All right, we're gonna get started. Thanks everyone for joining us here today. My name is Scott Berg. I lead our enterprise software and SaaS research efforts here at Needham. This is number 6 in a row. I hope I haven't lost my voice yet. I'm sure we'll be there soon enough. Today with us, we have SPS Commerce. I have known this company for a long time. Been covering it for about 13.5 years, is my guess, plus or minus. You guys went public about 14 years ago, not quite. We have the company's. This is kind of weird, this is my first time saying this: longtime CFO, Kim Nelson. That's not the weird part. The weird part, I have to admit, is Chad Collins introducing you as CEO. This is your first conference. Welcome.
I hope the day is going well for you so far.
Thanks, Scott. All good, yeah.
Awesome. Good deal. We'll just get started with an overview of the company for those who are less than familiar with SPS. I don't know who wants to give that.
Yeah, I can go. So, at SPS, we have built and operate a cloud-based network to connect retailers with their suppliers. And, the information they exchange across our network helps them together operate the supply chain more efficiently by exchanging information about orders and, in some cases, inventory, item information, and then we'll also exchange point-of-sale data. So what's actually happening with the consumers as they make store purchases back to the suppliers all across our network. We primarily monetize the suppliers' participation in that network, and we work very closely with the retailers on programs that will help digitize all these connections.
And that can be accomplished via our network, or, we have an open network approach, so we allow suppliers to connect directly to retailers as well.
Great. From a housekeeping perspective, we will take questions from the audience when we're done up here, so feel free to save those to the end. Wanted to, you know, start off with a little bit about your background, Chad. Obviously, you're new. I thought this would be a good venue to talk through that a little bit. You mentioned, or I mentioned earlier, this is your first conference as CEO. I was looking back at my LinkedIn earlier. You and I have actually known each other for 10 years.
Yeah.
This is not our first conversation, which has been great. But I didn't know that you and Archie both graduated from Marquette.
Yeah.
Is that why you got the job?
This was the number 1 criteria of the selection committee. No, just, just kidding.
Yeah.
No, by, by coincidence, Archie and I both went to Marquette, and I'm proud to say, I think we have a better basketball team this year than we had in any of the years that Archie or I were at Marquette. But yeah, a little on my background. Have been in this intersection of supply chain and technology, basically my whole career, early off as a consultant and then as a product strategist and executive most recently. I was the CEO of HighJump, which is a WMS company in the supply chain execution area since 2017.
When we sold that business to a German holding company called Körber, they helped us with the funding of some quite a bit of global expansion of that business. We became one of the leaders in the Gartner Magic Quadrant, together with Manhattan Associates, and we rebranded the company in 2020 to Körber Supply Chain Software.
Excellent. So SPS's execution has probably been the most consistent of any public company I've ever covered. I've covered well over 100 companies. I've been able to set the execution clock very timely with your work there. I guess I have two questions kind of within that, Chad. First of all, you're not allowed to screw it up. It's been really good. But secondly, and really more seriously and more importantly, is how does someone new come into an organization? How does Chad come into an organization and either do things the same or differently? Because the investors that have been involved with this stock for maybe it's a year, but maybe it's 10 years, have come to a level of kind of predictability.
How do you come in and maybe not upset the apple cart, yet bring in maybe new ideas?
Yeah, well, first I would say, I mean, what a sort of luxury situation to be in as a new CEO. Not many new CEOs get to come in when the core business is running well, when there's been such a thoughtful transition process by the previous CEO and the board. So it's really a good situation. What this allows me to do is really dive in and understand all those components that are working well at SPS and this core execution engine that we have, as well as the large addressable market that we have for our core business of connecting retailers and their suppliers. And there's still quite a bit of sort of undigitized or unconnected space out there that we can take advantage of.
So we want to continue to focus on that. Also an opportunity, though, to look to the future and really look to how the organization continue to help customers, not only with what we have today, but with new products we could potentially launch, new partnerships we could form, or new things we could add to the portfolio a little faster through M&A. So, good situation to be in.
Yeah. Let's talk about the industry a little bit. I tend to still get a lot of questions on your industry. You know, the company came, came public as predominantly just an EDI company. We'll go EDI in quotations at the moment. How has the market evolved over the last 14, 15 years, and, and how has SPS maybe evolved specifically within those market dynamic, dynamics? And why is the growth runway longer than most investors kind of appreciate?
Yeah, I mean, I think we've all lived it and seen the way that retail has really transformed itself over the last 10 years with the omni-channel dynamics. So what used to be a business that was primarily about exchanging information relative to wholesale shipments, so where you had suppliers shipping into the distribution centers of retailers and letting the retailers distribute it out, we now still have that business, and that's a big piece of it. But we also have the evolution of e-commerce. Right? E-commerce has brought longer tail bases of supplier relationships as consumers have wanted more products and more diverse products. We also have the evolution now of marketplaces, where you're having different supplier organizations be able to do participate in these various retail markets.
All of these changes, driven by the higher expectations of consumers, have really led to an evolution of our business, which has increased the needs for these retailers to be collaborating with their suppliers about the supply chain data.
I think one of the interesting things around the technology advancements in this space, actually have benefited you. I think a common misconception I hear is, you're an EDI company. EDI's been around for 40 years, right?
Yeah.
That's gotta be old. There's something more modern than EDI. There is: APIs, et cetera. But on the fulfillment side of your business, your customers can select any communication protocol, whether it be legacy or something on the newer side. Does the industry ever get off the legacy EDI technology for something more modern, or do you see a place for it over the longer term?
Yeah, so I think you do have to kinda look at what EDI did when it was first created. So you have to separate. So EDI is really data specification at one level, and really I think does a nice job specifying the various information flows around purchase orders and inventory and advanced shipment notices. So at one level, it's a very good data specification and widely used for supply chain. At the time it was created, it also had to be the technology mechanism, right? The way to transfer data. I mean, we didn't have the internet when EDI was created.
Well, that whole transfer mechanism has been modernized quite a bit, and so while we still exchange data in the EDI format, the ways that we do it with the cloud and the various new technologies is quite different. And so I think the data structure's likely to stay for quite a while. I think, we've already seen a modernization of the way that data is moving around and how it's using the hyperscalers and using the internet. And then, for things that are more newly created, like, marketplaces, marketplaces didn't really exist when they invented EDI. So in those areas, we're seeing more advancements around APIs and other protocols to support those, new.
SPS as a company did something I haven't seen covering public companies before. In 2021, you actually raised your intermediate-term growth target from 10 to 15. Usually, law of large numbers and time dictates companies to slowly start to bring that bar down, but you did the opposite. You were able to raise it. I guess, what's occurring in terms of retail technology investments today or within your product suite that gives you confidence that this is the right growth level versus, you know, the 10% level it was several years ago?
Yeah. So, you know, what we've realized is, one, that there's still a large unaddressed opportunity for digital connections within the retail supply chain. Now, that I think that will happen at a sort of a metered pace, right? As organizations become more sophisticated, they will digitize over time, but there's still a lot of sort of un-digitized connections out there to be made. You know, the other factor that we have is this complexity around omni-channel and the different ways that retail is happening now. That's driving a higher need for digital collaboration between retailers and their suppliers.
Then, just in terms of our business, we've been able to advance our go-to-market as well, to include organizations that are going through change events, like ERP system changes or changing major pieces of their supply chain applications, through our channel go-to-market strategy, which has helped us bring in a little bit higher revenue customers. So you kind of put all those factors together, and that gave the confidence to increase the mid- to long-term growth outlook for the business.
Last thing on the industry is: the pandemic exposed a retailer weakness in their ability to sell online, but want to fulfill in store. Some were doing it well, some certainly were not doing it well initially. But most of them that didn't do it well were putting together some duct tape to, quote-unquote, "make it work" really quickly. But has this multi-year process of retailers reshaping their respective supply chain technologies benefit tailwind to the company? And if it has been, how long does that last?
Yeah. Yeah, so the way I would describe it, Scott, is I think these retailers already had road maps to for omni-channel, for omni-channel acceleration, for the technology investments they were gonna need to make around that. Now, clearly, what the pandemic did was accelerate some of that and bring some of that, so it happened faster. But what we're seeing in our area is it's not stopping, right? So maybe they did a few things earlier than they otherwise would've, but they're continuing to execute on that roadmap. It's not like, "Hey, we accelerated the investment in and around the pandemic, and now we're gonna pause for a couple of years." It just kinda made everything happen faster, and I think a lot of that. Oops!, has been driven by the increased expectations of consumers that happened during the pandemic, right?
I mean, when, you know, we kind of got it all delivered to our doorstep during the pandemic, or we were able to drive up to a retailer and pick it up, that's now our new expectation, and I think that's been a benefit to our business.
So kind of within that, I'll add one more on the industry here. I attended the NRF conference this week. I've done it for 10+ years. Ironically, that was one of the places I met Chad several times. He was a great industry contact, and now that's gone. Not gone, just in a different route. But one of the. Probably the theme that came out this year was around improving the customer experience. I know that's a never-ending kind of journey for a lot of retailers, but there's a bigger theme around improving your technologies to maybe it's deliver that Amazon-like quality for two-day shipping, right? Maybe it's the experience while you're online.
But as I thought about that theme, is SPS has a very, I think, vibrant opportunity within that, especially when I think about your drop ship business in general. Is that a theme or a category that you can ride the dovetails on, do you think, in the short term, if that truly is a focus of brands and retailers today?
Yeah, absolutely. I mean, one of the things that we're seeing with this proliferation of e-commerce is a proliferation of products as well, right? There's just a wider variety of products that are available and kind of the long tail of the assortment. And yeah, that drives a lot of activities that happen. I mean, we do a lot of item information sharing across our network.
So, the more items there are, the more demand there is for item sharing across the network. And then, you know, now, this sort of drop ship phenomenon is that you can carry this wide assortment on your e-com site. You don't have to hold the inventory, but we can facilitate that whole transaction process that happens on the back end, so that that supplier can directly ship it to the consumer. I think that's one of the things that the folks who aren't, you know, maybe the retail supply chain nerd that I am, having spent 20 years in it, don't realize that a lot of the packages that show up on your doorstep aren't actually being shipped by the company you buy it from.
They're being shipped, either drop shipped from the supplier or by a third-party logistics provider somewhere in that network. So that facilitation of all the parties involved in fulfilling that order is something that we help orchestrate every day.
All right, moving to a couple questions on product. If I look at all the acquisitions SPS has done over the last, you know, 15 or so years, in my mind, there's two that have been really transformational to the business. One was Edifice on the analytics side, the other one was Data Masons, because of how it, I think, impacts your ability to sign even larger customers for the fulfillment solution. It was a very nice, It kind of accelerated your roadmap up there.
The company announced the acquisition of TIE Kinetix in the fall, which I think has some similar qualities to it and how it can be transformational, because it added some new product functionality along with a stronger, you know, footprint in Europe, you know, the geographic expansion. But can you help us understand the strategic rationale for this transaction, and how have things progressed post-close so far?
Yeah, yeah, absolutely. So kind of two aspects to the TIE Kinetix, one being an incremental product. So we're filling some product white space, and this was in the area of e-invoicing. So what we see in particular in Europe, we also see it in some other geographies, is that a B2B transaction that happens, you need to drop a copy of the invoice to the government for tax purposes. And so what we saw with buyers of our type of solution in Europe is that they were having the e-invoicing be a requirement of purchasing a B2B integration solution like what we have. And so this really filled that white space, gave us the e-invoicing capability.
And so now we can meet that requirement in Europe and some of the other geographies in the world where we see that. We don't, by the way, see that as a requirement here in the United States, today, at least. The other was, you know, SPS had a history in Europe. We had supplier customers who were trading with retailers in North America that were using our fulfillment platform. We also had a large number of analytics customers and an active sales force selling analytics solution over in Europe. But we didn't have the market presence in our core fulfillment product in Europe that we had in the U.S.
And so this gives us a beachhead into that market, allows us to explore some of the go-to-market differences that are there, either from a regulatory standpoint or just from some of the sub-region differences in go-to-market that you have in Europe, and gives us an active ability to be active in the European market and formulate our longer-term strategy.
Along the e-invoicing side, I'm sure some of you in the audience here have seen this. I'm sure you guys have well. There are, we'll call it, the three largest tech software companies in the world have all been fighting over an e-invoicing company out of Europe. And you, given the smile, I know exactly who. You know who I'm talking about, obviously is. I think a really interesting question around that is: how does SPS TIE versus that solution? Why is it, why is that e-invoicing functionality encompassed within a fulfillment solution, the right way for those buyers to consume and buy that product, versus maybe if they wanted it through this other company?
Yeah, so what, what we're seeing with our customers who are really have B2B transactions that are really centered around the buying and selling of finished goods, so in retail, a little bit in wholesale distribution, is that they really want to tie, you know, the, the invoice is part of that whole process, right? It starts with a purchase order, purchase order acknowledgement, ship notice, and, and then you have the, the invoice and remittance, and they really want to tie that invoice to the, the physical movement of those goods. So we, we expect for those companies that are are moving finished goods and the physical movement of goods, that that e-invoicing will be tackled more from those facilitating the physical movement of those goods, and it tied into that workflow.
If you're a services company, professional services, and you're not in the business of moving goods, then it may make sense to try to tackle that e-invoicing more from a tax regulation perspective and tie it more through your tax and financial system, because there's really no goods movement to tie it in.
Yeah. No, I was answering this question for an investor yesterday, your platform has the trigger point, effectively. It's the trigger point when that company's sending out the products, and if you've got the platform that has all this data on when it's being sent and when that transfer happens, it's just natural to have it be part of the platform.
Yeah.
Very much so. The company released a newer module about two years ago now called Carrier LTL, for less than truckload , which seems like it's been a real natural add-on on the fulfillment side of the business today. I guess, you know, what type of ARPU uplift do customers gain through, you know, that module, and how would you characterize adoption of it so far?
Yeah. So, I'll just start that long term, we think transportation is an area where we can really help our customers. It's, you know, kind of very much linked into the whole workflow and process that our customers are doing on the network. The way that we started with that was launching Carrier Services, which allows our customers who are using our portal-based solution to have, within that portal, the ability to make and transact parcel shipments or LTL, less than truckload , shipments. And we launched there because we felt that was the biggest need, and quite frankly, time to market was pretty good 'cause we could deliver that seamless experience all within the portal.
Now, it's worked out well, but because those are our portal customers, they tend to be our smaller customers. So from influencing total company ARPU, it hasn't been the largest needle mover, quite frankly, because it's focused on those smaller customers. I think with what we're learning about delivering that to our smaller customers through the portal solution, is really laying some groundwork in the company so that we'll be able to come up with additional solutions over time, to see if we can help our larger customers with their transportation needs. And I think if we're helping our larger customers with their transportation needs, you'd probably see the needle move a little bit more in terms of ARPU.
Yeah. Moving to go-to-market a little bit, probably the one thing that's been most interesting to me in the company's evolution in the last five or six years is your engagement with partners. Partners are a much greater component, it seems at least, of your, you know, net new bookings, just influencing, not that they have to sell them directly, but you've been way more active in your partner channels there. I guess how should we think about the trends and impact of your partner channel, you know, maybe today versus four or five years ago, and does that continue to be maybe accentuated even further going forward?
Yeah, yeah. So we use what we call an influenced partner model, right? So we do, we're still selling things directly to the customer. It's not a reseller partner network, but we do have a wide variety of partners who are there at what we call these change events in the customer. The customer may be implementing a new ERP system, they may be implementing new supply chain technology, like a transportation management system or a warehouse management system, and these are very logical times for customers to change out old approaches to now a new cloud-based network approach for EDI or other B2B transactions. And yeah, this has worked out really well. Those do tend to be higher ARPU customers that are coming in through that channel.
I think all this has been supported as well by the R&D investments that we've made in last-mile connections, what we call it, meaning the connections between the customer supply chain systems or ERP systems and our network. That sort of all gets pulled together nicely when you have, that ERP company or value-added reseller bringing us opportunities, and then we have the technology and expertise together with them to deliver that solution.
Enablement campaigns have been a strategic part of your go-to-market strategy for as long as I've known, which I think is actually ingenious. You're getting these retailers to give you leads for free, and it's driving your revenue model. Usually, you know, companies pay for referrals on that stuff, but you haven't had to do it. It's great. But how do we think about that strategy going forward? You have a subset of retailers that are really good about referring you customers on a consistent basis. Can you actually expand, you know, the retailers that help with those enablement campaigns, or is it kind of a fixed amount, do you think?
No, I think there's opportunity for expansion. What we will do is work with the retailer in terms of what their objectives are and their business case for having their suppliers digitally connected. In some cases, we'll actually work with the retailer as well to help develop those specifications, commonly referred to as a retailer rulebook, in terms of how their suppliers are gonna connect to them. And, you know, maybe this has been one of the surprises for me coming on the inside of the company, is just how much, sort of internal intellectual property there is around the people and process aspect of running these programs for the retailer.
We still see a tremendous opportunity to continue to drive these programs for retailers as well as distributors that are moving finished goods in their supply chain.
Sales and marketing as a percentage of revenues has certainly fallen over the last 10 years for a variety of reasons, but will remain actually relatively flat in 2023 for the first time. We don't know what the fourth quarter numbers are, but assuming there's not a drastic change there, you haven't driven a lot of leverage out of that. But how do you drive more efficiencies over time? Because I think you guys have done a great job there the last five or six years, but are we kind of now at stuck in a rut, or is this just a small bump in the journey?
Sure. So to your point, when you look at our EBITDA margins, and you look going back and call it from that 2016, 2017 time period, we were call it, you know, mid-teens from an EBITDA margin. We're now closer to upper end of the 20s, so we've had a lot of improvement that we've made there. A lot of that has come in the form of sales and marketing, a lot of different things we've done organizationally to make us much more efficient there. My view is, you know, there might be a little bit we can get here or there, but for the most part, we've really have gotten a lot of that efficiency out of that area.
When I look then across the P&L and say, "Okay, where, where's the next sort of leg of that margin expansion?" 'Cause our belief is that longer term, we can be at, call it, mid-thirties from an EBITDA margin perspective. Big driver of that's gonna come in the form of gross margin. Again, you look at the other line items, yep, there might be a little bit here or there, but for the most part, it's primarily gonna be in the form of gross margin. And the way we're going to get there over time is really on really scaling or growing into a variety of investments that we've made over the years.
So when you mention on NRF, the focus on the customer experience, when I think about our view of customer experience to what via our suppliers being customers, we have made a lot of investments over the year of making it, that last-mile integration, making it faster and easier to get up and running with SPS Commerce, being there to help and support as their businesses are growing. All of those are really positive from the overall customer experience, and over time, we'll continue to add resources, but we don't necessarily need to add them to the pace or the rate in which we've added them historically. And so over time, that will translate into higher gross margin.
Also, just as a reminder, when we think about that lens of, you know, we believe we can grow 15% top line for the foreseeable future, we've also said, as it relates to EBITDA or profit, we believe that on an annual basis, that will be anywhere between 15%-25%. So there will be some years where you will not see a margin expansion, and then there will be years you will certainly see that margin expansion.
Yeah.
Longer term, to get to the mid-thirties, gross margin is a big driver.
Kind of along those lines on the annual profitability improvements, you're already given a preliminary view for, for 2024. You've talked about how your adjusted EBITDA on an absolute basis will grow 15%-17%. It's on the low end of the 15%-25% range you just mentioned, but you have been very clear over the last couple of years, if you're gonna grow 15% or you think you can grow there, the margin expansion probably comes on the lower end there, so very, very visible on that. But more, the question is really more about where do the incremental investments go this year? Is it, is it more sales and marketing? Is it something on the product side? You know, where are you feeling that the investments may be tilting in 2024?
Sure. So if I just start first without the year 2024, but just broadly, as an organization, one of our values we have is called Win Today, Win Tomorrow, and I think that's actually really perfect for this conversation, which is we're gonna make sure that we're investing for our existing customers and delighting them in all that they're doing. But we're also gonna make appropriate investments for the longer term, for opportunities we see for not only our existing customers, but new customers, and what they need in order to be as successful as possible in their business. So that Win Today, Win Tomorrow mindset we have is relevant when we think about our spend. So in any given year, we're spending for the short term, the medium term, and the long term.
When I think specific to 2024, we're gonna continue that view of what makes sense for both the short term, the medium term, and the long term. The only thing at this point that we have highlighted or discussed that's a little bit more nuanced, specific in 2024, has to do with the TIE acquisition. And with the TIE acquisition, at the time we made that acquisition, we said we expect in 2024 that to be a break even, so not generating EBITDA dollars. And in 2025, that would contribute, call it $2 million-$3 million of EBITDA dollars. So specific to 2024, we do have a book of business where we are not anticipating profit coming from it in 2024, and then we will see that profit in 2025.
Okay. With that, we have a few minutes to take any questions from the audience, if there are any. Quiet group, it's only 1:16 P.M. Long day already. Yeah, go ahead.
Hi, Janet. I mean, how much growth can we see in Europe on the fulfillment side, and when should we start to see that occur, if that's something?
So, I, you want me to start and you jump in? So when we think about that acquisition, as Chad had talked about the reasons why that made sense for us, what we really want to do is we want to take 2024 to really understand that market a bit more. Now that we have the a product enhancement that will be helpful in Europe, we really want to make sure we understand that market and what we see as the opportunities. So our view is we're going to take some time in 2024 to really then have a more informed view of what do we see as that opportunity and what do we see as that growth rate. That was a business that wasn't necessarily growing at the same rate that we were.
However, longer term, we do see the opportunity that the combined entities, it should be something that is not going to detract or take away from our overall goal of growing at that 15%.
When you mentioned that transportation was an interesting channel or vertical to go after, does that take you closer into competition with, for example, Manhattan and a TMS type of provider, or Descartes and the types of services that they provide?
Yeah. I think the, the most logical place for us to help our customers would be in the, in the small parcel and LTL area, at least initially. And those are, are portions of what Descartes and, and Körber but very, I'd call them almost like features of what they do in transportation. So, I wouldn't say that that would put us, in direct, competition.
Hey, George.
Welcome aboard.
You.
Regarding TIE Kinetix, it does have the e-invoicing component to it. Relative to the overall business, how significant is that e-invoicing relative to fulfillment?
Well, so, the way we think about that, the TIE Kinetix business, there was a portion of it that was in the U.S. That portion of the business, say roughly 40-ish%, that has nothing, that is very much just straight down the fairway, very typical with other companies that we've acquired, a very similar fulfillment model of what we have in the United States. On the international side of the business, the way we think about that is it's really, it's part of their fulfillment offering. It's just one component. So think of it almost like a product attribute that is part of fulfillment.
Do they actually gain revenue specifically for their e-invoicing capability, or it's just the overall package product?
It's bundled together. So think of it as a feature of the fulfillment product. And right now, our objective is to keep it bundled and have it be a combination as opposed to competing in a standalone invoicing.
So you can think of it as it's an aspect that is a requirement.
Yeah.
For doing business in Europe, and therefore, think of it as one aspect of broader. It falls within the fulfillment bundle.
Any more? Probably have time for one more. Oh, yeah, Cal.
I guess, Chad, given your background, just wondering what the company's appetite is to move from, you know, network to supply chain execution applications, you know, things like WMS and order management, and if there's any unique characteristics that would enable SPS, you know, sort of a unique competitive advantage given in that market relative to existing players?
Yeah. So you know, positively, as I've jumped in here, I think the. What we have in front of us, our core business, our core products, the opportunity is tremendous. And I think, though, what I'll say is, you know, over time, we'll continue to engage our customers around what technologies they're using to operate in their supply chains. And also, if there's any of those technologies that would be better off if it was more tightly connected to a network like ours, and therefore could create some differentiation in terms of, you know, competitive barriers or just how it helped the customer. There was no predefined strategy here that based on my background, we're going to enter the supply chain execution market.
In fact, I'm not quite sure that that would be the right logical place to go first. But, we're definitely continuing to engage with the customers around, how connecting to our network might address more of what's being addressed by traditional supply chain applications today.
Well, with that, we're going to wrap up. I wanted to thank everyone for their time, for joining us today, and I wanted to thank Chad and Kim as well for helping us make this a great success. Thank you all.
Thank you.
Thanks.