taking our question. You mentioned seeing increased interest during the quarter with the drop-shipping product. Could you just drill down maybe a bit more on that as far as your expectations for 2020 there? And then kind of related, you’ve mentioned in the past, still selling this bundled and as a stand-alone product. Could you kind of fill us in there on how you’re approaching – positioning that product for 2020 and beyond? Thanks.

Yes. I think quite often, with a retailer, it’s a bundling and it’s completely – they’re looking at their entire supply chain, and we’ll sell it that way. What we’ve seen is sometimes they’re specifically looking for a drop-ship solution, and our strategy has always built – been to build long-term relationships with our customers and meet them where they are at. And so the drop-ship is an event that changes – that’s changing more rapidly. So that gives us an introduction to a customer or a retailer. And to the extent that we land that part of the business and we execute extremely well, which we tend to do, then that gives us an opportunity to expand our footprint. When I think about drop-ship, over time, drop-ship’s going to be about 20% of e-commerce. So e-commerce right now is about 13%. And so it’d be 20% of that. So pick your number where you think e-commerce is going and what the trajectory is, and if you – my guess would be 20% of that will be drop-ship.

Thanks. And then one more quick one. Any change in churn during the quarter worth mentioning?

No. It stayed consistent.

All right thank you.

[Operator Instructions] Your next question comes from the line of David Robinson from William Blair. Your line is open.

Hey guys thanks for taking my question. I just had a question around MAPADOC. I was wondering if anything changed relative to your expectations. And kind of how that – the integration is progressing so far?

Yes. First off, the staff and the employees that came with that acquisition have been a real positive to the business. They’re extremely qualified and extremely engaged. So we feel that they’re just part of the SPS Commerce family now. I would say what we had hoped for, which was more business and better customer experience, is materializing. So feel really good about the acquisition.

Okay, thanks guys.

Your next question comes from the line of David Gearhart from First Analysis. Your line is open.

Hi, good afternoon. Thank you for taking my questions. I just have one for you. Going back to the drop-ship question, you said drop-ship should be 20% of e-commerce at some point. Can you give us some sense of how big drop-ship is for SPS Commerce as a percent of revenue to kind of give us some idea of how much expansion opportunity remains for the company either with existing customers or new?

Well, if I had to guess, we’d probably look somewhat like the marketplace because a lot of times, it’s just – it’s all part of a different rule book and different documents and different trading partners. So very infrequently do we have a supplier that’s just using us for drop-ship for one retailer. That’s just not a material part of our business. So it is all part of a bundle typically. But I would guess that drop-ship is well below the 10% of e-commerce today, probably 6% to 10%, because only 350 of our retailers today are doing drop-ship. And e-commerce And e-commerce is about 13% of retail. So as far as document volume on fulfillment, that’s – that would be my guess.

There are no further questions at this time. So this concludes today’s conference. Thank you for your participation. You may now disconnect the call.