Welcome, everyone. My name is Bob McCooey. I'm the Vice Chairman of Nasdaq, and I'm so glad to have Chad Collins and Kim Nelson from SPS Commerce with us at the Nasdaq Investor Conference and to be able to discuss their business and potentially answer some questions from the audience at the end, but I think, Chad, Kim, it might be best to have you provide a little bit of background about SPS and kind of your role in omnichannel.
Yeah, absolutely, so at SPS, we operate a cloud-based network that connects retailers with all of their suppliers and allows them to exchange supply chain information across that network, and we do that in a couple of ways that are differentiated. One is by the size of the network, so we've been working on this cloud-based network for the last 20 years and have built out a substantial number of both retailers that operate in the network as well as suppliers, and then what else is a little bit unique about us is the way that we go to market, so like a lot of software and technology companies that have more marketing-driven programs, we do a little bit of that, but we primarily work with the retailers, and we go to the retailers and collaborate with them to establish all these digital connections with all of their suppliers.
And then as part of that process, it benefits the retailer to get these connections, but it benefits us because it's sort of like built-in lead generation for us to always get these supplier lists from the retailers we work with.
Does that kind of 20-year head start differentiate you from everybody else? I mean, has that put you in a different spot? Are there new competitors coming in trying to nip at your heels now? Or who do you look at as your competitors?
Yeah, so I think the time frame that we've been building out the network is definitely an advantage. I would say that that's also a business philosophy or strategy that we've had for many years. So as we've seen different people come in and out of this market over time, we've seen a lot of them try to focus on short-term gains of actually charging their customers to build out point-to-point connections between suppliers and retailers. And we've taken a little bit different approach that anytime we encounter a new requirement for a connection into our network, we proactively build that connection out. And we know that if we build that connection, it's just going to benefit us and our customers in the long term by having more connections.
So in terms of competitors, we don't see anybody out there with the size and scale of network that we have, and we yet to see anybody who's been able to replicate our approach of working with the retailers to get access to the suppliers.
So it's really about the partnership that you've created with them.
That's right. I mean, I think we're, in the end, all focused on improving supply chain collaboration between the retailers and the suppliers. And clearly, exchanging digital information in an efficient way is not the only way to improve that collaboration. It's a very important way.
If we just rewind the clock for a few years, did COVID accelerate the need for or the focus on the value that you create in this area?
Yeah, so the pandemic definitely had an effect in retail and therefore an effect in our business, and while I'd say all of the retailers had a strategy to advance in omnichannel, what happened in the pandemic was a lot of those things were accelerated, and so what we saw, in particular in our business, was much higher demand from the retailers to enable more suppliers, and in particular in order to support their dropship e-commerce programs and marketplace programs, so as all of us were at home and needed to find all the products online that maybe we were used to finding in the stores, that put a big pressure on all the retailers to make sure that all those products were going to show up on their e-commerce sites, and that really did increase participation in the network during that time.
Those that were already on the site or already in your network prior, that certainly must have benefited them. Did that accelerate those that plugged into you during that period of time because of the leadership that you had?
Yeah, absolutely. So because we had this unique service to digitally enable large numbers, thousands of suppliers in a single program, that was something that we saw that the retailers really wanted during that time period. It was difficult for them and their vendor onboarding organizations to handle that much volume of supplier onboarding. So as they were adopting these endless aisle strategies and trying to add more and more to their e-commerce product assortment, we were perfect for them because we could apply a lot of people and also apply the process that we perfected over the last year of onboarding suppliers quickly onto our network.
Great. So Kim, let me pull you in the conversation here. So how do you view your long-term opportunity and what are kind of the revenue drivers behind your 15% growth rate target that you talk about?
Sure. Yep. So to your point, we have stated goals that we believe we can grow approximately 15% top line on an annual basis while also delivering nice profit and margin expansion, 15%-25% Adjusted EBITDA on an annual basis. Why we feel that way is a lot of candidly what we've already been able to demonstrate and do. Very large opportunity in the fulfillment space. We are certainly not tapped out with the opportunity to bring along more and more customers to become recurring revenue customers. And the opportunity, as their business grows, to add additional revenue from those customers. Think of that as additional connections. The more retailers the suppliers are doing business with, the more opportunities we have then to monetize because from the way we price, we primarily price a fixed fee per retailer.
If you're a supplier, your business grows. You start with five retailers. You're now selling to 10. We'll get that additional five over time. A lot of that's what's driven us to our great growth that we've achieved, and we still have that opportunity going forward. On top of the fulfillment side, we also do have an analytics product, and there's opportunity for that to continue to grow with us as well. Longer term, there's opportunities for additional products as well. Not just the cross-sell, not just the upsell opportunity, but also the cross-sell opportunity.
So the analytics is obviously something that a lot of people talk about: the data that comes out. Do you repackage that and sell it back to the clients? Do you anonymize it?
Sure.
Is that a big growth area that investors should be thinking about?
Yeah. So when we think about our analytics business, think about that as about 10% of our recurring revenue with the vast majority of the rest being on the fulfillment side. The analytics for us is primarily focused on point of sale and sell-through data. So it allows visibility to the supplier of not only they know what pallet of goods they might have shipped to a retailer or a retailer's distribution center, but they don't actually know what's been consumed by the end consumer. This information allows that supplier that visibility into what's actually been consumed so they can do better supply chain management and what to produce and when to produce that allows them to avoid costly overstock or understock and have a missed revenue opportunity. So it is something that is very interesting and compelling to the suppliers.
The retailers will also benefit from that, and a great collaboration opportunity to be working with the suppliers on that. So it certainly is something that we think has a nice long-term opportunity for us.
Yes. So Chad, you've done some acquisitions this year, which you've completed and added to your product portfolio. Can you talk about your product strategy, acquisition strategy, and anything else that investors should be thinking about in terms of what you might be looking at or adding in the future?
Sure, sure. Yeah, let me highlight the one that we did most recently, which was a company called SupplyPike, who'd done a really nice job finding product-market fit in this area of invoice deductions. So what's an invoice deduction? So when you are a supplier and you are shipping and selling product to a retailer, you have pretty strict requirements in how you need to perform in the supply chain. Obviously, is it there on time and in full and not damaged, but also what transportation do you use? Did you send the right digital communications around that shipment? And if you don't perform one of those things, the retailer doesn't call you and ask you nicely why you didn't perform that. They just take the invoice you sent them and they apply a penalty to that, and they short pay your invoice for that penalty.
And so there's a big challenge for suppliers because, one, about 10% of these deductions they get are actually errors on the retailer side. They never should have been deducted this amount. And the other thing is a lot of times they don't know what the actual root cause problem was that caused this deduction. So this platform, one, this problem exists in our SPS customers, and this platform really helps those customers address so they can dispute the things they shouldn't have been deducted for, and then they can go find the root cause problem in their supply chain and address it. And so very applicable problem to our customers, and I think representative of just another way that we can help with this supply chain collaboration between retailers and suppliers.
And we can take a product that is very helpful, had found product-market fit, but maybe didn't have all the access to customers and the distribution and sales capacity that we have in our organization. So we can take that product, introduce it to our customers, and then cross-sell that. And I'm confident that we'll continue to grow on the core fulfillment and analytics, but also over time we will find things through our M&A strategy that will be like this invoice deductions platform and generate a good opportunity for us to cross-sell products to our customers.
Gotcha. Well, staying on that same theme, you've been very successful in growing your network in North America. Can you talk about the opportunity that you see for SPS in Europe, especially with your TIE Kinetix acquisition that you completed last year?
Yeah, yeah. So yeah, historically, our business has really grown through the U.S.. About 85% of our revenue is contracted in the U.S., and we drive the vast majority of these enablement programs we do with retailers through U.S. retailers. That's brought along some global suppliers along the way and certainly brought along European suppliers, but usually driven through a U.S. retailer program. With the acquisition of TIE Kinetix, which is a Netherlands-based business with operations, small operation in the U.S., also in France and Germany, brought us a couple of things. One, it brought us a new product capability for what's called e-invoicing. So many of you probably know of e-invoicing. It's a new requirement by the EU. It's now being adopted at a country level.
If you're doing B2B commerce transactions, you need to drop a copy of the invoice to the tax authorities so they can audit for VAT compliance on that. We did not have that product capability, so it was a barrier for us doing business in Europe in those countries that have that requirement. So we got that product capability with the TIE acquisition. The other thing is we're now able to set up a beachhead and go-to-market for our fulfillment product, including our community go-to-market programs to target European retailers and then pick up more of the suppliers as a result of running the community enablement programs with European retailers.
So moving away from Europe, what are the other areas of the world that you're focusing on? I mean, obviously, Europe continues to be an important one for your growth, but do you see other areas for SPS?
Yeah. So we have a nice business in Australia that we find Australia operates much like the U.S. in terms of the retailer-supplier relationship. And so we're running community programs in Australia in a business that generally fits given the GDP size. So it's much smaller than the U.S., but a nice fit for the smaller Australian market. And then out of our Beijing operations, we do a lot of work adding suppliers to our network in China and throughout Southeast Asia. Today, we are not targeting retailers in Asia, but I could see over kind of the mid to long term, we could start expanding and targeting Asian retailers as well and running community programs for Asian retailers. I'd say that would be a secondary focus to our initial focus of expanding in Europe.
Gotcha. So SPS has a unique go-to-market motion. Can you elaborate on its success to date, and can you leverage that even further on what we've been talking about in terms of your strategy here in Europe?
Yeah. So kind of three main go-to-market motions that we have. One is this community enablement program, and this by far is the largest source of new customers where we're working with the retailer, and they give us their list of suppliers, and in partnership with them, we do the outreach to those suppliers. Our commitment there is to the retailer, so establishing a correct and compliant digital connection to the retailer. Obviously, those suppliers can do it through our network. They don't have to do it through our network. So in the case that they have another method to connect to the retailer, we just take them through a testing and certification process to make sure they're compliant with the retailer. The second path to market we have is the more traditional digital marketing approaches that you find with many technology companies.
Where this fits really well is for that supplier who has some type of new retail requirement that wasn't driven by one of our community enablement programs. They can find us through digital search or through one of our marketing campaigns, and then the third area is our channel go-to-market, and what we find is that especially when companies are changing ERP systems and moving those ERP systems from on-premise systems to the cloud, that's a very logical time for them to change out all these digital connections they have with their trading partners, so maybe in the past, they'd had an on-premise ERP system and on-premise software to self-manage these digital connections. When they move their ERP to the cloud, that's a logical time for them to adopt us and take a cloud-based approach to these digital connections.
So our channels team is out there working with ERP providers, their sales force, and the broad ecosystem that we find of value-added resellers around many of the mid-market ERP systems.
So Kim, I want to pull you back in here and put you back on the spot. So your Adjusted EBITDA guidance calls for 15%-25% growth. What are the kind of major drivers behind your margin leverage? Is it scale? Is it gross margins? Is it across all lines? How should investors think about that?
Sure. So we have a stated goal on an annual basis to deliver between 15%-25% EBITDA dollar growth. And when we have a stated goal of that 15% top line, you can see how in most years you're going to have margin expansion that will occur. When we think about our journey going back, call it six, eight years ago, we were sort of mid-teens EBITDA margin. We're now closer to upper 20s. A lot of that scaling came through sales and marketing efficiencies that we were able to extract. The next leg of our journey from, call it upper 20s to mid-30s, will primarily come through in the form of gross margin expansion. A lot of that gross margin expansion is the opportunity we have to grow into various investments we've made over the prior years.
So said another way, we'll continue to add resources as we see appropriate for that overall customer experience, but we don't necessarily need to do that at that same rate, same clip that we have historically. And so there's natural expansion that will occur in gross margin over time.
Good. So that's organic. So let me take it to are you still looking at acquisitions? And how does you and the board think about that in terms of deployment of capital?
Sure. Yep. So we have been acquisitive as an organization. They've been more tuck-in type acquisitions as it's a pretty fragmented market. If it makes business sense and then financial sense, then we're happy to do those acquisitions. Those stated goals we have are an all-in, so they do include acquisitions in there. But from a capital allocation perspective, we are cash flow positive, which as a CFO. I love that. Great to have the cash coming in the door. And then how investors have seen us deploy that capital has been through periodic M&A opportunities. Again, they have to make both business sense as well as financial sense. And we also have periodically repurchased stock. So those are two mechanisms that investors have seen that capital be deployed.
And so, Chad, what is the board's philosophy on that capital deployment? Is it, you think, will you continue to do stock buybacks? Will you continue to think about doing a dividend in the future? Do you want to keep the cash for acquisitions?
Yeah. So to Kim's point, we have the benefit of being very cash flow positive. To the extent that we can find and have high conviction around the right M&A, we think that's a great source of our capital. And secondary to that would be the stock buyback program. And you've seen us over time, based on our cash position, utilize both of those strategies.
Gotcha, gotcha. So Kim, how do the market dynamics and the macro affect SPS?
Sure. And that is a question we do frequently get from investors, especially with our business primarily being in the retail space. Not surprising that question does come up. We tend to be pretty insulated, so we're probably not the best bellwether as it relates to what's happened in the economy. When economy is going really well or economy is a little less than stellar, our overall financial results have usually been within a pretty tight band, say revenue within, call it 1% or 2%. Part of the reasons for that, well, there's a variety of reasons for that. One is the way we price our product. So our product is not priced on GMV, so that tends to insulate it a bit. The other thing, when you think about our core fulfillment product, it's a pretty important product offering.
If a retailer is requiring a supplier to be able to receive that purchase order in an automated or an electronic way, that supplier really has a need for our products and services because they want to receive that purchase order so that they have revenue.
Would we go to mission critical?
Mission critical. So the criticality of the product coupled with the way we price that fulfillment product is why we see very little variability. Now, our analytics product, that one we do see a little bit more variability depending on what's happening in the economy, but overall, it's only about 10% of our revenue.
When you look at your clients, is the diversification of the clients, is that another factor that investors should be thinking about? I mean, you must have a very wide band of different clients. Some might be doing well, some might not be doing well.
That's a great point. So we have approximately 45,000 recurring revenue customers. All of them are pretty small, so none of them are a significant portion, no customers even 1% of our revenue. So to your point, we're going to have customers that some might focus more on groceries, some might focus more on fashion. There's going to be different ups and downs in the economy, but overall, there's a lot of consistency in our financial results by having tens of thousands of customers that are all relatively small from a revenue perspective. Yes.
So Chad, you're fairly new to SPS, a year in the role. What are your priorities? Let me ask you this way. What have you found surprising now sitting in the CEO seat, and what are the priorities that you have going into 2025?
Yeah. I think what was surprising is, obviously, we all know and talk about these network effects that can happen in business. What's surprising, though, is just seeing day in and day out how these network effects are benefiting our business, just how things pop up, customer relationships, lead flow. I'll say the network effect in the network business is real, and when you're living it day in and day out, you really appreciate it and are thankful for it as well.
The other thing was, while I knew SPS worked with the retailers to gain access to the suppliers, what I don't think I appreciated from the outside was just how much process expertise and refinement there is in that approach over the last 20 years, refining that approach of how to work with the retailers, how to manage the communication out to the suppliers, how to manage the situation when suppliers push back and say they don't want to establish these digital connections. That is all a sort of well-oiled machine that's been refined over 20 years, and so then in terms of what to focus on, I mean, I think there was definitely a view coming in that there were probably some new places that SPS could go.
I'd say the conviction that I got around the core business and the market opportunity we have there makes me think that priorities one through nine are definitely executing on the opportunity in front of us, and then I think over time, we can do some of the things that are in front of us in terms of expanding the product line, both organically and through M&A, and expanding the geographic diversity of our business, so some of the things that we've done really well in the U.S., continue to expand that and take that to other geographies to even open up more TAM for us.
Good. I want to leave time for any questions that may be here in the audience.
Thanks. Maybe one just on market shares of Amazon, you're taking more share. Does that impact you in any way in terms of total commerce, logistics, the whole thing?
Yeah. Yeah. So Amazon is one of the largest retailers on our network. So we have a lot of Amazon suppliers trading with Amazon across our network, and that comes both on both the wholesale business, the 1P business, as well as the third-party business where we're kind of helping customers connect into the Amazon Marketplace. And what I would say about Amazon, although they are certainly taking share, they're also raising the expectation around omnichannel commerce for all retailers. And the more complexity that's driven from omnichannel and this heightened expectation consumers have for a rapid delivery, all that generates some degree of complexity and heightens the need for supplier-retailer collaboration, which is really a tailwind to our business.
So I try to wait till 25 minutes in before I ask the question on AI, but I have to ask it because then I wouldn't be doing my job. How is AI affecting your business? How are you integrating it into it? Is it part of the analytics business, and how will that be further developing that in the future?
Yeah. So the most immediate effect for us is with our customer onboarding experience. So we've been able to train our own large language models kind of specific to our business and over time feed that with a lot of things like all the retailer rule books, all the requirements certain retailers have. And by training this and doing this, this has really helped us with the onboarding of our customers because effectively our customer success organization can query this ChatGPT-like tool that gives them the different information they need about how these suppliers are going to trade with retailers. So really applying it to some of our internal efficiency.
And then, I fully expect with the vast amounts of data that we generate on our network through continued application of AI to our network data, we'll be able to provide more and more insights to our customers about their performance and the broader performance of retail and the broader performance of certain categories within retail to help them manage their business.
Anything specific in the finance area that you want to add?
Yeah, I'd say currently the focus is. I'd say it's more internal focus right now in ways that we can use AI to be more efficient in what we're doing. And then we'll evaluate is there more external applications to our product that would make sense.
Could you quantify just the size of the addressable market for the core U.S. product and how much you've got, how much what everyone else is using, is it just non-digital and realistically where that could go over time?
Sure. When we think about the TAM or the total addressable market, call it sort of eight-ish. Multiple years ago, we provided our view of what it is. What's interesting is there's not a heck of a lot of great external data to look at. We sized our own view as it relates specifically to SPS. I'd start with the caveat that it's a little bit dated, that TAM, but at that point in time, how we came up with that view, we looked and we said our fulfillment product is primarily focused on small to mid-sized suppliers. We had a lens at that point in time that the definition of sort of small to mid-sized suppliers would be a supplier that has revenue of about $500 million or below.
Now, we certainly have many customers of ours that are much greater than that, but from how we were sizing the opportunity, we were primarily looking at that small- to mid-sized suppliers that we saw for potential opportunity. We looked at that lens and had more granularity into what that looks like specifically in the U.S., and then we applied a factor of saying that there's also opportunity outside of the U.S. When you sum that together, that came up with a view of approximately 200,000 suppliers as opportunities for our product. When we looked at the revenue opportunity or the revenue per customer, revenue per supplier opportunity, at that point in time, we sized that opportunity to be approximately $25,000, and when you do the math, that gets you about $5 billion total addressable market.
The way we came up with that view of the 25,000 was with our core fulfillment product plus our analytics product, with a lot of the driver being those additional connections, right? So the more retailers that suppliers are doing business with, the more opportunity that is for revenue for us. That's how we had sized the opportunity. Now, fast forward again, sort of eight years after the fact, still a very large opportunity. We think that opportunity is greater than $5 billion. We will be taking the opportunity in 2025 of providing an update to that number for a variety of reasons, one being we now have additional products than we did when we first sized it. So we think that it will be helpful to provide that update to investors next year.
Chad Collins, Kim Nelson, SPS Commerce, thank you for joining us again at the Nasdaq Investor Conference here in London. It's delightful to have you. Thank you so much.
Thank you very much.