SPS Commerce Inc (SPSC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined the SPS Commerce Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Nicole Gunderson with Investor Relations. Ma'am, you may begin.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's fourth quarter and full year 2016 Conference Call. We will make certain statements today, including with respect to our expected financial results, go-to-market strategy, and efforts designed to increase our traction and penetration with retailers and other customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to our SEC filings, as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on our Investor Relations section of our website, spscommerce.com.

During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP and adjusted EBITDA measures, including reconciliations of these measures with comparable GAAP measures.

And with that, I'll turn the call over to Archie.

Thanks, Nicole, and welcome everyone. 2016 was another year of business momentum and solid execution for SPS Commerce. The expansion of the SPS network continue to drive our results, as we grew our customer base and increased wallet share with our customers. For the full-year, revenue grew 22% to $193.3 million and adjusted EBITDA grew 17% to $26.5 million. Additionally, in 2016, recurring revenue grew 23%, customer count grew 6%, and wallet share grew 16%.

As both retailers and suppliers are increasingly recognizing the constraints of legacy systems and processes to achieve the agility that today's consumers require, we continue to grow our market leadership. This year, we expanded the size and strength of our network and benefited from our powerful lead generation engine, as we added new customers and deepened retailer relationships.

We now have more than 70,000 customers and over 2,000 retailers in our network, and of those retailers, more than 300 drop ship. Additionally, we are growing our global presence, connecting approximately 200 international retailers to their trading partners. We're also deepening our relationships with retailers and channel partners to drive our lead generation engine.

In 2016, we receive leads from approximately 600 retailers, 200 of which gave us all of their leads as well as approximately 200 channel partners. This broad-based retail network position us to take advantage of the multi-billion dollar market opportunity in front of us.

Consumer expectations and purchasing habits are rapidly changing, and omnichannel has shifted from a specific strategy to something that drives an entire business. For the past two years, retailers have reported a faster supply chain as a top priority, as technology has made it possible for consumers to have whatever they want delivered to their home, whenever they want it, with free shipping. This has gone beyond the largest retailers such as Amazon or Walmart, as companies like Uber have made same-day delivery service available to almost any merchant.

These elevated consumer demands and the high cost of doing business make it imperative for trading partners to collaborate and adapt quickly to the evolving retail environment. The SPS Commerce network provides the critical capabilities needed for success in today's retail industry.

Our market-leading network and solutions place us at the center of the retail ecosystem and our retail expertise enables us to act as a strategic advisor to retailers and suppliers as they build their omnichannel businesses. Large retailers and suppliers are driving the trends towards increased collaboration and communication and we saw an increase in larger customers this year as a result. We now have approximately 1,800 customers that pay us at least $20,000 annually.

As we move up market we are seeing an increase in customer's integrating with us through our channel partners, and this year, channel sales contributed 21% of all new business. Our leadership position is driving growth in our channel strategy and it enables us to form alliances with some of the world's largest systems integrators and value-added resellers. We recently worked with Capgemini, one of the largest global systems integrators and consulting partners to sign Ascensia; a $1 billion-plus company that recently spun out from Bayer.

Capgemini was hired by Ascensia to advice senior management and orchestrate the re-platforming of their operations as a standalone company including ERP and EDI implementation. Capgemini, a strategic alliance partner of SPS brought us in due to our ability to meet the scope and delivery demands of Ascensia's initiative. With hundreds of trading partners, SPS enables Ascensia to streamline their supply chain operations, scale their solution and collaborate with their trading partners, as they grow.

Real-time collaboration, inventory visibility, and data are critical in satisfying elevated consumer demands and realizing cost efficiencies in order to address the high cost of doing business in the omnichannel world. These trends are fueling the adoption of our broad suite of products, including our analytic solutions. In 2016, analytics was 19% of total recurring revenue, reflecting the success of our acquisition of ToolBox Solutions a year ago.

Additionally, in our Retail Insights industry report published last month, analyzing sell through data was recognized as a top way to collaborate better in the coming year. As trading partners increasingly adopt omnichannel initiatives, we will continue to broaden our product functionality and solutions to address the ever-changing retail environment.

Looking to 2017, I want to spend some time talking about two developments that we believe will have an impact to our revenue. The first is that we are observing what we are observing in the retail environment. We are seeing more retailers overhauling and upgrading their systems to become more competitive. These systems upgrades are more complex than ever due to omnichannel and require significant investment from the retailers. While these types of change events drive the need for our products and are a tailwind to our business, they need to be near completion before running community-enablement programs, and as such, we are seeing our timelines extend.

The second topic relates to changes we made in our sales organization. Following the addition of Dan Juckniess as Chief Sales Officer in 2016, we took a closer look at the sales organization. Effective January 1, we reorganized our sales teams into more streamlined territories. Additionally, we carved out a community enablement campaign team from the supplier sales team, which will now focus on new business, as well as up-sells.

We also continue to move some activities to customer success and sales operations, which will give sales reps more time to sell, which we believe will ultimately result in higher productivity per sales rep. Therefore, we expect we will not need to hire as many new salespeople as we did in 2016. We believe that the changes we made will enable us to scale better. However, during the transition period, we experienced lower output by our sales team which impacted our run rate exiting 2016, and therefore, our overall 2017 anticipated revenue. We believe that in the long-term, these changes will ultimately benefit SPS and will set us up well to go after the multi-billion dollar opportunity in front of us.

In summary, we continue to be excited about our prospects for 2017 and beyond. Consumers are still setting their expectations in retailing and retailers and suppliers are growing more and more focused on how to win over shoppers. According to our Retail Insights report, the top three priorities for businesses in our network were; growing e-Commerce sales, increasing profitability, and streamlining fulfillment. With a broad suite of solutions and the world's largest cloud retail network, we are in a prime position to expand our market leadership even further in the years to come.

With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Archie. We had a great fourth quarter. Revenue for the quarter was $51.1 million, a 21% increase over Q4 of last year and represented our 64th consecutive quarter of revenue growth. Recurring revenue this quarter grew 22% year-over-year and 16% organic. The total number of recurring revenue customers increased 6% year-over-year to approximately 24,800. For Q4, wallet share increased 15% year-over-year and 10% organically to approximately $7,600. For the quarter, adjusted EBITDA was $7.4 million compared to $6.7 million in Q4 of last year.

Recapping the year, revenue in 2016 was $193.3 million, a 22% increase year-over-year. Recurring revenue grew 23% for the year and 18% organically. And adjusted EBITDA grew 17% to $26.5 million. We ended the year with total cash and marketable securities of approximately $146 million. At the end of the year, we had approximately 275 quota carrying sales headcount, in line with our expectations and above our historical hiring levels.

As Archie mentioned, we believe the organizational changes we have made to our sales team will result in increased sales force productivity, and therefore, we will not need to hire as many sales people in 2017. For the year, we expect to hire approximately 15 sales people, which is about half as many as we have hired historically.

Now turning to guidance for the first quarter and full-year 2017; for the first quarter, we expect revenue to be in the range of $51.5 million to $52 million. For the full-year, we expect revenue to be in the range of $220 million to $222 million, representing 14% to 15% growth over 2016.

We expect adjusted EBITDA for the first quarter to be in the range of $7 million to $7.5 million. We expect adjusted EBITDA for the full-year to be in the range of $31.5 million to $32.5 million, representing 19% to 22% growth over 2016. As we look out toward next year, our philosophy on margin expansion remains the same, and we expect to invest any additional upside back into the business.

For the first quarter, we expect fully diluted earnings per share to be $0.06 to $0.07, with fully diluted weighted-average shares outstanding of approximately 17.6 million shares. For the full-year, we expect fully diluted earnings per share to be in the range of $0.29 to $0.33, with fully diluted weighted average shares outstanding of approximately 17.6 million shares.

As indicated in our earnings press release, we will begin tax effecting non-GAAP income to conform to the May C&DI issued on non-GAAP measures in 2017. Our guidance for the first quarter and full-year 2017 now reflects the tax adjustments of the add-back of stock-based compensation and the amortization of intangibles to GAAP -- to non-GAAP net income. Details of the impact of tax affecting non-GAAP net income on our first quarter guidance and 2017 outlook can be found in our earnings press release. Additionally, a reconciliation of the impact to historical periods can be found on the financial data sheet we have posted to the IR section of our website.

For the first quarter, we expect non-GAAP diluted earnings per share to be approximately $0.18 to $0.20. For the full year, we expect non-GAAP diluted earnings per share to be in the range of $0.80 to $0.83. For Q1, we expect stock-based compensation expense of approximately $2.4 million, depreciation expense of approximately $1.9 million, and amortization expense of approximately $1.2 million.

For the full year, we expect stock-based compensation expense of approximately $10.3 million, depreciation expense of approximately $8.5 million, and amortization expense to be approximately $4.8 million. For the full-year, you should model approximately 40% effective tax rate calculated on GAAP pre-tax net earnings. We expect to pay nominal cash taxes in 2017 due to our NOLs.

In summary, we had a strong 2016. As we enter 2017, we look forward to expanding our market leadership and we are confident in our ability to achieve our long-term targets.

With that, I'd like to open the call to questions.

(Operator Instructions) Tom Roderick, Stifel.

So, Archie, my first question for you, I was just looking for a little bit more detail around the first topic you highlighted, that's going to drive a little bit of slowing growth here in 2017. But this topic of retailers beginning to overhaul and upgrade their systems, can you just provide a little bit more data and clarity around what that's doing to the whole ecosystem?

Is it driving fewer enablement campaigns, and therefore, the top of the funnel is just not as full as it used to be as it driving longer sales cycles with your actual suppliers and brands out there. Maybe you can just talk a little bit more about how you're already seeing it impact results, and then, how you expect it to do so in the rest of the year?

Yes, thanks, Tom. From -- what we're seeing is from the retail, a subsection of the retail are doing major overhauls and we're part of those deals, but it's extending the sales cycle and sales length of time to close a retailer and oftentimes between the time of selling the deal and actually implementing, because remember, from a retailer, we actually get paid and earn our money when we get the community enablement campaign kicked off.

So for a subset of retailers, it is extending those implementation timelines and sales cycles. On the rest of the ecosystem, I wouldn't say there is a significant or any meaningful change. Obviously for channel sales, I don't think there is a change for our enterprise team that's going after the bigger suppliers, there is not a change. And our installed base selling -- upselling to our installed base, there is not a change. So I would say it's a change to a sub-section of the retail sales organizations is slowing -- lengthening the sales cycles.

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

Sure. So, where you would see the benefit, if you look at EBITDA guidance, you'll see that, that's up nicely, that's up based on our guidance; 19% to 22% year-over-year is the growth we're expecting there. So that's where you're going to see a nice improvement. The implied EBITDA margin associated with that is about 1% higher than 2016.

To your point, as you then look down to EPS or non-GAAP EPS, we are starting to tax effect the non-GAAP EPS and that impact of the tax effecting of the non-GAAP EPS, if you were to look at say, 2016 and you were to say, how much would that have been in 2016, it's about $0.30. Our metrics that we have on our website show what those metrics would have been if we had tax effected the non-GAAP EPS last year or in 2016.

Scott Berg, Needham.

Hi, great, thanks. This is actually Peter in for Scott. Couple of quick ones; if you can kind of highlight the changes that you're making to the sales organization? I know it took effect January 1, but any initial signs that that's actually kind of [resonating] well with the sales team?

Well, I think in general, the biggest things we did is, again, we carved out a community enablement team. We're really talking about focus here, which allows the supplier sales team to really go after the new business and upsells and not close out that. We also streamlined our territories and we have a dedicated analytics team from retailer to supplier. So the story there really is focus. I think the energy within the sales organization, I think we're ready to go after this year and I feel that we are positioned extremely well to scale the business and the huge market opportunity in front of us.

And then I know it's -- I guess, two years with the Leadtec acquisition, expecting to reach into the Australian market, but any changes relative to two years ago that you've seen in terms of adoption for fulfillment analytics?

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

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

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

Jeff Van Rhee, Craig-Hallum.

Great, thanks. Just a few from me tonight. I guess, Archie, back to the [sales org] for a second, I know with the hiccup last year, the belief was that it was a recruiting miss as opposed to any issues with productivity and that productivity had remained steady in the sense of ramp times and competitive landscape, nothing really had changed. And then you caught up on the sales and things started to hum again.

So at this point, as Dan took a look at the sales org, can you just talk a little bit further about where he saw inefficiencies in the sales org? It sounded like it had run pretty good for a long time, and at this point, we're making a pretty hard pivot. So maybe just a little more expansion there?

Yes, I wouldn't say it's a hard pivot. It's really one of his teams has focus, and it allows people to be very focused on their territory on a more clear path. So I think focus is a theme. And I think as we look back and we run the business, we're looking forward to a very large market opportunity.

So just like any other organization, we think about how do we scale the business and how do we continue scaling. So I think it's really setting us up for a long-term scaling. I think it's a change and there is change for people. But I think our market opportunity is there and I think that just more focus for people is the biggest thing, which allows us to scale.

Okay. And then, I guess, on the enterprise side, just expand a bit more on the retailers re-architecting. It sounded like you said, really no changes to the channel ecosystem, no changes to the enterprise team or installed base. But as I think about enterprise, I think of these major retailer architecture overhauls. So are you saying these tend to be the smaller and mid-sized retailers or just maybe reconcile that for me?

Yes, let me clarify. When I talked about enterprise, I was talking about enterprise supplier, the enterprise supplier group so that when we're going after larger suppliers, there is not an impact there. There is an impact on the retail side, primarily in the medium to large. That's where we get our community enablement campaigns from.

So again, I don't want to overplay it. It is a sub-segment of that, and obviously the segment that is pure e-Commerce, there isn't an overhaul there. So we continue to get enablement campaigns from those groups and there is a number of them that are just pure brick and mortar and some of them aren't. But there is a sub-segment of retailers that we are seeing extended sales cycles and implementation cycles, which is bringing down community enablement campaign slightly.

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

Sure. As it relates to -- we talked a bit about the retail environment, which Archie just discussed about some of the trends or dynamics we're seeing on the retailer space. The other part had to do with, as it relates to the change we made in the sales organizations, those, we started having conversations about that in Q4, rolled it out effective January 1.

So during that process, that did result in somewhat slightly lower output by the sales team, and really if you think about the end of Q4, so sort of our run rate exiting 2016 and then into 2017. So that was the pieces that related to what we are taking about slightly lower output by the sales team, that was specific around -- as it relates to the changes that we've made to the sales organization in order to help us keep pace with growth and scale going forward.

Tim Klasell, Northland Securities.

Yes. Just first a quick one on your hiring 15 sales people, is that going to be fairly linear through the year or as you change the skill set and the vertical market focus, will that be, I don't know, maybe more front-end loaded or maybe changing the profile of the recruit. I know you mentioned that last year that you were changing the profile, is that going to happen again this year?

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

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

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

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

Okay, good. Thank you very much.

Mark Schappel, Benchmark.

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

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

Thank you.

(Operator Instructions) David Hynes, Canaccord.

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

Yes, so, on the sales side, I want to make sure we understand a couple of things. One, as we continue to move upstream and have larger customers, we are going to hire more senior sales reps, which from a number standpoint won't equate to the same, but the quota capacity will be the same.

The other area is that we expect to invest back into customer success area and sales operations, which will allow the sales people more time to sell. So it's an investment, but it's showing up somewhere else which allows us to have more sales. So it's not necessarily a dollar efficiency, but it's a sales efficiency and somebody else is bearing some of those costs.

And then, as it relates to, when you think about the EBITDA guidance and then the implied EBITDA margins associated with that, the mid-point of the guidance is right about 14.5%, so the range is between 14.3% to 14.6% and that is about 1% increase versus last year. We will remain consistent with our approach that we want to make sure that we have the ability to invest across all areas of the organization to support not just our existing customers, but also future opportunities ahead of us. And so, our philosophy is, we're delivering about the percent margin expansion back to the shareholders, then that allows us to still have dollars to invest in both the short-term, medium-term and long-term to support the business.

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

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

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

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

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

Patrick Walravens, JMP Group.

Great, thank you. So first of all, just out of curiosity, you know all the issues and even markets is having and the whole Oracle deployment there. Did that impact you at all?

That one, in particular, did not Pat. But something like that -- those implementations that are taking longer than expected will. Sometimes, it's not the sales cycle for us. Again, I don't want to be [cue] with it, but we have two steps in getting revenue from a retailer. One is to sign the deal and close the enablement campaign.

The second is to actually rollout the community in enablement campaign. So, if we sign paper on January 1 and they have a hiccup in their system, they might not do the community enablement campaign till August, and therefore, it's a delay in our revenue. So that one in particular, no. But something like that would, perhaps not have changed the sales cycle, but it would change when we hit the community enablement campaign, which would have delayed our revenue.

The other issue Archie is a bunch of these guys just aren't going to make it, right? I mean, as we see Amazon putting more and more retailers out of business, what does that mean for you guys?

Well, I think there will be a sub-segment that does not make it. I think there is going to be a high percentage that do make it. And as you can see, we don't have any big concentration in any one retailer. So, pretty minor impacts when one does go out of business, but obviously it's a long-term concern, but I think the vast majority will make it.

There is a need for bricks-and-mortars, groceries, you're still going to have groceries; you're still going to have stores. And again, we have a huge opportunity in the e-Commerce world. As we mentioned, we have now 300 retailers in our ecosystem that drop ship that we're fulfilling on the drop ship model for them. So the e-Commerce is an ability -- is an opportunity for us as well.

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

Pat, in our view, there is a multi-billion dollar opportunity and it's ours for the taking. And because of that large opportunity in front of us, we are confident in our ability to get to the 20% recurring revenue growth. We haven't seen a change in the competitive landscape and we haven't seen a change in what we believe is the opportunity.

So because of that, we believe that the approach of growing the top line as well as delivering some margin back to the investors, not to the sort of 200 basis points that you talked about, but more about that percent a year, we believe that balanced approach is right for where we are right now and based on the opportunity we see in front of us.

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

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

Okay, thank you.

Jason Celino, Pacific Crest.

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

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

Okay, great, thank you. And then my second question is kind of in relation to drop shipping. Would you look to develop more of a focus-specific drop shipping solution similar to [e-Commerce hub], so that retailers or suppliers don't have to necessarily do that extra step in modifying their EDI for drop shipping?

Well, we believe that ultimately building an order management system, which is a non-trading partner relationship solution for a retailer, is not where we're going to go. Ultimately, we believe drop ship, ship to distribution center, ship to store, the same suppliers are doing multiple different ways of delivering. And we think ultimately, you want to have one solution that allows a retailer to use one solution provider like SPS Commerce to fulfill all of their order needs, whether -- no matter how you're delivering that product or who you're delivering it to, we want to be there.

So we have a very focused drop ship product for the suppliers. We have a very focused product that allows them to ship directly to the distribution center or they can ship directly to the store. We think it's all one solution, not sub-segment solutions.

Matt Pfau, William Blair.

Hey guys, thanks for taking my questions. First, I wanted to stay on the theme of drop shipping, and Archie, when you talk about those 300 retailers that are doing drop shipping over your network, so is that the number that your suppliers are connected into or those retailers that have specifically chosen you as the recommended drop shipping solution, maybe just some clarity on that comment?

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

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

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

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

I think it's a combination of both. We continue to, on the channel sale side, add new channel partners and deepening the relationships and then really the global systems integrators like the Capgemini's, as we get larger and go after larger customers, there continues to be an opportunity there. That's relatively new for us.

And so that's a whole ecosystem that we can go after and drive some meaningful revenue. So we think we've been at channel sales as an organization for about five, six years now and it's gone from 0% to 21% of revenue, new revenue and we think that they continue to grow for a long period of time and really optimistic about the channel sales group.

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