Oh, it's exciting. Okay, are we good to go? Awesome. Thank you everybody for joining today. My name is Dylan Becker. I'm the research analyst here at William Blair, that covers SPS Commerce. All the necessary disclosures can be found at williamblair.com. We have the CEO, Chad Collins here, and the CFO, Kim Nelson. Thank you both for taking the time. Maybe as a way to start, I think a lot of people are familiar with the SPS story, but for those that aren't, can you guys give us kind of a backdrop, a backstory on who you are and necessarily what you do-
Sure.
- for the retail ecosystem?
Yeah. So, we have built and operate a cloud-based network that connects retailers with all of their suppliers and allows them to exchange supply chain information, so information about orders, items, inventory, and a way to do business. And, we go to market in a little bit different way than a lot of software companies do. We work directly with the retailers to help them digitize all their connections to their suppliers to gain efficiency, and as part of that, we do all the outreach to the suppliers. So it really benefits the retailer, in that they're able to digitize all these supply chain connections and gain visibility to how their suppliers are performing.
For us, it's sort of built-in lead generation because those retailers that we work with are handing us lists of potentially thousands of customers that are ideal candidates to join our network.
And, and you've been now in the seat for roughly nine months, almost a year or so, right, Chad? Maybe, maybe can you give us a background on what attracted you most to the SPS opportunity?
Yeah, absolutely. So, SPS is just a fantastic business out there. One of the few more scaled SaaS platforms that's really a single product platform. We are operate one network, relatively no sort of technical debt. Also, a lot of strong differentiators in the market, in both the network that we spent the last 20 years building up, the number of connections. Also, a lot of the complex rules that retailers have established in doing business with their suppliers, we've built into the network over time, very difficult for others to replicate. And this unique go-to-market approach that I mentioned before is really a differentiator for SPS.
As I look then, as SPS can grow, you know, a couple of those potential levers happen to be things also that I have in my past background. So I've been in supply chain software my whole career and have had a lot of exposure to the broader landscape of supply chain applications, and also helped grow some companies outside of the North America geography. All of which things that potentially could be part of SPS's longer-term strategy.
Fantastic. Kim, maybe switching it over to you, we'll level set on kind of the backdrop and the opportunity, but can you give us a perspective on kind of the financial profile, the metrics you focus on as you think about the CFO seat?
Sure. So when we think about our business, we have tens of thousands of paying customers, which are suppliers. We refer to them as recurring revenue customers, and all of them are relatively small in their own right. What that does is then that provides a lot of visibility, consistency, predictability into our recurring revenue. We've had 93 consecutive quarters of top-line growth. Very proud to highlight that. A lot of that really comes from this network effect. So over time, we just have more and more retailers within our network, more and more suppliers within our network, more and more third-party logistics providers, et cetera, within our network. So it's a little bit of sort of the gift that keeps on giving.
So as of last quarter, we have approximately 45,000 recurring revenue customers that pay us on average about $12,500 on an annual basis. So you can see the price point's relatively low, so it's not too inexpensive for anybody to really be able to afford our products and services.
Sure, sure. And maybe as we think about, obviously, the statistic, almost 100 consecutive quarters of growth here, where are we in the supply chain digitization journey? Chad, what did COVID do to kind of highlight the stressors in the ecosystem, and what does that mean from an opportunity perspective?
Yeah, I think what COVID did is obviously point out a couple of things was one supply chain's critically important. If there's disruptions in that supply chain, if things break down, inventory doesn't get to store shelves, and consumers don't have what they want. The other thing that we saw during COVID is how ready for true omni-channel commerce many retailers were, right? When retailers needed to pivot quickly because consumers weren't able to come into their shops, how agile was that supply chain to move over to getting either buy online, pick up in store, or e- a shift to more heavy e-commerce transactions?
So I think all of this just raised the awareness of supply chain, and one of the things that retailers in particular learned is that, the way that they were collaborating and participating with their suppliers wasn't the most modern way. So we are still finding lots of undigitized, connection points between retailers and suppliers, and that might not be intuitive. You would think all these retailers. I know, before I joined the company, that wasn't intuitive to me. You would think that, you know, retailers are big companies, they spend a lot of time, but, you know, if you think about it, if you're a buyer at a retailer and you find some new product, you may send your first couple purchase orders just over email, right?
All of a sudden, that product picks up, and you're doing more and more volume. Now, you're 2-3 years later in that supplier relationship, and you don't have that connection digitized in a structured way, and that's really impacting your supply chain. If you just compound that with lots of buyers and lots of product changes that retailers have, you can see how these connections don't get digitized and sustained in a digitized way, which is clearly the most efficient way from a supply chain perspective that retailers and suppliers wanna be working together.
... Kim, maybe what does that mean from an overall kind of addressable market opportunity? Where you think that the business can kind of grow to over time?
Sure. So we think conservatively, it's about a $5 billion total addressable market. If anything, we believe that answer is probably higher. The reason I say that, is when we came up with our view, which was internally driven versus externally driven, not a lot of great external data to access. But when we came up with our internal view of that total addressable market, it's really primarily focused on our two main products: our fulfillment product, which is the majority of our revenue, and then our analytics product as well. Over time, we certainly do see opportunities for additional product services, et cetera, which would only increase what that amount is.
The way I would characterize it is, you know, we've had a lot of success in doing what we're doing, but it's still very early on relative to the huge addressable market in front of us.
Sure, sure. And Chad, you touched on, and, and actually Kim as well, but kind of the benefits of this network, right? And, and the compounding value associated with that over time. Obviously, the retailers were the ones who maybe felt more of that immediate pressure, but how does that incentivize adoption from the supplier side? Is they thinking about-- they think about working, and integrating with kind of the requirements that those-
Yeah
... retailers mandate?
Yeah, it's very challenging for our supplier customers to meet the requirements that retailers have to do business with them. Retailers often publish what's called a Retailer Rule Book, which if you printed these things out, they'd be this thick. And it goes over all the different things that you need to do business with them, from all the digital ways to receive an order, confirm an order, send a shipment, down to how the product needs to be put into the box, how the pallet needs to be laid out, on what side of the box the label needs to go on, so it can be read by the barcode scanner or the retailer. So all that complexity is there. And then think of that complexity compounded because you're doing that for multiple fulfillment models.
If you ship to a retailer's distribution center, there's one set of rules. If you ship directly to the store, there's another set of rules. If you drop ship on behalf of that retailer, yet another set of rules. And so what we've done is we've taken all of those rules, each by each fulfillment model, by each retailer, and built that into our network. So as a supplier, you can join our network, and not only can you then access all the digital connections of all the retailers you might do business with, but those specific rules, even by fulfillment model, are built into our network. So it really simplifies things for that supplier.
What has areas like e-commerce, Shopify, Amazon Marketplace as well, how has that expanded the overall ecosystem? And how does that-
Yeah
... create opportunity?
Yeah, so it's expanded things in a couple different ways. I mean, it's created new paths to the consumer. So e-commerce and drop ship commerce have taken more and more of the percentage of retail. Although I will point out, we often forget, because e-commerce is so popular, over 80% of retail is still brick-and-mortar retail, and that's still-
Sure
... a substantial part of our business. The other element that we've seen from some of the e-commerce innovation is the ways that brands are able to get to consumers. So, you know, maybe in the past, the only way you could get to consumers were signing a big contract with Target or Walmart. Now, you can start up your own brand within your Shopify store. You can get traction there, then you can maybe become a drop ship supplier to one of the major retailers, and then you can get into the store. So what that's created is just a more diversity in the set of consumer brands that are out there, and that diversity and the growing number of consumer brands has been good for our business.
Sure, sure. Kim, maybe for you, and Chad, obviously chime in here as well too, but how do we, how should we think about the commercial model, right? How do you charge customers? Is it transactional? And how do you grow kind of usage as they grow their connections with that retail ecosystem?
Sure. So we think about our fulfillment product, which is our biggest revenue that we have. There's really two components that make up that subscription fee. The vast majority of it is a fixed, think of it as a fixed fee per retailer. We sometimes refer to that as like a trading partner or a connection. So if you're a supplier doing business with a retailer using SPS Commerce, you'll pay us one monthly fixed fee for the foreseeable future. If your business grows or you have more retailers, let's say you have five retailers, you'll pay us five fixed fees on a monthly basis. So it's a pretty simple pricing model. Think of it as fixed fee per number of retailers that that supplier is doing business with.
There is a component that also has documents in it, a volume of documents, so number of purchase orders. It's not related to GMV whatsoever, and it tends to be a much more nominal portion of that overall subscription. What we have seen is over time, the longer a customer is a SPS Commerce customer, the more revenue we naturally get from them. One of the reasons may be when we acquire, say, a smaller customer through a Community Enablement campaign, which is when we're getting that vendor lead on behalf of a retailer, we reach out to that supplier, they become a recurring revenue customer. At that point in time, they're probably joining us just with that one retailer. Well, as their business grows and evolves over the years, they're naturally gonna continue to use us.
We have seen that continued increase in number of connections or trading partners from our suppliers over time.
Well, and I would think that that probably drives pretty healthy visibility in the model, too, right? Obviously, 20+ years of embedded growth here. How should we think about the business's index to potentially weaker macro environments? Again, kind of what you're seeing from the consumer sentiment side of the equation.
Sure. Because of the fact that we price the way we do and we're not pricing on GMV, as an example, we're probably not the best from a bellwether or indicator of what's happening in the economy. If you look at our financial performance over time, we've probably only been impacted maybe 1% or 2% in our top line growth, either positive or negative, depending on really good economic times, really, less than stellar, economic times, and it's really because of that, the way we price the product. Now, obviously, there's a lot of change happening in the retail space. We think we're there to really help retailers, through those change events. But in general, we're not the best from a bellwether.
Certainly. Certainly. Chad, obviously, there's a lot of value in the network. It seems like there's compounding value, too. I would think that that drives a pretty wide and durable moat from a business perspective. But how do you think about kind of the competitive landscape? What if, if customers aren't using SPS, what does that operation tend to look like?
Yeah, so, I mean, by far, what we're trying to conquer is these undigitized connections. That's the greatest opportunity for us, and gives us conviction in the overall long-term market opportunity. The other thing that we see is, and this is especially true with kind of mid- to large-size enterprise customers, is that when they probably adopted these types of digital connections 20+ years ago, and the standard at that time, when there wasn't an SPS network to go to, was to buy on-premise software and hire a team that would manage all this complexity of these digital connections and manage that. We still see that in kind of the mid- to upper end of the market. But we're convinced, and we've seen it, that it will change out, right?
As they move their other business systems into the cloud, they'll look for a cloud-based network. Maybe as those people are responsible for managing that, move on to other jobs or retire, that's a logical time for them to move that over to more of a managed service network like us, rather than taking on all that complexity themselves.
How do you think about the ability to expand kind of the platform or the network benefits over time, whether that's addressing new stakeholders, whether that's going deeper into different workflows and things like that?
Yeah, so we're continuing to build out the network, so that's been one of the core philosophies of the company. Anytime we encounter a new requirement to do business with a retailer, whether that's a new retailer or a new fulfillment model by that retailer, we're committed to build that out into the network, and then once we do that for that first customer, then it's available for everybody else in the network, and we don't see anybody else in the market having that commitment to building out the network. The second real benefit that we have is the way that we go to market, in that we run these community enablement programs, where we're working hand in hand with the retailer to digitize their suppliers.
And it's great for the retailer 'cause they get those digital connections, and it's great for our business because they're just handing over that sort of lead list then that we call through, and those are ideal candidates to join our network, either as part of that program or, you know, eventually when they have this type of change event, they'll come back to SPS, and we have them in our database, and we continue to market to them.
It certainly sounds like there's a lot of data gravity associated with this too, right? As the incentive of kind of providing a more holistic view-
Yeah
... of that supply chain and the supplier network. Is that the right way of thinking about it?
Yeah, I think the data is very important, and the data has been very focused on these types of supply chain transactions and getting things from sort of point A to point B, and related to the transactions that happen. I think over the longer term, there may be also some opportunities for us to put a little more context on that data-
Mm
... in our network and understand kind of what's happening more from a trends or macro perspective based on the type of traffic that's happening in our network. That's not been historically the focus of the company, but I think that's something that we'll explore over time.
Sure. It's a great segue into kind of part of the analytics opportunity in and of itself-
Yeah
... but there's a lot more value, to your point, to be had there over time. How should we think about your ability to kind of leverage that from an analytical perspective, the insights that you have, and, and what that can mean from a monetization perspective in the future?
Yeah. Yeah, yeah. So a couple aspects on that analytics. One, we have a product, so Kim mentioned our two main products, analytics, and fulfillment. Majority of our revenue is driven from fulfillment, so think about that as kind of the supply chain collaboration around an order that happens between a retailer and a supplier. The other piece is the product we call analytics. That analytics involves sharing point-of-sale data from the retailer to the supplier. And why that's important is many suppliers know how much they sell to a retailer at the distribution center level. They don't know if that inventory is still sitting at the distribution center. They don't know which stores it's gone out to. They don't know what even, and then if it's been sold to the consumer at the store.
So by sharing that point-of-sale data, then it makes it more effective for the retailer and the supplier to collaborate on what products and what level of inventory is required in the supply chain. And so, you know, that's also important and I think, you know, a big opportunity for us going forward, especially as we're able to work with retailers and help them see the benefit of how it helps their overall supply chain to share this data with their suppliers.
Sure. And it seems like there's a lot of opportunity there in and of itself, too, from a point-of-sale perspective and leveraging that intelligence for inventory management, thinking about losing the customer, not knowing if you have a product available. Can you dig into, maybe what that kind of point-of-sale opportunity can unlock for analytics?
Yeah, I mean, the ideal scenario for the retailer and the supplier is that when we all go to the store shelf to go get that particular product in that particular size that we want, that it's there, so we can, we can buy it, and when it's not there, then everybody loses. The best way to collaborate on that in-stock, in-store inventory is to have a collaboration process around inventory forecasting and inventory planning, and a key component to that is really looking at what's happening at a point of sale at a store level, so that retailers and suppliers can collaborate on that data.
Sure, sure. Kim, we've touched on a lot here with regard to the network. You do have kind of longer term financial targets out there, but I guess, what's the right way for those not as familiar to think about the durable growth profile, kind of the profitability of where the business can go over the next 3, 5, 10+ years?
Sure. So I'd characterize us as sort of a balanced growth company, meaning we believe we can grow for the foreseeable future, around a 15% top line, all in, revenue growth. And from an EBITDA or a profit perspective, we believe we can grow on an annual basis anywhere between 15%-25%. So what that means is there may be some years where the margins are, you know, pretty flat. There's gonna be years where you're gonna see nice margin expansion. As a company, we have delivered nice margin expansion over the years. We're currently at, call it, upper 20s% from an adjusted EBITDA margin perspective, and we believe we can get to that mid-30s or about 35%. Really a lot of that driving from just continuing to scale our operations and our business.
Given that there is a substantial opportunity ahead, how do you think about kind of the balance of reinvestment back into the platform to capitalize on some of those opportunities?
Yeah
... versus optimizing for margin leverage?
Yeah, that's what's great with our model. I'd say since we're sort of cloud by birth, multi-tenant on the technology side, that really does scale. That is fabulous that that's on our technology side. Also, just that subscription revenue, that subscription model, where we keep customers for a considerable amount of time, that's a nice, consistent opportunity for us to upsell our existing customers, continue to get that nice top line going. But as an organization, we always want to make sure, although we want to make sure we're caring about our customers today and meeting all of their needs, we also want to make sure we're investing for the future, for what we see for future customer growth, as well as future opportunities with our customers. And so that balanced approach has worked quite well with us.
When we think about our strategic planning or going into our annual plan, the process we go through, we always make sure that we're setting aside some dollars of more of what we call investment-type dollars. Those are investments that they may pay off in that next year. It might be 2, 3, 4 years down the road, but we always make sure that we carve out some of those dollars to make sure that we're focused not just on today, but also for the future opportunity we see. All of that has been taken into account in our belief to be able to sustainably grow at that 15%, as well as from the EBITDA side, sort of that 15%-25%.
Sure, sure. Maybe if we, if we think about kind of some of the uses of, of the cash that you're generating as well too, Chad, maybe how should we think about where M&A plays into the equation? Obviously, we've seen a handful of deals here more recently, but kind of the tuck-in nature, what do you guys kind of tend to look for from that perspective on the inorganic side versus what you can kind of develop organically as well?
Yeah, yeah. So the historical profile of the company's successful M&A has been to acquire other companies that manage this exchange of data between retailers and suppliers. They've usually been smaller companies than that. When we acquire those customers, we bring them over to our network. The customers see a big benefit of being part of a broader network, and then we're obviously able to take out some of the costs because we move them over to our network, so there's an overall efficiency. I would say that I think probably the next—just the way the industry is consolidated, we probably in the next 10 years don't find quite as many of those types of opportunities as we've found in the last 10 years.
But we will, I think, as we work through our product strategy, and also see kind of all the technology innovation that's happening at this intersection of retail and supply chain, find things that will complement our product portfolio, be very close to home, meaning very involved and close to the business process we're already helping customers with, but would expand our product portfolio and therefore be able to expand our wallet share with customers and likely be able to be upsold, cross-sold to, you know, our 45,000 customers.
Sure. And maybe Kim, within that as well too, what's the right way of thinking about kind of the expansion or the evolution story within the customer base today versus, or relative to, I guess, kind of the number of connections, the number of solutions you can sell-
Sure.
Kind of what's the balance of the equation, how they contribute to that kind of durable growth framework?
Yeah. So we have a really great go-to-market strategy that gets us in front of how we get new customers onto the network. Biggest quantity comes from those community enablement campaigns. Our channel sales also gets us in front of some of those larger customers. And then, of course, we have our marketing, normal avenues as well. So those get us the customers, and then we have multiple ways in which we then expand how much revenue we get from customers over time. A lot of that I'd characterize is we're there to really help support our suppliers and our customers in their journey to just be more and more efficient in their supply chain. So I see that translate in our results has been an increase in wallet share or average revenue per recurring revenue customer.
Pretty correlated to number of retailers on the connection side. Our expectation is we'll continue to see that go forward, so we'll continue to have the ability to bring on more and more customers, but the opportunity to continue to upsell as well as over time cross-sell, to Chad's point, that customer base into the future.
Sure. And obviously, there's a major emphasis on supply chain digitization more broadly. Chad, how do you think about the opportunity for the ecosystem to kind of partner and deliver value? How do you think about the other potential partners outside of kind of the network you've established today, and what that can mean for kind of driving broader digital adoption?
...Yeah, I mean, I think a couple of things are happening. One is, especially post-pandemic and the huge disruptions that everybody saw, there's just a heightened awareness that but higher collaboration between trading partners will lead to more efficient supply chains, and people are looking for these types of platforms and connections to be able to facilitate this on. And I think as we continue to build out the network, then participation in that network is gonna become more important to running an efficient supply chain, and the data that's being passed on that network will create new insights and opportunities for all the participants on the network.
Sure. So it doesn't sound like, yeah, we're slowing down anytime soon. I guess maybe kind of as a way to summarize the conversation for both of you, and we'd like to hear from both of you on this: what does excite you kind of about the next five years of the business, relative to where you see the most opportunity, where you see that's gonna be kinda the biggest contributing factor to the business's success?
So I'll start 'cause I have a little more tenure at SPS, but, you know, it's been amazing to see what the company has been able to do in its 13 years as a publicly traded company and 20-plus years, sort of in its evolution or in its life. However, what excites me the most is I still consider it just so darn early on. There's so much opportunity for continuing to help retailers, suppliers, third-party logistics providers with change that's happening in the retail space, that I just don't really see an end to that.
Sure.
And so that really excites me of just the continued opportunity we have to really help.
Yeah, and I've been around supply chain technology my whole career, and I'm still surprised at how much of it is still focused on the four walls of just one enterprise, where supply chains are inherently multi-participant, and I just believe, and have for a long time, that network-based technology is the way to solve a lot of supply chain problems. And the fact that we're already a leader with our network, I'm just convinced that we'll leverage this network and continue to solve supply chain problems for the whole retail ecosystem.
Fantastic. I think that's a great place to wrap it. I know we're gonna continue the conversation upstairs in the Jenney B conference room. Thank you, everybody, for listening in. Chad, Kim, thank you for taking the time.
Thank you.
Appreciate it.
Thank you.