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

All right. We can go ahead and get started here. So thank you, everyone, for joining us here this morning. My name is Chris Quintero. I am the supply chain software analyst here at Morgan Stanley. And I'm really excited to be joined here by the SPS Commerce team. We've got Kim Nelson, CFO; Chad Collins, CEO. Thank you for joining.

Thank you.

Thanks, Chris.

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So to kick things off, maybe for investors who are less familiar with the SPS Commerce story, give us a quick overview of what you all do, some of your key products, who are your core customers?

Yes, absolutely. So we operate the world's largest intelligent supply chain network with a focus on retail and distribution industries. And so across our network, retailers and all of their suppliers are able to exchange information about their supply chains, usually around the buying and shipping process. And we have 50,000 participants and 300,000 unique connections on our network. And the way that we monetize all that is typically by working with the retailers who will gain us access to all of their suppliers to help them digitize all those connections with their suppliers. We'll monetize the suppliers for use of our network by the number of connections they have on the network as well as the data that flows across that. Then also on top of that network, we have analytics capability where we pull in data from point of sale. So the actual end location where products are being sold in retail and clean up that data, service that back. That's great for suppliers because it's very important in their supply chain planning to understand exactly what's being sold at the endpoint. And then we have a new category on the network that we built out through a couple of acquisitions and product development over the last couple of years in the area of revenue recovery. So this is the charge-backs if you have a supply chain error or the penalties that retailers will charge their suppliers for those errors. Oftentimes, those penalties are not legitimate penalties. And so we help our supplier customers get money back from the retailers when they're erroneously charged for penalties in the supply chain.

Awesome. Kim, after 2 decades at SPS Commerce, you're retiring. So congrats on the retirement here. Joe Del Preto who is joining as CFO. So curious from both of your perspectives, what are some of the key financial priorities you're really excited by him taking over? And what is his perspective going to bring into the company?

Yes. Well, I can start with some of the process we went through. So what I would say is very typical with SPS. We do a lot of succession planning. It's a multiyear process. We want to make sure everything is done in a way that is very seamless. So there's also a nice transition. So both Chad and I obviously were heavily involved in the process as well as the Board. And one of the things that really stood out to me with Joe, he is already a public company CFO. He already is -- has a lot of experience and expertise in the SaaS and the software space. So from the -- I start there because of investors here in the audience, you are in great hands with Joe, and there's actually a ton of overlap even in the banks that cover SPS and cover where his former employer was. I also think that a focus on really that balanced approach, meaning lots of opportunity to continue to grow, huge opportunities still in front of us with the TAM, but we can do that in a way that also is very profitable. So we drive a lot of cash flow. We also have the opportunity to expand margins. He brings all of that sort of discipline and skill set. And I would say his approach fits in very well with sort of our strategy, our vision, our culture, our environment. And I think it's going to be great to have him added to the ELT for Chad, and I feel like in great hands for what I would call inning 2 for SPS.

Yes. And I think he's well aligned just to this balanced approach that we have of growth and profitability. We're obviously in a strong position to already generate a lot of cash in our business. Lately, we've been able to utilize that for share repurchase as well, which has been great. Joe is very much aligned with this approach. But I'd still say we've committed 200 basis points of EBITDA margin improvement going forward in the business. And so without sacrificing our long-term opportunity, we do think as we scale, there's continued opportunity for margin expansion. We've showed a lot of that through the gross margin. I think that will continue. And Joe is very much aligned with that disciplined and balanced approach that we'll use going forward.

Let's jump right into the AI debate. Clearly, a lot of investors are concerned about the terminal risk value across all of software, and so from the SPS Commerce perspective, curious what's really your competitive moat? What makes you really defensible against some of these risks from AI startups, large language models.

Yes. So I'll just say -- I mean we're super excited. I know the sentiment for software companies isn't that great out there, but we're seeing, day in and day out, both with new capabilities that we're adding to a product like the new MAX agentic capability we built right into the network, and we've got 3 features that are out in beta right now with customers. We think customers are just going to be able to do the things that they have been doing with SPS in a much more efficient way using this agentic technology and will likely unlock a few new use cases through it as well. We're also really excited about how it's going to affect our internal operations. We are already seeing big strides in the software development process and how we've agentified a lot of steps there. We're moving on to some of our customer relationship management and how we interact with customers and seeing what steps can be agentified there. So I'll just say, like internally, we're very bullish and excited about these technologies. I think with the disruption story and compared to some other SaaS companies that are out there, we do see a few things that put, we believe, SPS in a strong position. I mean, first, the data that we have on our network. Data drives a lot of these agentic use cases. And we think we're in a strong position there, both by having the customer-specific data and allowing them to access that data through other workflows and MCP access but also the broader network data that we have, which can be very valuable if served up in the appropriate anonymized ways. The other thing is we're not a seat-based -- we've always been usage-based. So really, the primary drivers of our model have been about how many trading connections you have on the network and how much information you're flowing across the network, which I think is tied more to how customers are getting value from our solutions. And then finally, I'd say we're not the largest ticket size, either in most IT organizations. Our average revenue per customer is around $12,000 and so if an organization is going to try to write out some of their other IT applications using agentic technology, I don't think SPS Commerce is going to come to the top of that list nor do I think it's an area they want to go after first, right? We're very sticky. We're core -- I mean for most of our customers, this is the main way they get all their orders from the customers. So it's pretty important for them.

Yes. Yes. So it's small ticket size within the broader kind of IT budget department, it's that usage-based model, it's the customer and the network data that you all get.

Absolutely.

You mentioned it a little bit, let's dig into MAX. Some of the new agentic AI capabilities you all have rolled out. I think there's 3 components. So maybe give us a quick overview of what it is and what makes you really excited about it.

Yes. So first, just from a technical architecture perspective, I think it's important we have our underlying network in all the applications that we sell to our customers are connected and riding on this network. So it kind of has become the platform layer, if you will, for SPS Commerce. And that's the level where we've built MAX and built that agentic capability. And then that allows us to serve it up as specific features in the application level. And so the first 3 features we've done are in our fulfillment product. So the first is MAX Chat and MAX Chat is right in the user interface. So it has context of where you're at in the application and what you're working on and 2 primary pieces of data that are really helpful that MAX operates on. One is the data that you have in the network. So those could be orders, invoices, et cetera. But probably just as importantly, is MAX has access to all our proprietary retail knowledge in the organization. So this is -- of course, the rule books that are published by the retailers, but we have 20 years of augmenting all of that with all the specific supply chain requirements that retailers have. And MAX knows all about that. So that allows you to do things like go into MAX Chat and say, "Okay, MAX, what is the time I have to acknowledge a Target order versus the time I have to acknowledge a Walmart order?" and MAX will tell you all the rules that are different about that. And then you can say, okay, "given this, go look at all my orders, MAX, and tell me which orders I need to acknowledge in the next 4 hours to be compliant with Target or Walmart." So kind of a simple example there, but if you start seeing how this combination of your data, plus all these proprietary retail rules can work together to execute that workflow. So that's MAX Chat. And then MAX Monitor is basically a dedicated agent for every connection you have on our network. So an agent that's looking after all of your connections to all of your customers of course, making sure that, that connection is technically up and running and viable, but maybe more importantly, looking for anomalies on that connection. So if you normally get your orders from Walmart that come in on Tuesday, and they have to be shipped on Thursday. And now it's Wednesday, and you haven't received your Walmart orders, that's something that MAX Monitor will pick up on and identify that. If you usually send all those invoices for those shipments on Thursday afternoon and now it's Friday morning and you haven't invoiced your customers, that's something the MAX Monitor will pick up on. And then the final feature is called MAX Connect and MAX Connect is an MCP endpoint, which allows for agent-to-agent communication. So because of the data and rulebook and rich information we have, we do realize that we will play a role in workflows across the enterprise that are going to be driven by agents that are not necessarily SPS agents. And we did something cool at the field kickoff we just had a few weeks ago, where we had one of our large ERP partners. We had our MAX and we actually interacted with both of those together via Claude interface. It could have been any LLM, but then that interface was able to go across data that's in our network, data that was in the customer's ERP system and really provide some unique context around both of that. And so you can see how those agent to agents can execute workflows that are going to be multi enterprise workflows. And then we think that we'll be able to monetize all those interactions over time once we get out of the beta phase.

Yes. Yes. I know it's a bit early, still in beta phase, but curious what's been some of the early customer feedback? And if you thought, how are you going to monetize this?

Yes. So early customer feedback has been extremely positive. We're somewhere between 50 and 100 customers right now that are actively using this in beta form and I think the most important thing is a bunch of those customers have come back and said, "Hey, don't take this away from me." So I think that's a good sign. And in terms of the monetization, we're still working through that. Expect it to be some kind of monetization to pay a fee to gain access to these features and then have that scale based on the usage of those features based on some sort of usage token concept, most likely.

Got it. Let's talk about the retail sector. It's a big part of the customer base that you all serve here. So I'm curious how those industry dynamics have shaped kind of your growth rate over the past few years? And how do you think about that industry dynamic going forward and how it impacts your growth?

Yes. So we have seen some changes in the retail landscape. Obviously, if we go back to the pandemic period, the pandemic was a big acceleration of retailers' omnichannel initiatives as the shops closed, as buy online, pick up in store became more important as there was a global trade situation where people couldn't get access to certain products, there was a diversification of the supplier base, all of which were favorable tailwinds for SPS Commerce. And because of our land and expand strategy, a lot of that carried out through sort of 2023 time frame. More recently, what we've seen is as a result of some of the global trade policies, a lot of the suppliers on the supplier side of our network have had a lot of just general cost scrutiny in their business as their cost of goods sold have gone up from the tariffs. They've looked at other places and then sometimes, they have found that they were potentially oversubscribed to certain elements of the SPS network. And so in 2025, we did see a little bit more pressure around contract scrutiny, contract reduction from suppliers. We did not see our customer churn change that's always been constant, but a little bit more pressure on those contracts. We're optimistic. We haven't quite lapped that liberation Day, but we are optimistic that through 2025, we did get those contracts rightsized, and there should be some positive effect as we lap some of those effects we saw in 2025.

Got it. That's helpful context. And one of the concerns I hear from investors is that EDI has been around for a while. It seems like you all are already pretty penetrated from a customer perspective, but you all have put out $11 billion, refreshed TAM, only about 25% penetrated per year analysis into that customer opportunity. So curious about that remaining 75% of customers that are out there. What are they using today? And why they have not been SPS Commerce customers so far?

Yes. So I'll share a couple of examples of customer stories that I think illustrate this. So first, on the retail side, in the last couple of earnings calls, we've highlighted the work we've done with Trader Joe's. So everybody knows Trader Joe's, big neighborhood grocery store. We've actually worked with them for a number of years, and they were really focused on the kind of higher-volume suppliers and getting those digitally connected. In more recent times, we went to them and highlighted all the benefits of having all of their supplier community digitally connected. They agreed with that, and we ran a successful 100% targeting program with them. Now they're also implementing our supply chain performance management. So it just shows there where, yes, they were doing EDI before but not for all of their suppliers and now seeing the benefits. And so we do see that at retailers where -- of course, they're doing EDI, but maybe not with the full tail of their supply chain. And there is a strong business case to get 100% of your suppliers digitally connected. Conversely, on the supplier side, I was meeting with a customer who had 2 or 3 of their retail trading partner connections with SPS, but did not have all 25 of their retail trading partner connections with SPS. The 2 that they had, they -- we had actually encountered them through one of our retail enablement programs. And as I sat with them and explained the benefits of getting all 25, they started to see that, hey, if they were connected to the SPS network for all 25, they'd have 1 seamless way to get all this order and information in and out of their ERP system and have a consistent internal operation by being connected to the SPS network. So that's the other piece I highlight. There's still an opportunity within existing customers for up to us to upsell more trading partner connections in the same account because certainly, we have customers where we absolutely have all of their suppliers. We still have other customers where maybe they're going and downloading certain orders from certain retailers from a portal or getting them e-mailed. And so there really is a benefit of just getting all of their trading partners connected via the SPS network.

Yes. So you've been working with some of your long-standing retail relationships for getting all their suppliers on to the SPS network. If we move on to the ARPU side, you all have given out a new growth algorithm, organic high single-digit growth, at least high single-digit growth. Most of that coming from the ARPU side. So curious from your perspective, as you look forward, where do you expect most of that to come from? Is it the cross-sell, document volumes, connections, where is that growth going to come from?

And on that, maybe if we go back to that TAM, so we do have a global $11 billion TAM within the U.S. $6.5 billion. And then if you look at the 2 components of that, on the U.S. side, it's a little less than 150,000 on the customer side, but up to 45,000 on the ARPU. And so that shows you there's a very large opportunity to ARPU. So now to that point on ARPU there's an opportunity once you've landed the customer, there's ways in which we can upsell as well as cross-sell. Historically, upsell has primarily been that go-to-market muscle and motion. So as Chad talked about, we might initially connect with that supplier through a retailer. We get that one connection. But then that supplier has other connections, other retailers they're doing business with. It's an opportunity for us to win those additional connections. That's that upsell motion. We've proven and demonstrated that for 2-plus decades in that opportunity of increasing ARPU. There's still a very large opportunity there. However, we also now have cross-sell opportunities. We have an analytics product and more recently, we have this revenue recovery product. So what's great about that is those give opportunities to even surround our customers, not just with our core fulfillment but with other ways in which we can help them in other products. So our TAM does take that into account. And some of those, I also think might be a little bit more relevant for more of those medium and larger-sized customers. So it's a smaller quantity of potential customers, but a very meaningful ARPU associated with that.

Right. The retailer-directed solutions from the Traverse Systems acquisition. I've said this multiple times, but I think that's really interesting and kind of you've always worked with retailers for a long time on the go-to-market side, but now kind of providing more products to them directly. So how do you think about building out that retailer solution product portfolio?

Yes. So really with what we got with Traverse, the supply chain performance management, that was the first offering kind of away from EDI connectivity for the retailer and that relationship management service we provide, but it was very logical because the core reason for the retailer to have all these digital connections is to improve the supply chain performance with their suppliers. But what we are finding with engaging with these retailers is, they didn't have good ways of measuring that. And that's exactly what the Traverse -- the product we got from Traverse has done is provide that whole performance management and score carding. So now we're able to come to the retailer and say, actually, the ultimate thing you're trying to drive here is better supply chain performance from your suppliers. Here's a tool to measure it. And oh, by the way, step #1 in that process is ensuring you have strong digital connections with all of your suppliers. And that's working very well. Admittedly, it was a big shift in go-to-market for us to combine this more performance and supply chain-based discussion, but things are looking good in that engagement. And I do think that there over time will be an opportunity to have a product portfolio that's around supply chain performance that retailers will be willing to pay for.

Yes. Let's talk about that go-to-market motion. You all talk about those community enablement programs. Maybe give a quick overview of what those are. And then you've also talked about a network-led growth motion more recently. What is that? And how are you kind of leveraging those network signals to drive upsell, cross-sell?

Yes. Sure. So first, on the retail side, we have an offering that we call relationship management for retailers that is really a process where we go through with the retailer to ensure that they have all of their suppliers digitally connected and compliant. And the way that suppliers can do that, of course, is by joining the SPS network, and we ensure their compliance across that network. The other option is that if suppliers have another means we will do a testing and certification process on behalf of the retailer to make sure that there are suppliers that are coming in that aren't on the SPS network are compliant. And that motion has worked very well for the company for a number of years because every time we run 1 of those programs, those retailers and distributors are giving us their full list of suppliers. And so it's like a built-in lead generation motion for us. And we do expect that, that will continue, both in working with new retailers, but also going to retailers that we've worked with historically and either doing new fulfillment models, which typically introduce new vendors or suppliers into that and establishing what we call ongoing supplier onboarding where we're just baked in to that retailer or supplier onboarding process, and we get access to every new supplier that they bring into their assortment. Then on the network led growth side, this is really around how do we look inside our network and see our customers' trading activities that gives us signals to what we might be able to upsell them or cross-sell them on next. Of course, the usage of the network is 1 area where we can monitor that and do monitor that and drive upsell but also looking at our customers and looking at the volume that they're doing with certain retailers where we do offer revenue recovery for those retailers or we do offer analytics for those retailers. And then based on those volumes would lead -- could send us a signal that tells us they're a likely candidate for cross-sell of revenue recovery or analytics.

And then how is that progressing so far? And when do you expect that to really start contributing meaningfully to the results and the top line here?

Yes. So this year, we have put in place incentives and expectations for our fulfillment sellers around cross-selling objectives, both analytics and revenue recovery. And as part of that process, there's tooling that allows them to get those signals that come off the network. Definitely, there is a shift underway at SPS, where we're developing more of the upsell and cross-sell into our sales methodology to drive that ARPU growth where I'd say, more historically, the company has really been driving most of the growth of the retail programs and access to new customers that have come through that. It's not to say that motion stops, but we want to augment that with a stronger upsell and cross-sell motion in the sales force.

Let's talk about recent results. You all called out some macro weakness over the past 3 quarters and the 2026 revenue guidance came in a little bit at the lower end of your target here. So curious if you can unpack what are some of those drivers that led you to that guidance? And what's the path to getting up towards the higher end?

Sure. So when we think about the guidance, it takes into account how we exited '25. And as you know, with subscription business and SaaS models that sort of -- your starting point matters then as it relates to your GAAP revenue for the next year. So we took that into account. And we also acknowledge some of the dynamics or the headwinds that Chad mentioned as it relates to some of the supplier purchase behavior where they might be down selling, et cetera, and some of those sort of macro headwinds and pressures. So we are still lapping some of that. So when you look at our guidance, we provided our expectations for Q1. We also did for the full year. In order to get to that full year, there is an implied higher growth rate in the back half of the year than the front half of the year, and that is because of the fact that we're still lapping some of those headwinds very simplistically by -- I think about by the end of Q2, we've completed the lapping of those headwinds. So all of that has been taken into account. We do expect continued opportunities to work with retailers on these community enablement campaigns. Those are certainly an important part of our growth, and we see that strong in '26 albeit a little bit later in the year versus the beginning of the year. The cross-sell motion that Chad talked about was revenue recovery now that we have that combined go-to-market engine. All of those things are now in place, and we'll begin to see the benefit of that, but the way the recurring revenue model works, more of that, you will see show up in the GAAP revenue in the latter part of the year.

Yes, second half of the year. Let's talk about Carbon6. You have to bring down your expectations a little bit for that growth in '25. So walk us through the Amazon policy change that impacted you? What led to that kind of lower growth rate? How do you think about that contributing for 2026?

Yes. So Carbon6 was part of our broader strategy to build out this revenue recovery solution for our customers. We heard from customers that they were really having challenges with their charge-backs, how to manage those. And it's a combination of both getting their money back when these charge-backs are erroneous, which is obviously important to them. But maybe more importantly, how do I go from a mysterious code on an invoice that's showing that I didn't get paid for something to understanding the root cause problem in my supply chain. So it's really this combination of get paid when it was erroneous, but maybe more importantly, get better in your supply chain so you can perform better for your retailers and help grow your business with that retailer. So that's what customers were telling us that led us to investigation of this particular area. We decided to get to market fastest through acquisition, which first was the SupplyPike acquisition, which is really a SaaS platform for managing all these charge-backs. Biggest focus there on Walmart, Target, some of the more brick-and-mortar retailers. We saw that we could further build this out by the Carbon6 acquisition, which gave us deeper penetration in Amazon, but really allowed us to more quickly have that full retailer portfolio. So that's the overall strategy. Unfortunately, what we saw on the Amazon side was after a really good performance in this business through the first half of last year that we owned it. We saw some policy changes on Amazon side, which reduced the amount of sort of penalties that Amazon was incurring on their sellers, which reduced the amount of revenue that we could recover on behalf of our customers. And the majority of the -- although for some of the other retailers, it's more of a subscription model. On Amazon, the historic model for Carbon6 was more on a take rate basis. where we recover the revenue for you and we take our portion of that. And in that take-rate model, when the amount you can recover reduces our revenue opportunity reduces. And so we've monitored the situation, tried to set the right expectations going forward. We do think -- we believe strongly in the overall strategy, and we're seeing great demand, both externally, attracting new customers in on this solution. but also from our fulfillment customers and believe the full portfolio of retailer coverage is very differentiated. We are the market leader in this category. We also do believe that over time, we'll be able to introduce more of a platform fee for those take rate customers as we bring more analytics and insights to help them improve their supply chain.

You talked a little bit there, maybe a platform fee model. But from the customer perspective, I think you are focusing on 1P customers from Carbon6 versus the 3P smaller ones?

Yes. Yes. So there's 2 models to sell on Amazon. One is more the wholesale model or 1P and then the third party or marketplace model. The customers that we have on the 1P side are much more addressable for the other solutions in our product portfolio, including fulfillment. And so we do expect to focus strategically more on that 1P side of Amazon than we will the 3P side, but there's still a sizable amount of revenue on that 3P side.

Got it. let's talk about margins. You talked about it earlier, committing to 2 percentage points of EBITDA margin expansion. I know most of it is going to be coming from the gross margin side. But when you think about sales and marketing, G&A, are there also areas for efficiency and leverage there?

Yes, absolutely. So to your point, Chris, we have a stated goal of driving 2 percentage points of EBITDA margin expansion on an annual basis, and we believe we can do that without jeopardizing anything in the long term just because of the efficiency of our model. In the shorter term, so specific to what you saw in '25 as well as implied in our expectations for '26. More of that will show up in the gross margins. We have a stated goal of, call it, low to mid-70s from a gross margin, we're more at upper 60s currently. And that's a lot of scaling and growing into various investments we've made historically. Very simplistically put, we don't need the same amount of sort of time and resources to accomplish a great customer experience, the onboarding process, et cetera. So there'll be continued opportunities to leverage that. But to your point, there are opportunities in other line items as well. The one caveat I would say is R&D. We think our stated goal, we have a sort of 9% to 12% for R&D, we think, is appropriate. There's certainly efficiencies through AI, but we also have a lot we want to do investing back in that customer experience for product offerings, et cetera. So R&D, we're not looking for really moving off of that on the sales and marketing side. Going back about a decade ago, we were more like upper 30s percent of revenue. We're now in the lower 20s percent of revenue. We think high teens to low 20s is where that will end up. And then on the G&A side, there's certainly opportunities there. We're more on the, call it, mid- to upper teens, and we think that's more on the lower side of that low double digits is where we can get to over time. So there's lots of ways in which we'll be able to drive EBITDA margin expansion. We have a stated goal of 35% or at least 35%. It doesn't stop at 35%, but that's our -- sort of our next goalpost we're going after.

Got it. Maybe before I open it up for the audience here, on capital allocation. Last year, I think it was about 75%, 76% of free cash flow went into buybacks. How do you think about -- and now you've -- the Board has authorized $300 million in total. So how do you think about capital allocation going forward, buybacks, M&A?

Yes. So if you think about capital allocation, over time, we think the company has effectively deployed capital in both M&A as well as stock buybacks and of course, investing back in the business. If you look at it and where we're currently at, to your point, you saw in '25, we did repurchase more shares than we typically do. We purchased about $115 million or about 75%, 76% of free cash flow. We did get increase in authorization, to your point, of up to $300 million for stock buyback. In light of where stock price is, that is a very effective use of capital to deploy for shareholder returns as well as based on where the current stock price is. So with that, you may expect to see a little bit more in the form of stock buybacks, but M&A over time, still, we believe, is something that makes sense for us. But in the shorter term, that the deployment of capital and stock buybacks is very appropriate.

Got it. Any questions from the audience here? All right. Maybe last one here to wrap. As you reflect back on 2025, what are some of the key lessons that you're bringing into 2026 in terms of what worked really well and what are some areas to continue to improve upon?

Yes. So if I look at 2025, it was definitely a time period where our customers were under some challenges, I think, primarily driven by the global trade dynamics and we took a long-term view on that. We have a value at SPS, which is win the day, win tomorrow. And I think as we looked at how we were going to work with those customers, the fact that our churn rate was not impacted by that. We did have some headwinds from a little bit of down sell and contract scrutiny, I think gives us a nice base and really being there for our customers during their more challenging period, I think, sets up SPS for success in the long term.

Awesome. It's fantastic. Thank you, Kim. Thank you, Chad.

Thank you.

Thanks, Chris.