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Operator
Good afternoon, ladies and gentlemen, and welcome to the SPS Commerce Q3 2016 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Nicole Gunderson, Investor Relations.
Nicole Gunderson - IR Representative
Good afternoon, everyone, and thank you for joining us on SPS Commerce's third-quarter 2016 conference call.
We will make certain statements today, including with respect to our expected financial results, go-to-market strategy, and efforts to design to increase our traction 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 statement 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 these risk factors that may affect our results. These documents are available on 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 it over to Archie.
Archie Black - President, CEO
Thanks, Nicole, and welcome everyone. We had a strong third quarter. Total revenue grew 22% to $49.3 million, recurring revenue grew 22%, and adjusted EBITDA was $7.4 million.
Consumers are increasingly empowered through mobile and social commerce, and the best way to retain customers and attract new ones is to give them what they want delivered when and where they want it. Collaboration and transparency between trading partners is more important than ever, as retailers and suppliers look to grow revenues, increase profitability, and retaining customers in the omnichannel world. SPS Commerce enables an unparalleled level of supply chain visibility, agility, and collaboration, and the industry evolution to omnichannel commerce continues to drive our success.
Bodybuilding.com is the number one online sports nutrition retailer with over 29 million unique visitors, and just recently embraced EDI to continue to grow their business. Previously, they were using a manual system to process orders and communicate with their suppliers by email, fax, and phone. Because of this, they had limited visibility into inventory of their suppliers. They made the necessary upgrades to their internal systems and ran an enablement campaign with us to ensure that their suppliers were compliant with their new EDI system. Building.com is now able to expand their product selection by enabling dropship capabilities as well as efficiently scale in the US, along with their growing European business.
Retailers and suppliers need to quickly address the ever-changing expectations and shopping habits of consumers. And the inability to adapt the supply chain can cause increase cost and missed opportunities. For example, according to Fortune, more than 61% of retailers use buy online, pickup in store as a way to attract more eCommerce customers while reducing shipping costs. However, the stunning fact is that more than half of customers who buy online, pick up in-store experience problems related to their orders, often resulting in customers going elsewhere.
The surge in online shopping has been a boon for consumers, but a challenge for supply chains. Retail researcher ShopperTrak found that, last year, eCommerce sales jumped 14% on Black Friday. And Adobe's Digital Index found that total online sales on Cyber Monday rose 16%. This increase in online purchase are good for sales, but can be challenging for profitability and puts additional pressure on the supply chain.
As eCommerce has transformed shopping habits, supply-chain operations have to be able to quickly adapt to these changing patterns in order volumes. Legacy technology and solutions that support single channel shopping are not sufficient in the omnichannel world, and this will continue to provide a tailwind to our success.
In summary, the third quarter was another quarter of strong execution as we continued to enable retailers and suppliers to address the ever-changing retail landscape. Our opportunity is more robust than ever, and I look forward to extending our market leadership even further.
With that, I will turn it over to Kim to discuss our financial results.
Kim Nelson - EVP, CFO
Thanks, Archie. We had a great third quarter. Revenue for the quarter was $49.3 million, a 22% increase over Q3 of last year, and represented our 63rd consecutive quarter of revenue growth. Recurring revenue this quarter grew 22% year-over-year and 17% organically. The total number of recurring revenue customers increased 6% year-over-year to approximately 24,600.
For Q3, wallet share increased 15% year-over-year to approximately $7,400. For the quarter, adjusted EBITDA was $7.4 million compared to $6.2 million in Q3 of last year.
We ended the quarter with total cash and marketable securities of approximately $138 million.
We ended the quarter with approximately 280 quota carrying sales headcount. As we have wrapped up much of our hiring for the year, we expect this number to come down slightly in Q4 due to normal levels of attrition, but we expect overall hiring for 2016 to be above our historical hiring levels.
Now, turning to guidance, for the fourth quarter of 2016, we expect revenue to be in the range of $50.5 million to $51 million. This guidance reflects a modest 1% impact from bankruptcies in the retail space. We expect adjusted EBITDA to be in the range of $6.9 million to $7.4 million. We expect fully diluted earnings per share to be approximately $0.07 to $0.08 with fully diluted weighted average shares outstanding of approximately 17.4 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.26 to $0.27 with stock-based compensation expense of approximately $2.1 million, depreciation expense of approximately $1.8 million, and amortization expense of approximately $1.2 million.
For the full year, we expect revenue to be in the range of $192.7 million to $193.2 million. We expect EBITDA to be in the range of $26 million to $26.5 million. We expect fully diluted earnings per share to be in the range of $0.29 to $0.31. We expect fully diluted weighted average shares outstanding of approximately 17.2 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.98 to $0.99 with stock-based compensation expense of approximately $8.1 million.
We expect depreciation expense of approximately $6.7 million. We expect amortization expense for the year to be approximately $4.8 million.
And for the forecasts, you should model approximately 40% effective tax rate calculated on GAAP pretax net earnings. We expect to pay nominal cash taxes in 2016 due to our NOLs.
For modeling purposes for 2017, factoring in the 1% impact from bankruptcies in the retail space, we expect recurring revenue growth rates to be similar to our current organic growth rate of 17% for the first half of 2017. We expect our recurring revenue growth rate to increase in the second half of 2017, and we expect to be back to 20% recurring revenue growth in 2018.
Regarding adjusted EBITDA, investors should model approximately 14.5% adjusted EBITDA margin, in line with our expectation of delivering about 1% improvement to adjusted EBITDA margin.
As we look out towards next year, our philosophy on margin expansion remains the same, and we expect to invest any additional upside back into the business. We look forward to continuing to expand our market leadership, and we are confident in our ability to achieve our long-term targets.
With that, I'd like to open the call to questions.
Operator
(Operator Instructions). Scott Berg, Needham.
Scott Berg - Analyst
Congrats on a good quarter. A couple of questions for me here. First of all, Archie, on the sales headcount additions, you guys have kind of went above and beyond your historical trends that Kim mentioned, 280. I expect a little attrition here in Q4, which is normal. But can you talk about maybe where those mix of additions are hitting your different sales teams? Are you investing maybe anything different this year relative to last year or the year before in terms of what sales team you're getting those additions?
Archie Black - President, CEO
Well, I think, as far as numbers go, it's spread pretty evenly with the current headcount between retail channel, international, and then supplier sales. As we have talked through the year, we are hiring more senior sales reps. It reflected as well in the numbers. But I think it's pretty -- it's spread throughout all of the groups. There's not drastic investments one way or another - again, factoring in the size of the groups. Obviously, if a group is larger, it did get more people.
Scott Berg - Analyst
All right, helpful there. And then Kim, on the bankruptcies in the industry that you talked about that seem to be impacting a little bit of your numbers here in the fourth quarter and next year, can you maybe give up a little bit more color in terms of magnitude? Do you think this a 1%, 2% headwind here as you go forward over the next 12 months or so, or should we be viewing it maybe in a different light?
Kim Nelson - EVP, CFO
Sure. So, we are anticipating it to be about a 1% impact and that is what we have reflected in our guidance for Q4 as well as the color that we provided for 2017. An example of what we are seeing in there -- we'll take Sports Authority as an example.
What's interesting with Sports Authority and we how we are seeing the impact us is Sports Authority actually used our collaboration analytics product. And so, by default, that means they were one of the retailers that was sharing point-of-sale and sell-through data that in turn we would then provide to our suppliers. In that case, that tends to be skewed to some of our larger size suppliers, so not as many total number of suppliers, but from a revenue per customer has a more meaningful impact because it's more on the analytic side versus the fulfillment side. But at this point, our expectation is the approximately 1%, which we have reflected in our numbers.
Scott Berg - Analyst
Great. And one quick follow-up for me, Archie. On your partner involvement, partners have been a much bigger part of your business over the last couple of years. And obviously omnichannel is a big theme driving what you do. Can you talk about any influences your partners have with their customers, whether it's on the retail side or the supplier side, to helping them make or bridge that gap and push them maybe towards your solution more quickly?
Archie Black - President, CEO
Well, obviously for these retailers and suppliers to adapt to the new omnichannel world, they have a business they need to change. And I think the partners are helping from ERP to design to process flow.
I think the one slight difference you are seeing positive in 2017 is, in the past, we have been almost 100% supplier focused, and we're getting more traction on the channel sales side. Again, it's very, very early, on the retail side, to help people to sign their infrastructure and drive enablement campaigns.
Scott Berg - Analyst
Great. That's all I have. Thanks for taking my questions.
Operator
Tom Roderick, Stifel.
Tom Roderick - Analyst
Thanks for taking my questions. So, Archie, I wanted to just touch on the break between fulfillment and analytics. You had touched on it anecdotally a little bit last quarter and suggested, in the second quarter, you guys had a very strong fulfillment quarter. Can you talk a little bit about the dynamic between those two trends, fulfillment versus analytics? What's kind of the primary driver of growth or the greater driver of growth at this point?
Archie Black - President, CEO
I would say it's more balanced in this quarter slightly towards the fulfillment side. As Kim mentioned, as we look at bankruptcy, that actually hit analytics a little heavier than filament, so slightly fulfillment leading, not as much as it was the last few quarters, and bankruptcies going forward will hit analytics. That 1% is actually heavier on analytics. Pure dollar amount, it's heavier in analytics and obviously it's a smaller piece of business. So from a percentage standpoint, it's more.
Tom Roderick - Analyst
And Archie, as you guys go back and look over the last few quarters -- and I know you specifically called it out last quarter that analytics had perhaps slowed a touch, but fulfillment offset that. Now that you have some more information at your fingertips, you are able to see the impact from Sports Authority itself. Is it possible to conclude that that one factor was in fact slowing things a touch on the analytics front? Or were they unrelated in the past and it's just going forward that we will see some of that impact from analytics coming out of Sports Authority?
Kim Nelson - EVP, CFO
Sure. Tom, I would say that it is more unrelated between the two. So if I think about the community enablement campaigns that we discussed last quarter, the mix of those enablement campaigns the prior quarter were more on the fulfillment side. And I really think that is just more as retailers were really trying to grasp what they needed to do in order to compete effectively in the omnichannel world. So, I do look at that separate versus the comment we are making on the bankruptcy side and giving the additional color of saying, related to the retailers that are bankrupt, that will impact the -- if you want to think about it, that base analytics number a bit more versus fulfillment just because of what type of retailer that was.
Tom Roderick - Analyst
Got you. Okay, good. And Kim, one last for one you. Just looking at the number of sales reps you've hired this year, you've outpaced your expectations. As those reps start to come online and become fully productive, where should we start to see the impact of that? In other words, are you staffing a lot of these in lead gen and lead closure such that we should start to see the new customer count growth rate accelerate? Are they being put on teams where they are upselling to the installed base and therefore we are going to see it on the latter -- on the ARPU side of the equation? What's the best tell of productivity for the reps that you've hired here?
Kim Nelson - EVP, CFO
Sure. So it's really going to be across or throughout the sales organization. The quantity of them will be more based on the size of what those organizations are. But we really have added throughout and not a disproportionate amount percentagewise in one area versus the other. How you are going to see that reflected in our numbers will -- you'll see that as it relates to the total recurring revenue growth. And then we provide the two metrics, which are in essence outputs of that, the customer count as well as revenue per customer. But it will really be on that overall recurring revenue growth that we have stated that, in 2018, is when we expect that to be back to 20%.
Tom Roderick - Analyst
Got you. Okay. Thanks, guys. I appreciate it.
Operator
Jeff Van Rhee, Craig-Hallum.
Jeff Van Rhee - Analyst
Just got a couple for me, guys. With respect to ToolBox, I think the original target was $6 million. Are you still on track for that?
Kim Nelson - EVP, CFO
So, as it relates to ToolBox, we are actually ahead of what our original expectations were for ToolBox. So we are very pleased with the acquisition as it relates to financial performance as well as the fabulous group of employees and individuals that we got as part of that acquisition. So overall, ToolBox is at or exceeding our expectations.
Jeff Van Rhee - Analyst
Okay, good. And then on these sales attrition, I don't know what normal sales attrition would be for Q4. Can you give even a crude sense of what kind of drawdown you think might be a reasonable baseline to expect?
Kim Nelson - EVP, CFO
So, what we have seen is through the first three quarters is back to more historical level of sales attrition. And so our expectation is we would expect similar levels in Q4 as well.
Jeff Van Rhee - Analyst
Similar churn in Q4 -- but you can't give me -- I don't know what sales churn was in Qs 1, 2, 3. Do I (multiple speakers) individual range (multiple speakers)
Kim Nelson - EVP, CFO
No. Our historical sales turnover levels have been in the 20s% attrition.
Jeff Van Rhee - Analyst
Okay. Got it. And then, from a customer standpoint, where are you I guess this quarter with respect to dollar in customer count churn?
Kim Nelson - EVP, CFO
Sure. So, as it relates to those metrics, the customer churn is still at about that 12% from an annualized perspective. Dollar churn is still somewhat similar to that.
As it relates to the bankruptcies that we discussed, that in the going forward where we anticipate that impacting us about 1%, you would see that impact more that revenue per customer metric than the number of customers metric.
Jeff Van Rhee - Analyst
Got it. And just one last for me then. With respect to the new customer capture this quarter, I'm just curious. How many of those that were brought on were previously tested, were prior test customers that were now converted to full paying?
Archie Black - President, CEO
I don't know the answer to that in this particular quarter. Typically, when you see an enablement program, here's what's kind of classic is that you test -- those that you test, there's usually some revenue about six months later, four to six months later, where those go into recurring revenue customers. They tend to be larger customers, so the count tends to be extremely low. That's the classic. So I don't know what the number was this quarter.
Jeff Van Rhee - Analyst
So, what you're saying is the timeline to conversion from a test to a paying customer, any changes there?
Archie Black - President, CEO
No. No. And again, the count -- the thing that's important is the count number is important, is not that meaningful, but the revenue is because they tend to be customers, again, that might be 5 to 10 times our average customer ARPU.
Jeff Van Rhee - Analyst
Yes. Got it. Okay, great. Thanks.
Operator
(Operator Instructions). Craig Nankervis, First Analysis.
Craig Nankervis - Analyst
Nice quarter. I was wondering. Can you discuss the proportion of your suppliers that do dropship today or, say, new suppliers you've brought on board in the last 12 months or so to do dropship? I'm just trying to think about how influential that trend can be for you guys relative to the other influences on your business.
Archie Black - President, CEO
Yes, I don't have a concrete number of what percent actually do dropship or have a third-party logistics partner do dropship for them. I think the big driver for dropship is as their supply chains gets more complex and there's more requirements, that forces them away from their legacy systems. And that's really, in my opinion, the bigger opportunity, is that in this fast-changing world, I can't change fast enough if I am anchored down with legacy systems. So, that's the biggest influence from our standpoint on dropship. It's a meaningful number for us, is the number of suppliers that dropship.
And I think one of the things that you're going to see for retailers is more and more retailers are going to have their existing suppliers dropship because what we are seeing in a best -- what we consider to be a best practice scenario is a supplier might sell 200 items. 50 of those are going to be in the store and 150 will be dropship. And obviously that's a way for a retailer to see if their customers are interested in that product. And obviously, the retailer strategy typically is that if sales velocity increases, they stop dropshipping that product and bring it into either the distribution center and/or the stores.
Craig Nankervis - Analyst
Okay. Thank you. And just on your bankruptcy factor, the 1% impact, is that -- have you previously had to make adjustments for that? I'm trying to just get a flavor of how unusual an adjustment that might be for you. Thanks.
Kim Nelson - EVP, CFO
Sure. So, we are expecting the bankruptcies to have minimal impact of about 1%. So we did provide that update in our guidance. You know, the last time this had occurred, it was actually back in 2008, 2009. So it is relatively unusual, but it is also a pretty small percentage impact overall for us.
Craig Nankervis - Analyst
Right, right. Okay. Thanks very much.
Operator
Patrick Walravens, JMP Securities.
Natasha Asar - Analyst
Hi. This is Natasha on for Pat. Thanks for taking my question. Can you talk a little bit about the impact on business if Oracle ends up buying NetSuite?
Archie Black - President, CEO
Yes. We have -- in our five channel sales practice areas, one of them is NetSuite. One of them is Oracle. We have a very strong relationship with both. We actually have a very strong top-to-top relationship with NetSuite. So, I think there will be minor impact.
I think that the question will be can we leverage the very, very strong top-to-top relationship with NetSuite that we have to drive more business from Oracle? But I think it's minimal because I think, over the next at least number of years, you're going to see a NetSuite solution and an Oracle solution continue to be in the marketplace. So as long as those two companies remain strong and vibrant, I see minimal impact.
Natasha Asar - Analyst
Great. Thank you.
Operator
There are no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all now disconnect.