SPS Commerce, Inc. (SPSC) Earnings Call Transcript & Summary

Good day, and welcome to the SPS Commerce Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Irmina Black, Investor Relations for SPS Commerce. Please go ahead.

Good afternoon, everyone, and thank you for joining us on SPS Commerce Second Quarter 2026 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 and 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 on our website, sdscommerce.com and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on the Investor Relations section of our website, spscommerce.com. During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP income 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 financial measures, including reconciliations of these measures with comparable GAAP measures. And with that, I will turn the call over to John.

Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. At SPS Commerce, our foundation has always been our cloud-based supply chain network. . Today, our network stands as a massive interconnected retail ecosystem of tens of thousands of suppliers and 3,500 buying organizations including all the major retailers and distributors in North America. We work with more than 2,000 logistics providers and over 400 technology partners which enables us to integrate our network with all of our customers' supply chains and business systems. We are protocol agnostic and enable fulfillment models and channels with enterprise-grade security certifications. . That foundation makes everything that follows possible and represents every AI use case on our network. The SPS Commerce network took over 25 years to get to where it is today. Through its effect and scale, we are building partnerships supporting evolving supply chains and helping our customers grow. Having recently divested the 3P revenue recovery business, we have sharpened focus on strategic relationships with 1P suppliers who operate multi-retailer trading relationships and benefit from our intelligent supply chain and portfolio solutions. As the network expands, we continue to capture proprietary intelligence from trading partner activity, transaction patterns, digital specifications and compliance rules strengthening the supply chain rules engine that powers MAX, SPS' AI agent. By leveraging SPS's network intelligence within everyday workflows MAX enables customers to interact with their supply chains in a more intuitive, proactive and connected way. Users can instantly compare business requirements and business performance between major retailers like Target and Costco with proactive monitoring, MAXes of 24/7 extension of a customer's team, detecting anomalies and flagging critical business errors. Max puts the expertise of the SBS network at the customer's fingertips to instantly diagnose business issues and determine actionable solutions shortly in the time it takes to address risks in trading partner relationships. For example, branch furniture is a fast-growing wholesale brand selling to major retailers like Williams-Sonoma, Lumen and Office Depot. They rely on SPS Commerce to manage order flows across multiple channels and have already experienced significant efficiencies using MAX to resolve order issues in minutes as opposed to days from one of their key retail partners, Max helped achieve 90% weekly time savings in managing overdue orders. Other customers have recognized tangible results since MAX' beta phase launch. MAX successfully cut a $290,000 invoice failure due to an incorrect UPC code. It identified 100 stalled drop-ship orders for an outdoor brand. It flagged $70,000 in unacknowledged purchase orders for a food manufacturer. Delivering this immediate ROI, MAX is quickly becoming the default starting point for customers inside the SPS user interface. They trust MAX' proprietary supply chain expertise, and they are increasingly allowing it to take automated actions on their behalf, continually improving operational efficiencies with our trading partners. By pairing SPS' network intelligence with our Agentic capabilities, with our first AI-powered customer onboarding, including presale context and account provisioning. We're working toward a future where a Gentek technology can engage in new customer immediately after a deal closes, with more of the onboarding processes shifting to AI as we continue to reduce the time it takes for customers to transact with their trading partners. Agent assisted customer functions and onboarding as well as the identification of our internal operations are the pillars in our agent strategy already in motion at SPS. We are also exploring new AI-powered use cases and products, which we believe will drive ARPU expansion and increase the size of our addressable market. The initial launch of MAX to all SPS fulfillment customers is expected by the end of the summer, and we plan to launch additional products at scale later this year. One of the key learnings from our beta program is that users of MAX through the chat interface are more likely to explore advanced MAX features and we expect this usage trend will define the path to monetization of our AI solutions. We are excited about these AI capabilities and the immense value they will bring to our network and so are our customers. In a recent study of SPS customers, we quantified and validated the value and impact SPS delivers to their business. 83% of customers said that the data in the SPS network improved their AI readiness. 87% cited improved scalability and 100% of the surveyed customers said that without the SPS network, they would need more headcount, more tools and more time or in some cases, simply could not operate at the scale they do today. They see SCS as a strategic partner in navigating increasing supply chain complexity while they expand their business and trading network. Chosen Foods, a premier food and beverage company, best known as America's 1 avocado oil brand needed a supply chain that could keep pace with growth across their U.S. and Canadian operations. Over their decade-long relationship with SPS Commerce, they have scaled from trading partner to dozens of customers, multiple 3PLs and a growing supplier network. To prepare for their next phase of growth, Chosen Foods migrated to a new ERP and trusted SBS to manage the transition. Through a fully integrated Acumatica deployment, SPS Commerce delivered a unified approach across their order to cash procure to pay and revenue recovery workflows ahead of schedule and with 0 operational downtime. Crucially, with growing deduction complexities across major retailers like Walmart, Amazon and Target, CS' automated dispute management successfully recovered approximately 30% of outstanding deductions, which represents hundreds of thousands of dollars while helping chosen Foods identify why these deductions occurred and how to prevent them. Other customers realizing real ROI from SPS revenue recovery include Alete, a leader in infant health technology recovered $1.4 million within 6 months of using the solution including 100% recovery on our recent settlement totaling $423,000. Serta Simmons Bedding one of North America's largest bedding manufacturers save $200,000 by successfully challenging a post audit with a large retailer. Turning to our analytics business. SPS's new analytics solution is now running on a new enhanced platform that delivers significant gains in both power and scale. This new platform brings an improved user experience while enabling faster time to insight so customers can improve -- can move seamlessly from data to decisions. It expands what's possible for customers, supporting growing data volumes, broader use cases and future AI predictive capabilities. With these platform enhancements, our analytics solution helps customers protect revenue, margin and shelf space by catching risks early while uncovering new growth opportunities across products, customers, markets and distribution. It also gives teams the agility and efficiency to act sooner align inventory, forecasting and planning while strengthening retailer relationships with a single view of performance. Raffles, a children's clothing company based in Texas is leveraging the platform to gain significantly better sell-through visibility into one of the nation's largest retailers capturing critical insights from data across more than 400 retail locations and the retailers' e-commerce channel. To sustain this momentum, automated data feeds and scheduled reporting will drive ongoing day-to-day analysis. Early feedback from ruffle but on the platform's granular product and location insights has been highly positive, prompting this supplier to consider adding another major retailer to their reporting. In summary, SPS' customer success stories demonstrate that navigating today's increasingly complex supply chain requires an intelligent network as businesses continue to expand across technology platforms and connect with new trading partners, they view SPS Commerce as a vital partner for scaling their operations and improving AI readiness. No other company can match the unique combination of AI capabilities, 25 years of proprietary data deep domain expertise and an expansive network access to drive this kind of tangible value and collaboration that SPS offers today. With that, I'll turn it over to Joe to discuss our financial results.

Thank you, Chad, and welcome, everyone. We reported a strong second quarter of 2026. The SPS Commerce's core business, which excludes an invested 3P revenue recovery business grew in the high single digits, driven by the acceleration of 1P customer ARPU growth resulting from continued upsell and cross-sell momentum. . On June 30, we announced the sale of the 3P revenue recovery business. We believe this divestiture sharpens our focus on the strategic opportunity with 1P suppliers who operate multi-retailer trading relationships and are positioned to benefit from our intelligent supply chain network and purchase additional solutions like fulfillment, revenue recovery and analytics. SPS Commerce received a cash payment of $9.5 million at closing, we incurred a loss on sale of $23.5 million in Q2 2026 in connection with the transaction. Now let's review our Q2 results. Revenue was $197.8 million, a 6% increase over Q2 of last year. Recurring revenue grew 6% year-over-year. As a result of the sale of the 3P revenue recovery business and its approximately 7,300 customers, the total number of recurring revenue customers in Q2 was approximately [ 46,650 ] and an average revenue per customer was 15,100. In Q2, ARPU skewed higher due to the divestiture's impact on our ARPU calculation which used an average of beginning and end of quarter customer counts. Because the quarter and divestiture significantly reduced our final customer count, Q2 ARPU reflects full period revenue divided by a lower customer base. Adjusted EBITDA increased to $66.6 million, highlighting the health of our business as we scale, strong operational execution, the realization of past investments and benefits of improving process efficiencies. Turning to liquidity and cash flow. We ended the quarter with total cash and cash equivalents of $173 million. Free cash for the quarter was $57.4 million, bringing our trailing 12-month free cash flow to $198.7 million, up 40% year-over-year. In Q2 2026, we deployed nearly 90% of free cash flow to repurchase $51.2 million of SPS shares. Now turning to guidance. As a reminder, as a result of the divestiture of the 3P revenue recovery business on June 30, 2026 guidance factors in a reduction of approximately $10.5 million to revenue to the second half of 2026. The divestiture is expected to be neutral to adjusted EBITDA in the second half of 2026. For the third quarter of 2026, we expect revenue to be in the range of $196.3 million to $198.3 million. We expect adjusted EBITDA to be in the range of $67.4 million to $69.4 million. We expect fully diluted earnings per share in the range of $0.72 to $0.76 with fully weighted average shares outstanding of approximately 36.8 million shares. We expect non-GAAP diluted income per share to be in the range of $1.20 to $1.23 with stock-based compensation expense of approximately $16.4 million, depreciation expense of approximately $5.4 million and amortization expense of approximately $8.5 million. For the full year 2026, we expect revenue to be in the range of $788.4 million to $793.4 million, representing approximately 5% growth over 2025 at the midpoint of the guided range. Excluding the impact of the divested business, we expect our core business revenue to grow high single digits. We expect adjusted EBITDA to be in the range of $264.6 million to $269.1 million, reflecting an adjusted EBITDA margin of 34% at the midpoint, an increase of approximately 300 basis points compared to full year 2025. We expect fully diluted earnings per share to be in the range of $2.24 to $2.33, with fully diluted weighted average shares outstanding of approximately 36.9 million shares. We expect non-GAAP diluted income per share to be in the range of $4.84 to $4.93 with stock-based compensation expense of approximately $69.8 million, depreciation of approximately $23.4 million and amortization expense for the year of approximately $35.6 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings. In summary, SPS' strong second quarter performance reflects the strength of our core business driven by upsell and cross-sell momentum. We continue to demonstrate operational rigor, exceeding our margin expansion goals while simultaneously rolling out our AI strategy across our network. With that, I'd like to open the call to questions.

Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. Our first question today will come from Scott Berg with Needham.

I got a couple of questions. Chad, first of all, I want to talk about the divestiture of the third-party revenue recovery business. you've been pretty positive on the long-term outlook of revenue recovery in general. And I know that part has been a little bit of a store in your side, but why divested, why divested now were obviously a month ago, just help us understand the thought process to move on from that segment.

Yes, Scott. So overall, we remain very confident in revenue recovery. We're seeing the cross-selling to our fulfillment customers be good and also seeing new business come in as a kind of a new emerging category of SaaS solutions, where more of that positivity was though is on the 1P side seller. So that are selling primarily wholesale to multiple retailers, Amazon being one of those, but the 1P sellers really can use our whole portfolio of revenue solutions across multiple retailers, whereas the 3P business was -- those were more Amazon Marketplace sellers there didn't turn out to be a lot of overlap with the other parts of our portfolio for those customers. . I think that, combined with the take rate revenue model and some of the policy changes in 3P we saw from Amazon. All clearly pointed out that the 1P side of this business is much more attractive for us and has much more overlap with our ideal customer profile than the 3P side does.

Got it. That's helpful. And then, Joe, I think we kind of probably understand the number of customers that are leaving the platform with the divestiture seems to be moving around. But I guess I got a couple of questions on the ARPU side is one, are you calculating any differently than how the company has before I ask you to comment your revenue in the quarter, but obviously lower customer accounts exiting the quarter. And then I guess, secondly, in conjunction with that, how do we think about the impact going into Q3 because of the revenue step up.

Yes. So we didn't calculate it any differently. And I think because we kept the calculation consistent, it kind of skewed in the quarter. And the reason for that was, if you think about the way the calculation works, Scott, it's the average customer count in the beginning and the ending of the period. . And so we had those 7,300 3P customers in the beginning customer account, but they weren't in the ending customer count -- and then that's compared against the revenue in the quarter and the full 3P revenue was in the quarter, but not the ending customer accounting. So because of that, the ARPU overall skewed higher than it normally would have. And so that's just -- it's more of the impact in the quarter going forward, if you think about it, we'll just have 1P customers in the beginning of the end of the period. And so it will be a little bit more consistent going forward than it has been than it was in Q2.

Awesome. And if I may ask a quick third question here, sorry, on the Medica. Joe, can you quantify what the third-party revenue recovery revenues were in the second half '25? I know you said the business is going to grow the rest of the year excluding that. But any further kind of quantification of that I think would be helpful.

Yes, Scott. So the only other color we're providing on 3P business outside of the fact that your point that outside of the divested business, then we'd be growing high single I think the other thing to call out on the full year is we called out the 10.5% in the second half of the year. And you can assume the first half of this year was slightly lower than that. So you can kind of get a full run rate of the business for 2026.

And our next question will come from Dylan Becker with William Blair.

This is Jackson Bogle on for Dylan Becker. Maybe sticking on the revenue recovery side, now that the focus is solely on the 1P side of that business, -- how are you thinking about the level of resources and investment dedicated to that business going forward? Is that more -- is there more resources being redeployed toward fulfillment and analytics? Or does the retained 1P opportunity still warrant the incremental investment from here?

Yes. So the -- Jackson, the 1P business, I would say, is nearing consistent with our overall margin profile in the business overall. It wasn't that way right out of the gate with divest with the acquisition of Supply Pike and Carbon 6. But as that has gotten more integrated into our overall business, it's more approaching our overall margin profile. So I wouldn't say it's an area of our business that is sort of receiving oversized investment at this point in time. And I think the divestiture of the side of that business really helps us. I mean, because there's quite a bit of good customer overlap product portfolio overlap on the network with the 1P side, and definitely think that revenue recovery business is definitely in line with the margin profile of our overall business.

Got it. Super helpful. And then maybe as a follow-up, with ERP migration is still creating a little bit of timing noise. I mean I would just be curious get your thoughts if you guys are seeing any change in like onboarding duration, I know you guys talked about the AI enabled customer onboarding. So is that changing anything with like the customer readiness or attach rates once those projects are complete? Or maybe are there areas where migration delays are building like pent-up expansion demand that could release once these go-lives.

Yes. So we're super excited about the progress around agent onboarding -- we did have in the prepared remarks that we did the first fully agentic onboarding. Now keep in mind, that's with the more kind of simple onboarding that we have that's really taking things that would have been previously done in days and getting them down to kind of minutes. With the more complex onboarding, which is really where we have all the ERP integrations, we do expect that we will continue to make great progress there. We've been making progress there over the last couple of years, speeding that up. That's led to a better customer experience has also helped us on the gross margin. And as that was really done all before this Agente capability was applied. So we do expect to speed up those more complex ERP onboardings as well. There's just still a little bit more work to do there. Once we have that in place, that speed to time on the network can be a barrier for adopting the SPS network. So we think any efficiencies we gain there will help with customers and speed up that access to the network. I wouldn't necessarily say that there's substantial pent-up demand just kind of waiting for this. Admittedly, the ERP market has been a little bit slower in 2025 and so far this year, especially at the kind of medium to large end of that market. But I do think our speed of onboarding with agentic ERP onboarding is going to be a massive differentiator for us and really speed up customer time to value.

And our next question will come from Chris Kingdee with Morgan Stanley.

Had, Joe, I think the question and ratings here. I want to hear your thoughts on maybe the macro environment and kind of what you're hearing from your customers? We're hearing about higher fuel costs, higher freight costs, the cape economy. I'm just curious kind of what you're hearing and seeing high level from your customers from a macro perspective.

Yes, Chris, I mean, I would say no substantial headwinds we're hearing from our customers relative to the macro we were coming off a tougher 2025, especially on the supplier side of our network where they did cite some headwinds related to tariffs and that did cause some contract rightsizing last year. We anticipated that, that would dissipate this year as we kind of did get those contracts rightsized and they were onetime, and that's playing out as we expected. And so I'd say no overwhelming headwind in the macro, of course, things like the fuel prices and still a little bit of looming tariff uncertainty, things that we continue to monitor. But those things are not coming up in our engagement with customers right now.

Got it. And then maybe, Joe, for you, just on the 1P customer counts. If I have my math right, it seems like that went down around 200 quarter-over-quarter. Is that right? And if so, curious what you're seeing on the community enablement side of things and new customer adds?

Yes. No, that's your calculation there is right. We were down a little over 200 sequentially on customer count. . The driver of that was really just the timing effect of some of the retail enablement programs Keep in mind, those customers that are typically churning or adding that are primarily affecting that customer count tend to be the real low ARPU customers. That's why we're able to still deliver the financial results, even having that customer count there. The overall pipeline for an enablement activity right now is strong. There's programs that we're running now that will contribute in the second half, plus the remaining pipeline that's to be closed in the second half looks positive. That said, I would expect for the year were kind of flat to slightly positive on customer count, but I do expect some of that momentum from the second half enablement programs will carry into early 2027.

And our next question will come from George Kurosawa with Citi.

Okay. Great. Maybe if I could just ask about the MAX beta. You had some interesting anecdotes of customers saving in some cases, it sounds like hundreds of thousands of dollars. I think you've done some work on market sizing. Maybe you could just share updated thoughts there on how you're thinking about a potential uplift maybe in a best case scenario or for a median customer and then how that maybe has evolved your overall thinking on packaging and pricing as the product portfolio continues to expand.

Yes, absolutely. So yes, as you noted and was in the script, we're seeing customers really identify different supply chain anomalies and disruptions using MAX, which today is through the chat feature, that's what they have access to in the beta. And using that chat feature, they're able to get to some of those those problems in the supply chain get them resolved, and that's resulting in hard ROI savings for them. What we've seen through the good adoption of chat here, is that a lot of the things that customers are doing via chat would be possible to automate with an agent. So today, it may take them 20 prompts in the chat to get to the right answer. We're seeing that that's something that actually could be automatic, automatically detected and potentially, in some cases, automatically resolved, which is great because we are developing those types of agents on top of this now. And we believe that those agents that can do things more autonomously in terms of identifying these anomalies and in many cases, resolving them, not only finds the kind of hard ROI in the supply chain savings, but also is going to be a very favorable kind of headcount and efficiency impact for our customers. So what we're in the process of now is converting the chat piece from the beta into a general availability, all newly deployed customers as of the last month have been onboarded with MAX included and over the course of the next several weeks here kind of through the summer, we'll be making it available to all our other fulfillment customers and we'll be doing that as part of their standard subscription. But what we believe the major monetization activity will be is when we deliver those agents on top of that, that are more autonomous and self acting that customers will be willing to pay for that. And that's really where the monetization would come in. And the way that, that would work is there be certain tiering or bundling of the packaging of those autonomous agents running on top and then we would monetize the customers through subscriptions to those bundles. But what I'd say is it gives us high confidence in this approach is we're already seeing customers using Max Chat to get to these benefits in their supply chain. And the things that they're finding and doing, we have high confidence we'll be able to automate with the agentic architecture over the top.

Okay. That's great color. And then 1 for Joe, if I may. Just looking at the change in guidance for the second half. It looks like from what we can tell, on the revenue side, it looks like basically the Q2 beat flowed through, excluding the divestiture impact. On the EBITDA side, it looks like the full beat was not flowed through. So I wonder if you could just maybe comment if there's anything incremental spend, expense timing, conservatism, anything we should keep in mind on the EBITDA line.

Yes, for sure. I think on the EBITDA side, I think there's a couple of things that we contemplated. One, there was some movement of some of the expenses that moved out of Q2 into Q3 and Q4. And so that was some of it. I think the other piece is we want to make sure we're being very prudent with the way we're approaching our internal AI costs. As we're building out this stuff for MAX, as we're building out our internal agents on the things we're doing internally, we want to make sure we give ourselves enough room to make those investments and make sure that we've got enough flexibility in the cost structure. And so that's the other part of that and why we didn't flow all that through the year, George.

Our next question will come from Parker Lane with Stifel.

Chad, you talked about some of the advancements you're making on the analytics side of the house. It sounds like there's a new enhanced platform there. So it's good to see that. I think the revenue side, it was up maybe 1% in the first half of the year. Can you just talk about what you're seeing from a demand perspective around that? I know you had mentioned that historically, it's been seen as maybe more discretionary, and that was an impact to that business last year. But looking to the second half of the year, what are your expectations around analytics?

Yes. So we're really excited about this new technology revamp. I mean I do think it will help us on the sales side, some of the previous technology had gotten a little sale a little dated. Our feedback from customers who are up and running on this new capability is, one, just the look and feel and ability to use the system and the prebuilt capabilities are much stronger than they were before, plus there's more tooling for customers to kind of do more on their own. And then probably the most important thing in all this is it really changes the underlying data architecture of that product, which now sets it up for many more AI features that we'll be able to add to that over time. So we are optimistic about that outlook for the Analytics business. I think the fact that it is a little bit more discretionary is true, still, but I think with this replatforming, not only will we be in maybe a little bit stronger competitive position, but we should also be in a position then to add more AI features, which I believe will be able to monetize over time.

Got it. And we're coming up on 2 years in the entry into the first party revenue recovery, space with the supply pike deal. I think at the time, there was about 300 customers that overlapped with SPS -- how have you -- how attach rates or adoption rates trended at the 2-year mark relative to back then? And what are some of the learnings you guys have had on the go-to-market front and how to effectively cross-sell both both into the historical supply pipe base and back into SBS' base.