All right, everyone. Thanks for being here. We're going to get started with SPS Commerce. We have the pleasure of Chad Collins, CEO; Kim Nelson, CFO of SPS Commerce; I'm Will Jellison, I cover vertical and back office software for Davidson, of which SPS is one. So thanks for being here.
Thank you.
I figure it makes sense to start out this conversation with maybe a couple of minutes' overview on who SPS is, the problem you solve, and the value proposition.
Yeah, sure. At SPS, we operate a network in the cloud that connects retailers to all their suppliers so they can exchange supply chain information across our network, largely related to the ordering process. The big benefit of having this network for the retailer is that they can digitally interact with all their suppliers, which gives them visibility to inbound inventory and the commitment time frames of their suppliers, and also just an automated way to interact with their suppliers. For the suppliers, the big benefit is also a digital way to receive their orders and interact with the retailers. The retailers are known for having some pretty strict and frequently changing requirements on how these digital transactions need to work with the suppliers. By being connected to a network like SPS, suppliers do not have to worry about managing retailer by retailer.
They just connect once to the network, and then we manage all the complexity that comes from the retailer's requirements.
Great. Then starting off with the network, Chad, I'd like to start with asking you a high-level question, which is, to begin with, SPS has the largest EDI network in North America. Can you speak to the importance of the community approach that SPS takes and the different kinds of stakeholders like suppliers, logistics, retailers who depend upon the network?
Yeah, yeah. One of the very unique and strategically important decisions that were made long before I got to SPS was to enable this, what we call community enablement go-to-market. That is where we go to the retailers, and we work with the retailers and highlight the need for the retailer to have all their suppliers digitally connected. We have a program with that retailer where we get the mandate from the retailer to do all the outreach to their suppliers to ensure that they get those digital connections in place. A big benefit to the retailer is that they get all the efficiencies of having these digital connections with all their suppliers in place. Also, a big benefit to us because that is like built-in lead generation. We are getting a list of hundreds or thousands of suppliers that are all in our ideal customer profile.
We partner with the retailer, and we have a team that calls through all that list of suppliers, and they can meet the retail requirement by joining our network. We have an open network approach. If they have another method to meet the retailer's digital requirement, we'll take them through a testing and certification process. At the end of this, even if those suppliers go through a testing and certification process and do not join our network at that time, we put them on our CRM, and we continue to market to them. For the retailer, the big benefit of this program is they have all those digital connections in a compliant fashion with all of their suppliers.
Great. If I look at the first quarter, which you reported a little over a month ago, on an organic basis, excluding the customers you brought in from the Carbon6 acquisition, which I'll get back to in a few questions, the 300 net new customers on an organic basis was two quarters in a row of nice re-acceleration in the network expansion. It sounds like we have visibility towards a similarly strong second quarter as well. Can you speak to what's driving success in expanding the network in the first half of this year?
Yeah. So there's really two ways for us to ways the revenue shows up on our scorecard. Of course, it can be via a new customer acquisition, and it can be through increasing the average revenue per customer. The mix of that in any given time period, a quarter as an example, is really going to be driven by the nature of these community enablement programs that I was just speaking of. If we have a situation where we are working with a retailer to run these enablement programs where we've worked with that retailer quite a bit in the past, there is an opportunity to monetize the suppliers in those programs. Because we've worked with that retailer in the past, there tends to be a higher proportion of existing customers inside that program. We do monetize them.
It just shows up a little bit more on that average revenue per customer side of the scorecard versus the customer count scorecard. Conversely, if we're working with a retailer who we have not worked with in the past, there's a higher likelihood that we'll find new suppliers that are not our customers inside that program, gives us a higher chance of adding new customers through that program. In any given quarter, if you see it show up, our growth show up more on average revenue or count, it really just is based on the mix of those programs. What we saw in Q1 of this year was a bit more of a shift towards some community enablement programs that were with retailers we hadn't worked with in the past, therefore drove a higher customer count.
If you look back to 2024, we had a higher proportion of retailers that we have very strategic relationships with and have worked with many times. Therefore, it drove it more on the average revenue per customer.
Great. Kim, SPS resized its TAM recently. I should say updated the TAM it publishes for investors earlier this year. As you went through that exercise in sizing the $11 billion TAM, how did you think about just how fast the overall EDI market is growing and what role did that play in the TAM you eventually published?
Yeah. So just a little bit of context. We had a prior version of TAM, which was we believed the opportunity was at least $5 billion, so $5 billion or greater. Now, that was quite dated, call it a decade-plus old. We knew we had an opportunity to, even though it is still a very large opportunity, take the time to actually go through and refresh and update that. Our starting point on that was really looking to say, what is the population of potential suppliers out there that could benefit from our products, services, and offering? Based on that, that gave us a view of how many potential customers or recurring revenue suppliers, recurring revenue customers there would be. Our view of that is globally about 275,000, of which the US is 147,000 of the 275,000.
We also then had a view of how much revenue on average do we think that that customer will translate to us over time, getting us to that combined $11 billion you mentioned on the U.S., $6.5 billion of the $11 billion. I start there because it wasn't started with what is the pace of growth that we're seeing. It was really based on who do we see out there as prospects or potential companies that would benefit from our products, services, and offering.
That being said, our belief, right or wrong, because there's not a lot of great data, candidly, out there to really try to understand what's happening here, our belief is that we're probably growing at a rate faster than what the overall market is growing just because we believe we're the clear leader in this product offering and have the broadest sort of depth and breadth of our portfolio as well as the network itself.
Great. Can you talk a bit about how you decided to slice the customer cohorts into small, medium, and large?
Yeah. No, that's a great point. That was one thing that we realized as we have evolved over the years. Our product offering really does meet the needs of any size customer. When we started two-plus decades ago, we really focused on really that small-sized supplier. Now, from a quantity of opportunity, small suppliers are the largest. However, over that two-plus decades, our product offering also, we have some customers that are more medium-sized suppliers, some customers that are more larger-sized suppliers. As we were updating our view of total addressable market, we recognized that there was an opportunity for us to help explain that to investors that might not know our story quite as well and that there are different dynamics depending on what size customer you are.
In our investor deck, which is available on our website, we have one slide that says specific for the U.S., how do we think about that opportunity? Think of it as that $6.5 billion opportunity, and it shows the quantity of potential small-sized suppliers, medium-sized suppliers, and large-sized suppliers. As you would expect, the largest quantity in number of customers are going to skew to the small. When you think about how much on average the revenue per customer is, as you'd expect, that gets bigger as you go to the right on that page. The larger-sized prospect or potential supplier for us has the most average revenue per that size. It basically, if you start on the small size, on the smaller-sized customer, biggest quantity, over 100,000 in size.
As you grow, how much average revenue per customer, the medium-sized customer is about, I'm rounding a bit, but about a triple the opportunity size to the small, and then the large is about a doubling in what that opportunity size is from the medium.
Great. Thanks. Chad, we've spoken about this a few times before, but I think it's worth reiterating for the audience. Can you speak to the components of the core EDI pricing model and how that pricing model is structured so as to relatively minimize the revenue sensitivity to things like consumer spend, which might be top of mind right now?
Yeah. The way our Fulfillment product, which is the product that is the bulk of the revenue in the company, is priced is based on the number of connections you have in our network. If you're a supplier with Fulfillment, that's really the number of retailers that you're doing business with. There's a fixed fee per connection. Really, scale is primarily based on that connection. Think of that as probably 80% of what the customer is paying us. On top of that, there is a small variable component that's based on the documents that are being exchanged. Usually, that document equates to an order. An order will be one document. The acknowledgment will be another document. The Advanced Shipment Notice, another document.
The interesting thing about doing it on a document basis is actually the frequency of orders is actually pretty consistent, even if the quantities that retailers are ordering is going up or down inside that based on certain economic conditions. We really see, one, this big fixed fee component tied to the connections, which is the bulk of the pricing. We also see relatively stable documents with our customers, but still gives us an opportunity to get some growth with the customer. All that leads to a very predictable revenue model based on the way the product is priced.
Great. Great. Kim, I'll ask you this one. R&D spend has been both efficient and consistent at about 10% sales. That's GAAP for the last several years. As we sit here today, how is SPS balancing R&D resources towards generative AI, machine learning from all the data flowing through your network, increasing speed to compliance, or newer products?
Sure. When you think about our R&D spend, typically that has been spent on continuing to enhance our existing product offering. We do not want to just assume because we have had a product offering out there that we do not need to continue to make enhancements and make it more robust for our customers. There is an aspect of R&D that goes into enhancing existing products. There is an aspect of R&D that goes, think of it almost like an investment internally in our own tools and technology. How can we be spending some money there to ultimately make what we are doing as the employees of the company to be more efficient in that task or that work? That aspect, there is an element of certainly AI that you do benefit from in there as well.
There is an aspect of R&D that's just building out these rule books. As a retailer has rules and expectations of how they want to place an order all the way to get that order fulfilled, those are those rule books that we talk about. There tends to be lots of different rule books. The R&D function makes sure we're building those out and then maintaining those. That's also another area where we can leverage AI in that. Historically, as a business, we haven't had as much R&D in new product development. That aspect with product development has been more on enhanced of existing products. Over time, should we find ourselves in a position where it makes sense to build a new product offering, certainly there would be some R&D component to it.
Historically, when you look at what our spend has been as a percent of revenue, it's primarily been, again, enhancing existing products, investing in back-end tools and technology, and also building out the various rule books. Specific on the AI side, in two of those three I mentioned, those are great opportunities for us to leverage AI. We are leveraging AI. We do think that that benefit of AI ultimately will have a benefit in the overall customer experience because things can be done in a more efficient way. The AI investment primarily has been more the internal focus versus a commercial external focus up to this point.
Great. Thanks, Kim. Speaking of new products, Chad, I wanted to ask you, just a month ago, SPS announced a new Manufacturing Supply Chain Performance Suite. It's an EDI toolkit focused specifically on co-packers, manufacturers, and manufacturers. Can you talk about why you decided that this was a product worth building and releasing and what kind of problems it solves?
Yeah. If you think about our network today, the vast majority of transactions that happen on our network are between retailers and distributors and their suppliers. You have sort of finished goods that are being bought by one organization or manufactured by one organization and sold to another organization. What we do not have a lot on our network is a lot of manufacturing-type transactions. If you think of our 50,000 supplier customers, a good portion of them are actually involved in the manufacturing process. This solution is actually addressing that sort of upstream component of the supply chain, right, dealing with the suppliers to our supplier customers and giving us another potential cross-sell opportunity to increase revenue and solution value to those supplier customers. We are very early on this.
What I would say is one of the benefits is from a technology standpoint, it's actually very similar. This can all be done with similar transaction sets in a similar way the network works. It's not a situation where we have a big outlay of R&D to make a product like this work. However, the way that it's sold, implemented, the terminology that's used, the value proposition and business case are all different when you're dealing with the manufacturing supply chain versus the finished goods supply chain.
We have had to put a lot of effort in there to enable our sales force around this, of which it's just a small subset of our sales force focused on this, and also the portion of our customer success team that's dealing with this manufacturing part of the supply chain versus the finished good part of the supply chain.
Great. Another new product that's been important to SPS that you ultimately decided to buy instead of build is Revenue Recovery. I have a few questions about it, but I think it'd be helpful to start out with what is Revenue Recovery software and why is it important?
Yeah. So it probably makes sense to start with how this works in the retail ecosystem. That said, the retailers publish a thing called the retailer rule book, which is basically a very thick guide that you need to, if you're a supplier to a retailer, it defines all the rules that are required from a supply chain perspective to do business with that retailer. It could cover things like payment terms. It covers all the digital transactions, like the ones across our network, but it also includes a lot of the physical things, like how you put product in the box, how the boxes go on the pallets, how the things get labeled, what transportation providers you can use. If you're a supplier and you violate any of these rules, then the retailer will charge you a penalty or a chargeback.
The way that they do that is they just short pay your invoice and put an often very mysterious charge code on that to reflect the fact that they're short paying the invoice. You can imagine this is very difficult for suppliers. They don't exactly know why they had this deduction, and they certainly don't always trace that back to their supply chain and where the problem was caused. In addition to that, the industry average would say that about 7%-10% of these deductions are actually errors on the retailer systems, and you should have never had that deduction in the first place. The kind of old-fashioned approach to dealing with this is you might have an accounts receivable person who would receive these invoices, see that it had the penalty, attempt to dispute it with the retailer, very manual back and forth.
Over the last three or four years, there's been an emerging category of SaaS solutions, which have been developed and have built into them all the complex rules of these chargeback programs that retailers have, but help you dispute the ones that are sent to you or given to you erroneously. We call that Get Paid. Get Paid is where the retailer made the mistake, not you, but then Get Better helps you go back to the root cause problem in your supply chain so you don't make that mistake again and you can avoid these penalties. We certainly discovered this and were aware of this problem from our supplier customers.
Through all that work, discovered two companies, one that was very deep in Walmart and Target and Lowe's and Home Depot and some of those retailers, another one that was very deep in Amazon. We acquired those two companies kind of in 2024, in the very beginning of this year. Now we're putting those together into a common Revenue Recovery offering that we can, one, because it's an emerging category of software, we think we'll be able to get new customers. We also believe we have a pretty significant cross-selling opportunity to a portion of our 50,000 Fulfillment customers because many of them have this problem with revenue recovery, and this solution will help them.
Right. And that cross-sell is a two-way cross-sell opportunity as well, right? Can you talk about the two different ways?
Yeah. Probably the largest way will be of the 50,000 Fulfillment customers, having them adopt the Revenue Recovery solution. We expect most of it to go that way. There is also an opportunity for the customers that came with the Carbon6 and SupplyPike acquisitions that are not yet SPS Fulfillment users to become SPS Fulfillment users.
Great. Is there a target customer, whether it's by amount of business done or number of employees, that really represents the sweet spot for cross-selling revenue recovery into?
Yeah. So it really depends on how much volume they're doing with the retailers that have these chargeback programs. Typically, we like to see we'll see a stronger business case if they're doing at least $2 million of GMV with a particular retailer. Then there's typically a very compelling business case to add revenue recovery for that retailer.
Got it. Prior to SPS's acquisitions, respectively, Carbon6 and SupplyPike were priced a little bit differently, Carbon6 on a take rate basis and SupplyPike on a subscription basis. Now that they're under the SPS family, are they going to be priced consistently?
Yeah. As we're bringing these together, one is we're combining the retailer coverage. If you, previous to us pulling these together, if you were selling to Walmart and Target, you probably would have had to go buy from SupplyPike and go buy from Carbon6 to get the retailers. We're combining that. As you mentioned, Will, they had different revenue models, but they also had different service delivery models. There's kind of, and now we're able to position this as the customer wants it. One model is you use it as a platform. You have the software, but you have your own team that uses the software, and then you manage the interaction back and forth with the retailers around all the disputes.
There's another model where it's more of a service that we provide, a little bit more of a white glove service where we'll use our own platform, but manage more of the dispute back and forth with the retailer on your behalf. That is really where the revenue or pricing model comes in. Where you're doing it with your own people, you just pay a subscription fee for the platform. If you're using more of the white glove service, then we will actually take a portion of the revenue recovered.
Great. Great. Kim, I have one for you. Over the last few quarters, we've started to see some very nice gross margin accretion, which we probably expect will continue through this year. That's a consequence of SPS scaling into some investments it made over the past couple of years. Can you talk about what those investments were and how you're now growing into them and driving leverage?
Sure. Over a multi-year time period, we've invested in the overall customer experience. Simplistically, from a financial lens, that would mean the amount of dollars in cost of goods sold was either at or sometimes higher than what that revenue growth was occurring in that particular time period. It made the gross margins be flat, and then sometimes we were investing even at a faster clip. When we think about those types of investments we've been making on the customer experience, a lot of it was focused on time to value, last mile integration. Think of it as when you sign up to do business with SPS Commerce, how do we make it as quick and easy for you to get that full value up and running on our platform? We've also done things, if you think about as our customer size has evolved over time.
If you're a smaller-sized supplier, we've certainly made some investments in how do we make it easier when you're in that tool and application to be able to use it, if you have questions, sort of a self-service Q&A, et cetera. If you skew to more of the larger-sized supplier or customer, there's more of a proactive outreach that can happen to that customer size to make sure they're getting the full value and utilizing our products and services to the full extent. Those would be just some examples of investments we've made. We'll continue to invest in the customer experience going forward, but simplistically, that rate of investment or the amount of bodies to be added in the future is not at that same clip that it has been historically. Therefore, over time, you'll start to see a gradual improvement in our gross margin.
Great. Can we build upon that by talking about the overall target financial metrics that you look at in the long term?
Sure. So we have a stated goal long term for adjusted EBITDA margins to be at least 35%. We're currently, call it more upper 20s-ish, and that next leg, we're primarily pointing investors to gross margin. That does not mean there isn't room for improvement in other line items as well. The caveat is probably not in R&D. We do think that's an appropriate level of investment. But each of the other line items are certainly opportunity for improvement, but we've already extracted a lot of efficiencies out of sales and marketing as an example. That next leg of the journey is primarily in gross margin. To put that in context, we've been, call it, mid-60s-ish from a gross margin perspective for a multi-year time period, and we have a stated goal of sort of low to mid-70s.
That low to mid-70s equates to our stated goal of 35% or greater from an adjusted EBITDA margin perspective.
Great. How about the revenue growth model? How do you think about the different drivers of that between wallet share, net new customers, and M&A?
Yeah. There are multiple ways in which we can deliver that revenue or top-line growth. The mix of that will candidly vary depending on the year, but maybe if we talk about some of the different components there. Our community go-to-market, that has been a very strong lead gen engine for us for our last two-plus decades that we expect to be in place for the next two-plus decades. That tends to bring us, for our initial interaction with the prospect, it tends to skew to those smaller-sized suppliers. We also get a lot of outreach to already an existing customer through those community enablement campaigns, in which case it will show up on that RPU versus the customer count. That remains alive and well. Our channel sales team going after those larger-sized prospects when they are making an ERP change, that remains alive and well.
We have multiple ways of cross-sell over time into our existing customer base. We also have the opportunity to be acquisitive. We have been acquisitive in the past. If it meets certain business needs that we see, we'll continue to be acquisitive going forward. All of those contribute to what our overall growth is at any point in time.
Great. Chad, as of the most recent 10-K, SPS sits at about 17% of sales internationally, growing a little bit faster than the domestic customer base. Where does SPS stand with its international growth ambitions?
Yeah. For a long time, SPS was able to win suppliers onto our network that are outside the U.S., but it was always primarily driven by community enablement programs with U.S. retailers. The suppliers to those retailers just happened to be outside the U.S. We had a mechanism in Asia for us to sell and service those customers that were Asian suppliers to U.S. retailers. In Europe, we would actually sell and service them from the U.S. About two years ago, we made an acquisition of a company called TIE Kinetix. TIE brought us a presence in Europe. We've been now transforming that go-to-market so we can sell directly in Europe and service customers directly in Europe. We're in the beginning stages of launching the community enablement go-to-market in Europe.
Great. At this point, I have more questions, but I'll press pause, open it up to the audience, and see if any of you have things that you want to ask Chad or Kim.
You guys put out of the—sorry. You put out on the top-line retailers where you are and what that opportunity is. I guess the question is, is that the opportunity or is it the revenue recovery software and the cross-sell opportunity there? Where's the bigger go-forward opportunity?
Yeah. We have the majority of the U.S. large retailers trading on our network. From a network perspective, we're supporting the major retailers. There's another way that we can work with those retailers by running these community enablement programs. That tends to be a little less binary, meaning at any given point in time, we can go run a community enablement program with a retailer. That's kind of ongoing activity we do with the retailers. What that does then is if we work with those retailers, it drives the market penetration on the supplier side. We definitely, to Kim's comments earlier on where we're going to increase the wallet share the most, think the largest opportunity is increasing existing customer connections on the network. That will be driven, though, by the programs that we run with the retailers.
The cross-sell of our analytics and revenue recovery products are important, but secondary to adding new connections on the network.
Have you integrated the two acquisitions for one pricing structure?
That is literally in process as we speak, yes. We closed on the second of those two at the beginning of January. That has been a big focus of our post-merger integration to combine those sales forces, combine the message to the market, and combine the pricing models.
Regarding the message to the market, one of them was event and very wedded to Amazon. Amazon's got to buy into high-end pricing, right?
Yeah. So we have a great relationship.
I have a lot of input, at least.
We have a good relationship with Amazon. They see the value of having this type of offering to their suppliers. Amazon does not necessarily dictate our pricing model, right? This is a mechanism that we provide that if Amazon makes mistakes, you can recover your money from Amazon. While it's a positive relationship with Amazon, they're definitely not dictating our pricing model.
Is the cross-sell opportunity with 50,000 to put some more customers, is that material for revenue recovery?
Yeah. So what I would say there is it's not going to be addressable to all those 50,000. So I mentioned this kind of $2 million GMV level that would be ideal to prove out the ROI. So a lot of our 50,000 customers are below that level. But when you get into kind of the medium and large portion of that 50,000, it's very addressable to them.
Matt.
I'm looking at the RPU slide in your presentation. I'm kind of curious, the concentration of customers that are below your average, but then there's a smaller number that is in a big gap. Which would you rather see move further to the right? Would you rather have the high number of customers slide to the right, or is that 10-15% kind of incremental margin lift in terms of the size of the companies that can actually get to that goal? I guess if you understand what I mean.
Yeah. Yeah. In each of our small, medium, and large customer segments, we see this common pattern where 80% of the customers are below the average for that segment. The opportunity for us is to take that 80% and drive them up toward the average because we know there are customers already that are at the average, and then there are some way out on the right-hand side, which are kind of an ideal state. Definitely, with 80% below the average, the big opportunity for us is to move more toward the average. Obviously, the average will change as we move them up, but yeah.
What keeps that percentage down below the average? Is it the size of the customer? Is it maybe they just haven't had the opportunity to penetrate yet?
Yeah. No, that's a great question. It's really about the penetration. If you think about a lot of application software that's out there, I mean, let's just take CRM as an example. If a company has Salesforce, all their salespeople are going to be on Salesforce, right? It doesn't really work that way in our business. We may get a customer, and they add one connection for one retailer. For the other retail customers, they have other ways of interacting with those retailers. They could be getting those orders via email. They could be going out to a retailer portal. They could be using one of our competitors for certain connections. The big opportunity for us is to kind of win that battle customer by customer to go get all of their connections so they have a streamlined approach connected to our network.
I can ask another question about SPS's acquisition track record. If you were to look over the course of the last 10 years or so, SPS has done a handful of deals that were either focused on expanding the network where it was opportunistic to buy a pool of customers or to bolt-on complementary technologies. Thankfully, you've never done anything majorly transformative, nor do you need to because you have a relatively beautiful business model. As we sit here today, having absorbed a few bolt-on technology-related deals over the last year, how do you think about the kinds of acquisitions you might pursue moving forward?
Yeah. Yeah. First, if we break those into the categories, a lot of network expansion acquisitions where we've been able to take companies that were basically competitors and bring those customers over to our network. Usually, that's a big benefit for the customer because they join a bigger network, and then it's a big opportunity for us to upsell that. We can take costs of the acquired technology out as we migrate those customers to our network. Very value-creating. The second category, and for that category, we will continue to do those types of acquisitions to the extent that we can find those acquisitions. What I would say is the industry has consolidated. We've done a lot of that consolidation.
There's still some out there, but I don't know that we'll find as many of those in, say, the next 10 years as we were able to do in the last 10 years. The other category is as we moved up market, we saw the need to have tighter integration with our customers' ERP systems. And we did acquire some technology there, which gave us adapter technology to connect our network into our customers' ERP systems. There may be one or two small things that we could still do there. I would say we generally feel like our adapter portfolio for ERPs has been built out at this point. Some of it's come through M&A. A lot of it we built out ourselves.
I would say that we do see more opportunities for things like revenue recovery, where there's a category of software, the strong ROI and business case for the end user, and is very addressable for our current Fulfillment customers. Also, and we didn't mention this earlier on revenue recovery, it gets better by being connected to our network. These Revenue Recovery solutions, before we own them, had to go out and get data from lots of different sources. A lot of that data can come right off our network now. The actual solution gets better by being connected to the network and being owned by SPS.
Great. Any others? All right. I'll ask one more. How do you think about SPS? It has a network, 50,000 suppliers, lots of different 3PLs and retailers in that network as well. How do you think about the other ways you might be able to monetize all of the data that's created from the commerce flowing through it?
Yeah. I mean, it's definitely something that we're working on. We do see, based on the volume of transactions and the amount of U.S. retail trade that's going across our network, that there's things that we could do to provide better insights to our customers around how they should be demand planning and forecasting and other patterns based on that data in the network. I think there's going to be, over time, further monetization opportunities of that network data.
Great. Thanks, everybody, for coming. Thank you, Chad and Kim, for being here.
Thank you.
Thank you.