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

Excellent. All right. Well, welcome, everyone, to Citi's 2025 Global TMT Conference Day 2. Good morning. I'm George Kurosawa, software analyst here at Citi, and I'm pleased to be joined by SPS Commerce CEO, Chad Collins; and CFO, Kim Nelson. For those in the room today who are joining us, I will leave time at the end for questions. So if there's anything we don't address, please don't be shy. To start with Chad, if you wouldn't mind giving us the SPS story, who are your customers and what do you do?

Yes, absolutely. So at SPS, we operate a network in the cloud that connects retailers and distributors with all of their suppliers to exchange supply chain information across the network. And we're unique in operating the world's largest retail network doing this and the fact that we've done and solved the supply chain data exchange problem with a network-based approach. The other way that we're unique is our go-to-market approach. We will work with retailers. And surprisingly, retailers don't have all their suppliers digitally connected, and we provide an enablement service then to do all the outreach to all these suppliers and take them through a process to help them get digitally connected to the retailer, and that helps us build out our network. So, as a result of all this, we've added over 50,000 suppliers to our network, many of them doing -- trading with multiple partners across our network.

Excellent. You recently updated your TAM figures to an $11 billion opportunity. Maybe if you could just walk us through kind of the breakdown there. Where do you feel like you are most underpenetrated? Where is the opportunity as you see it?

Yes. So as we refreshed our TAM, we really did it from a bottoms-up analysis looking at all the potential suppliers that could join our network and found, one, a significant opportunity still for suppliers to be added to the network. Most of that coming from suppliers that are not using digital connections to their retail partners and would get benefit from a network like ours. And we also saw a significant opportunity to add to the average revenue per customer coming really in 2 components, the largest being more connections from existing customers on the network. So we found that a number of our customers, there's still further penetration opportunity to add more connections with our trading partners on the network. And then to a smaller degree, also an opportunity to cross-sell our broader product portfolio to the customers to increase the average revenue per customer.

Excellent. I think we're about a month and change removed from your Q2 print. And I would love to follow up on a few things there. I think you guys called out some incremental macro headwinds in the quarter, and then you gave some new go-forward growth and margin targets. So maybe just to start on the macro side, if you could describe what you saw with that subset of mid-market customers? And then just talk about kind of your macro resiliency sensitivity more generally. I think of you guys as a more resilient business model. A couple of things have popped up here. Just how are you thinking about that component of the business?

Sure, sure. So as we've seen a little bit of macro pressure on the retail industry and in particular, the suppliers to retailers and then also headwinds coming from the uncertainty from the global trade environment, what we saw was actually pretty steady and consistent demand on the retailer side of what we do. So the pipeline for these enablement campaigns, that I mentioned before, has remained strong and actually customer additions, which are primarily driven through those enablement campaigns, has been strong here in 2025. On the supplier side, it's been a little bit different. I think, especially driven by the global trade uncertainty, suppliers that are more small and medium having fewer sources of global supply. They may be single sourced to certain countries. That's created some uncertainty for them. And I believe that uncertainty has been sort of met with some more scrutiny, not specific to SPS Commerce and their spending with SPS Commerce, but in general, cost scrutiny and looking at all types of recurring costs on the supplier side. And so what that has resulted in for us is just some prolonged sales cycles. Another nice channel for new customer wins for us is mid-market ERP conversions. That's often a time if they implement new ERP, they'll convert all their digital connections over to our network. We've seen some of those sales cycles slow down as well. So I'd say, in general, the business has proven to be quite resilient to the macro. But what I would say is the time period here has been, I'd say, a little maybe unprecedented, similar to actually what we saw in the first couple of months of the pandemic. And then we saw some acceleration generally in retail, which kind of picked things up in the pandemic. So we're optimistic that this was sort of a onetime set of cost scrutiny. And as there becomes more certainty, especially in the global trade environment, the spending on the supplier side of our network will pick up, as it has been steady already on the retail side of our network.

Okay. That's really helpful color. And then on the upgraded -- the updated growth and margin framework, at least high single-digit organic growth, 2 points of EBITDA margin expansion per year, a point that I think gets missed quite frequently. Maybe you could just talk about how you guys kind of triangulated on those numbers just to start with.

Sure. Yes. So to your point, we provided an updated view, and it's a bit of a broader view. So just for context for those that may or may not be as familiar with SPS, every year, we guide specifically for the year of what our expectations are. But then periodically, call it, every 3 to 5 years, we provide a view that's a little bit more broader of how investors should think about our business in a multiyear time period for both how to think about growth from the top line as well as how to think about profit or EBITDA from the bottom line. So that is what we updated in our last quarter, which was our broader statement of at least high single digits top line with, to your point, 2% margin improvement from an EBITDA perspective. So the puts and takes are how we got there. If we start with the top line, I'll piggyback off of some of the comments Chad just made. So we certainly are in a time period where there are some uncertainties out there, as it relates to global trade environment, our customer spend, et cetera. We did take that into account, but we also do know that there's still a very large opportunity that we have with our TAM for customers to continue to buy more products from us. And the way we go about and getting those customers initially, those are very strong engines for us, the community enablement as well as the channel sales. So various scenarios we put together to evaluate what do we think that could look like. And all of that translated to scenarios that got us comfortable to say at least high single digits. Now the prior statement that we had made going back about 4 years ago, we had an all-in stated goal of 15%, which did include M&A. So one notable difference between these 2 is this comment that we're making excludes M&A. So the way investors should think about that is that would all be additive or on top of our stated goal. Specific on the bottom line or that EBITDA margin of 2 percentage points, there's a couple of reasons that give us conviction of why we can deliver that. One, being a SaaS business, there are inherent efficiencies that one can get with a SaaS business model. Two, when you have a growth rate expectation of high single digits, we do want to make sure that we are appropriately spending accordingly based on having a growth expectation of high single digits. Simplistic example would be there. We don't necessarily need to add as many additional resources when your top line is growing a little bit less than it otherwise would have been. On top of that, we have made a lot of investments in the customer experience over a multiple year time period. And we're at a point where we're going to be able to start to grow into some of those investments. You're already starting to see that come through in our gross margin in 2025. And we have a stated goal longer term of about low to mid-70s versus mid-60s where we historically have been. So all of that has been taken into account with our belief and conviction of why we can grow at least high single digits top line, while delivering approximately 2 percentage points EBITDA margin expansion on an annual basis.

That's excellent color. So you said you have historically updated those numbers on a 3- to 5-year basis. I think a lot of people took your comments as like a 2026 guide, which I think is probably the wrong interpretation. Is it fair to think of this more as like a 3-year outlook? Or is there any sort of -- how would you frame that?

Sure. No, that's a great way to look at it. So as a business, we will provide our official guidance specifically for 2026. We'll do that on our Q4 2025 earnings call, very similar to what we do on an annual basis specific for the year. Yes, George, to your point, that comment is more of a broader statement. It's also why the statement is saying at least high single digits. There's various scenarios over a multiyear time period that translate to different numbers. And since it's a broader statement, meaning over a multiple year time period, we felt comfortable providing that perspective of saying the at least high single digits.

Excellent. So I'd like to unpack that high single-digit plus growth and how you kind of get there sustainably. Maybe just to start, if we think about your core North American EDI fulfillment market, if we just think about that business by itself, how far does that get you? Can you achieve high single-digit growth with just that before we consider things like international, the cross-sell and all these other growth initiatives?

So I would say to come up with that number and knowing that there's various scenarios, it takes into account all of our existing portfolio. And then there's assumptions of how that growth will occur over time. So the core fulfillment product is a big contributor, but it also does include our other product offerings. Analytics currently is -- there's a lot of headwinds on analytics with the uncertain economic times, and that is a product where we have historically seen and we would expect to continue to see more pressure in those more challenging economic times. But we have a new product offering on the revenue recovery side, still pretty new for us, but over multiple years into the future, we certainly do see nice cross-sell opportunities. So all of that has been taken into account relative to our expectation. When you translate that and look at it relative to TAM, the biggest chunk of that is the core fulfillment, even though, of course, there's still opportunities in both revenue recovery as well as analytics.

Excellent. Okay. Well, maybe let's talk revenue recovery. That's a really exciting opportunity, I think, Carbon6 and SupplyPike, the 2 acquisitions there. If you could talk us through the strategy, where you're at on the integration status and how you're thinking about early performance?

Yes. So maybe let's start with the problem that our customers have. Our customers are the suppliers to retailers and retailers put in place very complex rule book that dictates how the supply chain needs to operate if you're a supplier to a retailer. It covers everything from these digital transactions and messages that we've already discussed here to, how you need to put the boxes on the pallet, how you need to label the pallet, what transportation carriers you can use and at what time frame it needs to show up to their distribution centers. If you violate any of these rules, the retailers will charge a penalty for that. And the way the penalty happens is they just short pay your invoice with a very mysterious sort of penalty code associated with that. Well, that presents big challenges for suppliers, right? I mean, one, nobody wants to get short paid on their invoice. Two, if you do, you want to understand what the problem was, so you can fix it and make sure it doesn't happen again. And then on top of that, we find that about 7% to 10% of these chargebacks or penalties are actually errors in the retailer system. And so if you have the right supporting documentation, you can dispute them and get your money back. So that's the big problem that we were hearing from our customers. And as we looked at how we might address this problem, we found that there were some newer SaaS companies that have been built that were solving this problem for suppliers to retailers. And the way they were doing that is kind of building out around solutions for specific retailers. So the first one that we found was SupplyPike. SupplyPike had started solving this problem for suppliers to Walmart and grown out to Target and Lowe's and Home Depot and CVS and a few other retailers. And that was our first acquisition in this space. We felt that it was more efficient to -- from a time-to-market perspective to acquire in this space versus build or partner. And shortly after that, we engaged further with Carbon6. And Carbon6 had deeper penetration with Amazon, which was not yet built out on the SupplyPike side. So we felt that by combining SupplyPike and Carbon6, we could get the broadest retailer coverage. And there's a tremendous opportunity for us to cross-sell these solutions over to our fulfillment customers that we already have on the SPS network. So where we're at with the integration, it is important that we go to market not as Amazon solution or a Walmart solution, where we bring all the retailers together. So we have unified the go-to-market for revenue recovery, have one go-to-market that covers all the retailers. We also offer it in a couple of different formats. If you want to use our platform and manage the recoveries yourself, you can do that just with a straight platform subscription fee. If you prefer for us to handle on more of a white glove service basis, the recoveries on your behalf, we can do that for you as well. And in that case, we take a percentage of the recoveries for that more white glove service. So we've integrated that whole go-to-market. We have those teams selling together now. And we've kicked off early cross-selling opportunities back to our SPS fulfillment customers. But I'd say we're in early days and expect that to ramp up more over the next several years.

Okay. Excellent. And when you think about the sort of pace of rolling that out to your sales force and ramping up that cross-sell, you framed it as the next several years. Is it -- can you kind of walk us through, is it fair to think of 2026 as kind of a sea change from what you saw last year where you're doing more of the product integration, turning on the cross-sell in 2026? Or is it going to take a little longer than that?

Yes. So I'd say what we've seen in 2025 is some early success. Even in our last earnings call, we highlighted a customer, all-star products, who've been a long-time SPS fulfillment customer, they were introduced to the revenue recovery solutions and selected it for recoveries for a broad range of their retailers. So those types of proof points show that there's definitely an opportunity here for the cross-selling. I'd say at this point in time, it's been a bit more in an opportunistic and pilot phase, as we ramp up the knowledge of our fulfillment customer account managers on the solution to help identify opportunities for revenue recovery. And as that becomes to get more programmatic in 2026, we should see an increase in that cross-selling. I'd say the other benefit that we have in this cross-selling approach is that we're a network company. So we see all the data that's flowing and understand the transactions that are processing between a supplier and a retailer, which can really help us do kind of back-end prospecting based on that data to help the sales team identify those opportunities in a more programmatic way.

Really interesting. As it relates to the Amazon ecosystem, I think that's an area we've gotten some questions about some of the changes they've made to their ecosystem, particularly on the 3P side, which I know is not kind of the core focus of what you're doing there. But just anything in terms of implications or impacts that you've seen?

Yes. So we see tremendous growth in the Amazon marketplace and continue to see more and more sellers there, which just increases our opportunity for revenue recovery. There has been a few maybe more well publicized on the Amazon changes in their policies relative to what can and cannot be recovered. And what I'd say is that these retailers are always changing their policies around their penalty programs. And it really is driven by their need to modify their own supply chain performance and supply chain scorecards. So that really is the benefit of a supplier being on a SaaS platform like this rather than needing to keep up with all the rules from all the retailers when these policies change. If you're on a SaaS platform, we maintain the compliance with all those rule changes and support it on a platform and then you get it through the technology. And so in this sort of ever-changing policy and rules changes relative to these chargebacks and penalties, that's really a huge driver of why you want to be on a SaaS platform rather than try to manage this all yourself.

That makes perfect sense. Really analogous, I think, to your EDI value proposition in a lot of ways. The fact that these rules can change and do change as part of the value proposition. Okay. International, I think another really interesting long-term growth opportunity. I think from our perspective, the question is really around kind of pacing of how you are thinking about rolling that out. It seems like you guys are thinking more kind of country by country. Maybe if you could just talk to us about what the current strategy is there?