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

All right. Welcome, everyone, to Citi's 2024 Global TMT Conference. My name is George Kurosawa. I'm a software analyst here at Citi. I'm pleased to be joined by Chad Collins, CEO of SPS Commerce; and Kim Nelson, CFO. Welcome to you both.

Thank you.

Thank you.

As a reminder, this session is for Citi clients only.

And with that, maybe, Chad, about a year in the seat now, if you wouldn't mind kind of starting out with the kind of high-level SPS story. And yes, the main points as you see it.

Yes, absolutely. So at SPS, we operate a cloud-based network that connects retailers with their suppliers so they can exchange information about the supply chain and collaborate on their supply chains. The way that we go to market with this product is a little bit unique, and that our primary way to obtain new customers is by partnering with retailers. And what we find is that although retailers have established guidelines for connecting and having their suppliers connected, they don't always have all those digital connections in place. And so we will work with the retailers and do outreach to all of their suppliers to ensure they get digitally connected with the retailer. They can do that through the SPS network, but they don't need to. They could do it in another format. But that's really good for the retailer, and that the retailer then has access to the resources and capacity and expertise we provide around the outreach in establishing these digital connections, and then they get the benefit of that in their supply chain. It's also good for our business then because we're getting those lists of suppliers from the retailers that traditionally hit our ideal customer profile, and we're able to convert them into subscribing customers on our network.

Excellent. Maybe just to start on kind of the market opportunity. I know you guys have thrown out a $5 billion TAM number. I think maybe probably understating the opportunity a bit. But just how you're thinking about it in terms of the size and the characteristics and how much of it is bended versus in-house versus maybe pure undigitized greenfield?

Yes. So by far, the largest opportunity is undigitized connections in the supply chain. Most things today are -- when I say undigitized, I mean, everything flies through e-mail and maybe PDF documents. I mean a structured digital communication, where there's really a guideline and a specification, an established communication protocol. Those are things that are really required for efficient collaboration in the supply chain. And a portion of this is vended today. But other than SPS, what we don't find is a cloud-based network approach to solving this business problem. You still have more historic approach out there where it's on-premise, software, more in the do-it-yourself model. And the challenge with that approach is really these retailers are constantly changing their specifications in terms of how you need to be digitally connected with them. And if you're trying to do that yourself with your own software, with your own teams, it's really hard to stay on top of that. That's really where the benefit of a cloud-based network comes in because with the network, we manage those changes for the customer, and also we can make them once in the network and then all the participants in the network benefit.

Great. And then as kind of a pure-play retail tech -- net retail supply chain, I understand there's kind of layers of separation between how your business performs versus the aggregate retail market. So I'd love to kind of like dig into those levels of separation. But also it seems like you have an interesting purview. It's such a broad network that in spite of that, maybe disconnect between the performance of retail versus your performance. I still think it would be interesting to hear how you're seeing kind of the state of retail. So maybe starting with kind of the pricing model that you have and how that kind of creates a level of separation?

Yes, yes. So we're definitely highly coupled and playing a big role in the retail ecosystem. We're -- because of our business model, we're maybe not susceptible to some of the changes in kind of the overall economic environment of retail, and that is driven a lot by our pricing model. And so we're really monetizing the suppliers based on the number of connections that they have to their customers and then a little bit on the information that's flowing across the network. Unlike other software, the servicing the retail, which may be based on volume or GMV, whereas that volume is up or down, they're more susceptible to larger swings in their revenue by pricing it based on connection, one, we think that, that's really aligned to the value that the supplier is receiving. It also makes our business model a little less susceptible to the overall ups and downs that you might see in retail.

Got it. And then I guess just on the state of retail, I mean, there's been maybe some one-off anecdotes here and there, a few bankruptcies popping up, I guess, from your purview, kind of how are you viewing the landscape today?

Yes. So we still just do see a lot of uncertainty that we're hearing about from our retail customers as well as our supplier customers and probably the same things that we're all hearing about the economic environment right now, right, like interest rates are up, but is consumer spending going to say, strong or is the higher interest rates going to have even greater headwind against consumer spending, what's this mix between goods purchases that were kind of spiked a little bit during the pandemic versus experiences and other services where consumers might be spending their money versus on goods. And does that swing back now to a little bit more equilibrium. So all those things are just creating some uncertainty that we're hearing from the whole retail ecosystem. Thankfully, we haven't seen a substantial number of changes or consolidation or bankruptcies. A little bit here, but I'd say that's fairly consistent with retail. And then again, I would just point out that even with that dynamic of things going on in retail and that uncertainty, because we're such a core operational system for our customers, we do tend to be a little bit isolated from that, and not necessarily our business be a bellwether for how retail is doing overall.

Makes sense. Maybe just shifting gears to kind of the growth algorithm has been a big topic of discussion, kind of that mix between net new customers versus wallet share. Maybe you guys could talk about kind of the recent trends you've seen there? I know you guys did some work on kind of scrubbing the pipeline on the enablement campaigns and understanding the -- what's happening under the hood there. So maybe we'll just kind of start with how you're thinking about that mix?

Why don't I pause and let Kim take that one.

Tag team here. So I'm just going to start first high level as it relates to there's multiple ways that drive growth for us. And that's one of, I think, what is very unique about SPS that I absolutely love about SPS. So maybe if I just start there and then we'll go into your second part of your question. So if you think about the different growth drivers, there's attracting and getting new customers and then there's getting more and more revenue from customers over time, which we would refer to as wallet share. So on the first bucket, there's really 3 ways in which we drive getting customers. By far, the largest quantity of net new customers come through community enablement campaigns or activities, and that's where we're working with a retailer. They give us a list of suppliers for us to contact on their behalf. That historically has been the vast majority of driving of getting the net new customer quantity, and that is our belief going forward will be the largest contributor to getting us net new customers as well. Now they tend to be on the smaller size. So as Chad had talked about sort of this undigitized or, let's call it, white space opportunity, that's a lot of what we're going after there. We also do get some new customers through our channel sales efforts, but those tend to be going after larger sized suppliers. Suppliers that are already doing this just some way other than with SPS. And typically, we'll get in front of them when they're maybe making an ERP change. In that case, we'll rip and replace, they become a customer of ours, but they're going to more meaningfully show up on the scorecard on that wallet share number because they're going to -- when they sign up with us, use us for more retailers, and therefore, that revenue per that customer is greater than our average revenue customer size. So therefore, it's going to show up a bit more on the wallet share side. And then, of course, we have a lot of just regular, I'll call it, marketing type activities to help drive to get us in front of new customers. So those are ways in which we drive customers. Again, the biggest driver of quantity of customers' community. On the wallet share side, what we found is the longer customers with us, the more revenue we naturally get from that customer, typically because of how their business is growing. So I'll go back to that community. We get a customer that's very small initially, so they might join us with a retailer. Their business grows and evolves over the years, and we're going to continue to get all those additional retailers that, that supplier is now doing business with. And therefore, that's going to show up as increased wallet share on our scoreboard. And then, of course, we have M&A opportunities for us, which will show up in both customer adds as well as wallet share depending on sort of the size of the transaction, how many customers, et cetera. So that's just sort of in general, how we drive to the top line and the multiple ways in which we are able to attract new customers as well as get more and more revenue from our existing customers. The second part, which you had commented on is more specifically when we look at 2024, there's been a little bit of a different dynamics maybe in what that mix looks like. So if over time, both have been very, very meaningful, important solid contributors to that overall growth. In 2024, we're seeing a bit more come in the form of wallet share and a bit less come in the form of that net customer adds. The primary driver for that is when we look at the community enablement campaigns that we've done in the front half of the year as well as our lens, to your point, I think you mentioned it's like scrubbing the list that we see for the back half of this year. What we're noticing is, within those community enablement activities or those campaigns we're running, more are actually with existing customers of SPS Commerce. So therefore, we're just -- what that means is we're going to get more revenue from those existing customers. So more will show up in the form of the wallet share versus typically the quantity that you've seen come from net new customers. Now what's great about this is we're servicing a need for our retailers, and it's more revenue for SPS as well as servicing a need, of course, to the suppliers as well. It's just specific in '24, that mix is a little bit more skewed on that wallet share side and less coming in that net customers.

Got you. I wonder if you could just dig into that a little more in terms of that pipeline of enablement campaigns. Presumably, the reason why a lot of these are already customers is because this is an enablement campaign that you've maybe run a few times for the same retailer. With your pricing model, usually, it's based off of kind of connections to a number of retailers. So presumably, you're not adding new connections in these cases. So what are kind of the levers whenever you run these that are leading to this kind of increase in wallet share?

Yes. So when we have a certain set of data elements that are common for retailers and suppliers to exchange and our network supports all that. Sometimes what we -- although we would encourage a retailer to do outreach across all of those data elements at once for the suppliers, sometimes there's various reasons why it makes sense that the retailer doesn't do that and kind of goes one at a time. Usually, they want to start with the purchase order and information about the purchase order. And so what can happen is we will do one pass and then they want to add on additional supply chain information to exchange across the network and collaborate on. And we'll do a second pass, potentially even a third pass, but second pass to add that additional information. And what we find when we do that second pass, is we're less likely to add new subscribing customers in the second pass through a retailer supplier base than the first pass. But it's still good business for us because although we are monetizing primarily on the connection to that retailer, there's an element of our pricing model, which scales based on the amount of information that's flowing across the network as well. And so the more that we're able to add in terms of information flowing across our network, the more powerful that is. And in general, I'd just say the more that the retailers are specifying about data that they need from their suppliers, the better that serves the network. Just the more data going across, the more sticky it is, the more valuable it makes to all the participants and the more that helps our business.

Got it. I think one thing, I think that would be maybe reassuring a bit is that if you wanted to, you could have kind of pushed the lever on driving more towards new logos and just in this case, the opportunities that came in front of you or tend to happen to be more a little bit on the wallet share side. But is that kind of the case? And maybe you could talk about kind of how are you incentivizing the team that goes about building the pipeline for campaigns?

Yes, yes. We think our business will perform best when our sales force can bring in as many community programs as possible and with the highest amounts of suppliers within that community program. Therefore, although as you pointed out, George, we could really kind of point the sales force at trying to get ones that we think are going to have the highest new subscribing customers in it, that would be an option. I think our better -- our business is just better off the more total programs we can bring in. Therefore, our incentives and motivations for the sales force is to bring in as many of those programs as possible. And frankly, we're not too discriminating about what the underlying content of that is. We think, over time, just bringing in a lot of community enablement programs is the best way for us to grow the business.

Makes perfect sense. Maybe moving on to SupplyPike, the kind of new exciting acquisition. Maybe before we dig into the strategy and the deductions management space, Kim, if you would keep us honest and maybe run through kind of the numbers, what we're expecting from revenue, EBITDA and kind of impacts on customers and wallet share?

Sure. So to your point, we recently announced an acquisition of SupplyPike. When we announced that acquisition, we gave expectations for '24 as well as '25. In '24, again, it's not a full year, obviously. We anticipate -- at the time we announced the acquisition, we said we anticipated about $8 million of revenue and a negative about $1.5 million from an EBITDA perspective. In 2025, we said we anticipate approximately $25 million in revenue and breakeven from an EBITDA. So if we think about that business, that business has been growing nicely. And the '25 expectations reflect how that business was performing, but also our belief as we own them. So that's a nice sort of acceleration -- continued acceleration in growth we're anticipating. That business was not profitable. There's a lot of investment going into the business. And our belief is that we'll, of course, continue to be investing in that opportunity, but that we can get it to be breakeven in '25 being -- by us owning them as well. So sort of combining the forces together to get it to breakeven.

Excellent. Maybe, Chad, if you could just talk a little more on the strategy side of deductions management market, what is the problem that you're solving for customers? And then maybe if they're not using SupplyPike, what are they doing?

Yes. So retailers, I think it's good to start with the retailers. Retailers have very detailed rule book for all their suppliers in terms of what's required from a supply chain perspective to do business with that retailer. And it's that rule book will span everything from this digital communication, which is kind of core to the core SPS business in terms of what information needs to be exchanged digitally. But it'll also cover things around how you need to package materials, what labels need to go on boxes, what transportation companies you need to provide, also tolerances in terms of what's going to define a late shipment, what's going to define a short shipment. It's all put into this retailer rule book. And if a supplier doesn't meet the requirements of a retailer rule book, there's a financial penalty that this retailer can put on the supplier. And the way that they do that is through invoice deduction. So they just basically short pay their invoice in the amount of the penalty and put some sort of coding associated with the reason why they're short paying that. Well, that could be very challenging for a supplier. One, about 10% of these invoice deductions are actually erroneous. There are errors on the retailer side, in the retailer system or the retailer's process, there actually should have never been a deduction in the first place. The other thing is it's -- these kind of show up as mystery. Sometimes it's really hard to get to what was the root cause in your supply chain, which caused the problem, which resulted in the deduction. And so what SupplyPike has done is really created the first of its kind SaaS platform specifically designed for managing this whole invoice deduction process for the suppliers to retailers. And there's 2 ways to do that. One is help identify their erroneous deductions. So help identify those that really weren't -- shouldn't have been penalties and go back and dispute those and get paid and do that in an automated way. The second is, even if it was a legitimate deduction, help identify where the root cause and the supply chain is and get that problem corrected. So you don't have future deductions. And before SupplyPike really kind of inventing this type of SaaS-based approach to the problem, you had a few alternative approaches. One, you just had accounts receivable departments trying to sort through this, making a bunch of phone calls back to the retailers, a bunch of Excel spreadsheets just kind of manually hashing through it. You also have a handful of companies who would do this on gain share basis. So they might take your last years' worth of invoices to a particular retailer, they'd audit those and you do some sort of revenue share with them on anything that was recovered by them. But kind of more on a batch-based fashion, maybe you'd only do that with some of your bigger invoices. And then some of the bigger CPG companies have utilized business process outsourcers to help them manage this. But really, there hasn't been a software base, an exclusive software-based approach to managing this problem before SupplyPike. And so that's really why Supply Pike made a bunch of sense for us. We're already close to that business process. We're already exchanging a lot of invoices across our network. The ideal customer profile for SupplyPike and SPS Commerce are very similar. So for all those reasons, it made a lot of sense.

Excellent. And then maybe if you could talk a little bit about what customers -- the customer profile that you expect to be kind of early adopters. And then you think about kind of longer-term penetration into your customer base, what could that look like and the kind of ASPs associated with that, so we can kind of do some math on what the revenue opportunity here is?

Yes. So I think the most fertile ground for SupplyPike within our customer base is going to be more of this mid-tier supplier. So probably one that has significant enough volume with the retailers that justifies investing in this type of solution, also enough volume that they're sort of feeling the pain of this problem. I think that will be the most fertile ground initially. Over time, I think what we'll be able to do is some of our larger customers who maybe have used business process outsourcers or these gain shares. I think there'll be time to convert them over to a SaaS-based approach over time. And then I think as we continue to build things out, make it simpler, we can potentially have kind of lower-end offering that may open up even that bottom end of the market and have some offerings for that end that are addressable for the lower-volume suppliers.

Super interesting. Maybe just on this point, I think one of the things that's really interesting for me about SupplyPike is it seems to open up a new arrow in kind of the cross-sell field of growth. So I'd love to just hear more about your current approach to cross-sell. You have the analytics product, obviously, maybe that's had some fits and starts in terms of the growth rate. But how are you kind of targeting customers for cross-sell with these products? And what is that -- how are you exposing to them? And yes, what does that look like?

Yes. Good question. So I think one of the important -- most important things to know about our business is it's very much driven by upsell and cross-sell existing customers. We very much -- even in the core network business, have a land-and-expand type of model. So it's very common for us to increase that average revenue per customer or the average revenue at a customer by adding trading partner connections on our network. And that's a very strong sales motion that we already have in the company. We also have existing motion to cross-sell the analytics product and now with SupplyPike, have another product. I do think as we grow and mature and size that up and potentially add even more products in the product portfolio, we'll do what a lot of technology companies have done in terms of cross-selling at scale, where we've got kind of account management that's managing the relationship with the customer and managing the opportunity for cross-selling of that customer and kind of an overlay team with product specialists that we can bring in at the right point in time to provide very specific product expertise that's needed in the sales process.

Got it. And maybe on the analytics product, I think one of the big advantages you have as a company is this kind of scale of the network and the amount of data that you're exposed to. Maybe you could talk about -- we can't take it out of a tech conference without talking about AI. So maybe how you're able to -- how you're thinking about leveraging those data assets that you have, whether it be to the analytics product or some other means and what that could mean?

Yes. So I do think we have a tremendous opportunity to leverage the data that's going across our network. Our analytics product has really been focused on point-of-sale data, which is a critical element in supply chain planning for our suppliers. Often a supplier knows what they sold to a retailer, which is called the [ sell 2 ], but they don't understand then what -- how much of that is still sitting in the warehouse at the retailer, how much it actually has been sold to end consumers at the stores. And then, of course, what stores have they been sold at. So that's really where that point-of-sale data comes through, and that's kind of the core element of our analytics product. Although we're seeing increasing interest in just the data that we have about the [ sale 2 ]. So the vast amount of purchase order data and the best amount of product category data we have, based on our size and scale now, there's quite a bit of the total retail economy in the U.S. that's flowing through our network. And so we're looking at some things in different ways that we could potentially monetize or have offerings around that data that's flowing through our network, in addition to the point-of-sale data that we're already monetizing today.

Super interesting. I think, Kim, when you were talking about the different ways that you guys go to market, one of the things that came up was this partner channel and partnerships with ERPs. I'd love if you could kind of give kind of the lay of land of what does that partner ecosystem look like today and kind of what investments are you making? What seems to be resonating?

Sure. So our channel sales team, think of them as they're out and surrounding sort of the ERP universe, right? So that means they're building relationships directly with ERP companies as well as the sort of intermediary. So think of them as the value-added resellers, the systems integrators, the GSIs. And the purpose there is to make sure that SPS is sort of front and center thought of across that universe. So when there's a company that's looking to make an ERP change, and they're in the retail space, we naturally can then fit in and help do what we do, the fulfillment side of the world. So think of it as the channel sales team builds the relationships and then it's almost like there's a referral. It's like the lead comes in, and then our direct sales team will be the ones that will actually do the outreach to that prospect. As I had mentioned earlier, typically, for a company here, they probably already had to figure out how to do this if they're in the retail space. So it's a great opportunity for us to come in and win that business by ripping and replacing what would typically be more of a do-it-yourself type model. I also had alluded to, they're a bit larger in size. So when they join us, there's usually multiple connections that we are helping sort of onboard on to SPS Commerce at that point in time.

Got it. And then is there kind of an ERP migration story here as well, just thinking through some of the bigger ERP vendors are going through, in some cases, forced migrations. Is that kind of a catalyst sometimes for looking at something like SPS and how are you thinking about that opportunity?

So what I would say is our channel sales team, there's obviously lots of different ERP systems that our customers are using and prospects are using. We tend to have a pretty strong presence in a couple of different areas. So you can think of that as like a Microsoft, [stage, Mike's], NetSuite, Oracle, SAP, of course, there's quick books in some other areas like that as well. And what's interesting within our business model, probably because of the depth and breadth of where we are, we're not really skewed just to one. We have healthy presence at across the area. So what that matters then is although there's going to be certain drivers within maybe an ERP area that might be an impetus for change, such as moving to cloud. But overall, since we play in all of these different areas, not one is going to tend to have any major impact to what's happening there. But of course, anytime there is a more of a push to a change or to more of a cloud-based solution, we should be a beneficiary of that.

Makes sense. I do want to pause there to see if there's any questions from the audience for Chad and Kim. We have a mic to pass around potentially? Maybe just put up a mic real quick.

Yes. Sorry. So you spoke about displacing incumbent solutions. Who are you really seeing in terms of displacements? Is it somebody like an access? Or is that a completely different business model? If you could maybe speak a bit about that?

Yes. Want me to take this one?

Sure.

So when we're talking about the displacing some more of those larger size supplier, somebody that might already be doing this in some way other than with us, there's been a lot over sort of decade plus, there's been a lot of consolidation in this space. There's a couple of names that might resonate with you that are more in that, I'll call it, you're buying hardware software, more of that do-it-yourself type model. Their -- GXS would be an example of a company, Sterling would be an example of a company. Both of those are owned by a parent company, but those would be 2 companies that offer a service, not exactly the same as what we do because ours is more of a SaaS solution, but that would be more of a legacy sort of hardware software do-it-yourself type model. So that would be examples of companies that if we're going in and winning that business, we potentially are displacing one of them from what that prospect was using.

Any other questions out there? We'll get the mic, one second.

Just a question around the implementation of your solution, like especially on the displacement, how does that work? Do you do it yourself? Or do you like system implementers like Accenture or others?

So as it relates to implementation -- because it's a good point, when you're joining SPS, there is some work, there's setup that needs to be done. So in that case, let's say, it's a company that is choosing SPS Commerce and they have Oracle as their back-end ERP solution. We will make sure as part of our service, right? We're getting a subscription from the company, but they will pay us a set-up fee or a onetime fee for us to get them up and running. And so what we'll do is we can approach that in a couple of different ways. We have our own team, our own staff of implementation experts that are able to, from beginning to end, soup to nuts and get that customer up and running. Sometimes, we may partner with a third party that has some expertise in that last, call it, maybe last mile integration. That is an example of over a multiyear time period. We've actually -- some of our acquisitions have been companies that have had more expertise in a particular area. So one example I could give there is Data Masons that has an expertise in really that Microsoft space. That's a company we partnered with for many years. And we chose at one point in time to say, why don't we just own that technology ourself, and then we're going to own that integration soup to nuts with that customer. So long-winded way to say, a lot of times we do it. And that sometimes we will also bring in another third party to help out as well.

Great. Any other questions out there from the audience? Okay. Maybe I'd love to ask on the international opportunity. You guys have had TIE under the umbrella about a year now. What have you kind of learned from having that business under the hood? And how are you thinking about kind of future investments in that space?

Yes. So a couple of things with TIE, we really got kind of 3 elements, I think, so TIE, although headquartered in Europe, had a just under half the business in North America, and that's all been very complementary to our North American business, and we've integrated that because it's geography and similar pattern of our business quite seamlessly. The other element that we got was e-invoicing capability. So this is a product outside or throughout Europe and in some other countries in the world, there's a mandate to provide a copy of the invoice to the tax authorities when you're doing B2B transactions. And that was a capability we didn't have in our product portfolio. It was a little bit limiting for us doing business with our fulfillment product outside of the United States. So great to get that capability into the product portfolio as well, and that should open up more, call it, internationalization of our go-to-market over time. And then, of course, we had the beachhead of a go-to-market for our fulfillment product, kind of the classic network EDI product in Europe. And what we're finding on that front is a lot of the things that we would have seen in the U.S. market, say, 15 years ago, we see in Europe. So yes, EDI is being used there. Yes, EDI is mandated by some retailers, but maybe the aggressiveness of the adoption is lagging behind where it is in the U.S. We don't yet see any players over there who have done what we've done with the community enablement programs and partnering with the retailers. So definitely some signs that some of the playbooks that we've used in North America maybe opportunities in Europe. I would say we also see some additional complexities in Europe, meaning we're able to run a whole community enablement campaign across the largest economy in the world, all in a single language here in the U.S. It's a lot more fragmented and regionalized and language implications in terms of how to do that in Europe. I would say also in the U.S., we see a lot of power in the supply chain sitting with the retailers, maybe a bit more balance of power between the retailers and the suppliers in Europe based on the regionality and just generally smaller size of retailers in Europe. So definitely some things that we'll have to navigate in that market. But early indications are some of the things that have worked well for us in the North American market are likely to translate to Europe.

Super interesting. On the e-invoicing point that you brought up, are you thinking of that as kind of a joint sell? Does it just kind of expand the size of the fulfillment land? Or is it essentially like a tip of spear type product where you can get in with invoicing and then cross-sell fulfillment? Or how is that working out?

We're really viewing e-invoicing as a feature of our fulfillment product. So in the case that we're implementing fulfillment in geographies that have this e-invoicing requirement, now we can meet it in those, but really leading with the fulfillment product rather than leading with stand-alone e-invoice.

Got it. Maybe just generally on the kind of M&A strategy. You did Traverse, which was kind of helping monetize the retailer side a little bit. Most recently, SupplyPike, which is more of a cross-sell opportunity. So maybe moving -- not moving away from, but a little different from maybe the more like roll-up style EDI acquisitions that you've done in the past. Is this going to represent any maybe change in your M&A approach? Or is this just kind of another look at it?

Yes. So we do have this very strong history, a very successful tuck-in M&A or EDI type M&A activities. I think one of the realities that we were likely to encounter is, I think, as the industry is consolidated and we've been a big consolidator there. We're likely to find fewer in the next 10 years as we found in the last 10 years of that flavor. And so we have done the product strategy work to, what I'd say, open the aperture a little bit in terms of the type of M&A and open up some of these things that are product line extensions, very applicable to our customer, very close to the business process we're helping them with today, but definitely a product line extension. We think that should contribute then to cross-selling and should open up the TAM for us a little bit. So I wouldn't say it's -- and it's necessarily a big departure, but just maybe a widening that we think keeps a healthy M&A pipeline in front of us.

Makes perfect sense. I did want to touch on kind of the margin framework. I think, Kim, you talked about gross margin starting to increase in the back half. Maybe if you could walk us through the mechanics there? And then how you're thinking about kind of the long-term gross margin? Like where is the ceiling on it as you see it here?

So the gross margins have been hovering around, call it, sort of mid-60s. And we think longer term, that can get to sort of low 70s. Now how we go about that, then will not be like an inflection point and overnight, we move from one to the other. You should think of it as more just sort of a gradual improvement that we'll be seeing in gross margin. The biggest way in which we're going to go about getting that is actually really more of an efficiency and scaling. So sort of flowing into various investments that we've made over the years. We'll continue to, of course, add resources as is appropriate for overall customer experience. But we do believe we've sort of reached a point where we should now be able to not have to add to that same pace that we've had to historically. And therefore, that will naturally sort of show up in the P&L in the form of increased gross margin over time.

Excellent. We've got about a minute left. So maybe just to close, you guys are sitting here at Citi 2030 Conference. What does the business look like then? What does the industry look like?

Yes. Good question. So I think ideally, at that point in time, we've continued to maximize this core opportunity around these undigitized connections. We're seeing -- I would expect there more innovation in terms of omnichannel, but also how people in the supply chain are collaborating more digitally, maybe even in some ways that we haven't even thought of today, and we've been able to take advantage of that across our network. And then I think within SPS, you're likely to find a bit broader product portfolio of things that we built ourselves or acquired or partnered with. So just more ways that we're helping our customers and probably doing in that in some geographies in a more extensive way than we are today.

Excellent. I'll leave it there. Thank you, Chad and Kim, and thank you, everyone.

Thank you. Appreciate the interest.