I think we can go ahead and get started. My name is Chris Quintero. I am a software analyst on the U.S. Equity Research Team, and I'm really excited to be joined here by Chad Collins, the CEO of SPS Commerce. Chad, thanks for joining us.
Good to be here, Chris.
Awesome. So, Chad, maybe to kick things off, for investors who are not familiar with the SPS Commerce story, where does SPS fit within the broader supply chain software landscape? Maybe who are your customers, and what is the value they're getting from adopting your software and services?
Yeah, sure. So, at SPS Commerce, we operate the world's largest retail network in the cloud that connects retailers to all their merchandise suppliers. And across our network, they're able to exchange information about the supply chain, generally information about orders, items, inventory, and shipments, so they can collaborate more effectively. And we have sort of a unique go-to-market where we partner with retailers to digitize all these connections to their suppliers, and we do that through an enablement service. And the benefit to the retailer is they get, through that program, 100% of their supply chain digitized. The benefit to SPS Commerce is we gain access to all these suppliers who are in our ideal customer profile and give them the opportunity to join the SPS network. And we're doing this for more traditional retailers, general merchant retailers, plus grocers, distributors in industrial, food service, and medical supply distribution.
Got it. And I'm glad you brought up the Community Enablement go-to-market motion, which I think is pretty unique. So let's double-click on that. How does it exactly work? Is it a direct sales force that goes out to the retailers and engages with them? Tell us a little bit more about the details on that go-to-market.
Yeah. So most retailers and distributors have some sort of vendor or supplier management department that will handle the onboarding of suppliers. What typically happens, though, is the digital requirements, that team is not, they're not able to keep on top of that. As there's a change in the supplier base, ultimately some of the suppliers end up, you're doing business with them in a non-compliant digital way, and that's the preferred method from a supply chain efficiency standpoint. So we offer a service to the retailers where we will come in and manage a program to do all the messaging and communication and outreach to all of the suppliers to get them caught up and make sure that 100% of their suppliers have digital connections. Then ideally, we stay on and offer a service we call ongoing supplier onboarding, which is just built into their normal vendor onboarding process. Anytime they onboard a new vendor, we handle the digital connection for them. We have a dedicated retail team that works with large retailers and distributors primarily in the U.S., and we're starting this up in Europe, and they will offer this service to the retailers.
Got it. And actually, I want to go back to your background. So before you joined SPS Commerce, you were the CEO of Körber, another supply chain software company. What were some of the lessons from your time there, and what are some of those that you're implementing at SPS?
Yeah, yeah. So first and foremost, I mean, I rose up from being a systems implementation consultant, actually writing code on projects. My philosophy is you really got to know the customer. You really got to know the customer's problems and challenges, and through that, you will develop the right corporate strategy and the right product strategy going forward. Then specifically, some of the things that I learned at Körber, where we really took a business that I was leading called HighJump in the warehouse management space, primarily a U.S. business, we were able to combine that with a larger European operation that the Körber Group had and then go on to do M&A in eight different countries around the world to really build a global offering.
And that's not exactly the same playbook that we're executing at SPS, but at SPS, as we do become a more global company and expand outside of the U.S., really helping the company understand what it takes to truly be a global company, both in terms of the product and service you provide, but also the culture that you need to have. I think we definitely are a U.S.-centric, and I would even sometimes say Minnesota-centric. We're headquartered in Minnesota, the upper north part of the U.S., which comes with its own culture up there, company. And I think as we grow and scale the business over time, we'll much more have to become a global company, as we did in my time at Körber.
Yeah. So clearly, you spent a lot of time in Minnesota. Maybe taking a step back, let's talk about the industry you all operate within: electronic data interchange. What does that exactly mean for investors who are not familiar with it? And we've seen the advent of APIs. What does that mean for your business? Is this an opportunity? Is this a risk for SPS?
Yeah. So maybe there's a few of us in here who can remember a time before the internet, but not everybody in the room. So before the internet existed, there was a desire for businesses to still do business digitally. And in the retail industry in particular, there was a set of standards that were developed called electronic data interchange, really to facilitate the ordering and goods movement information. But there was no internet to transmit this across like there is today. There was no cloud, right? So there was an emergence of a certain set of specifications that developed and a concept of a value-added network, which is a very specialized transport mechanism for these messages.
Well, we are way past that now, and we have the cloud, and it's very easy to exchange business-to-business transactions. But one element of this has stuck around, which is the actual structure of that data transmission, so the actual file formats. And that is what today is referred to as EDI, even though the vast majority of it passes through the regular internet, as do most B2B transactions. A lot of it still is in the same file format. And so on our network, to us, it does not matter if it's EDI or API. API tends to be the more modern way to do this. So an example I use is a big retailer in the U.S., Target. All of the customers that we have connected to Target, if they are shipping to a Target store directly or a Target distribution center, the structure of that data is EDI, and that's just for historic reasons.
If the customer is also connecting to the Target marketplace, which has been introduced more recently, that's on APIs, and our network supports those API connections. And so I often get the question about, you know, is API somehow a threat to your business? To us, it doesn't really matter. And in fact, I'd say if it's an API connection, it actually tends to be a more complex connection, and I think really requires or there's a larger benefit for having a network handle that API connection. So I think the more and more we move to API connections, the more value there is in a network like SPS.
Got it. And I wanted to touch on the retail sector dynamics that have occurred over the past few years. Could you walk us through what some of those dynamics have been over the past few years, how they've impacted your customer growth, those customer growth rates during that period?
Yeah. So I'll go back to the pandemic time period, which was obviously a challenge in many ways, but for the retail industry, it really acted as an accelerant on many retailers' omnichannel initiatives. So as shops were shutting down and there was more driving in e-commerce, you did see the assortments of retailers really increase on the e-commerce side. You also saw the acceleration of these omnichannel initiatives like Buy Online, Pick Up In Store. All these things required retailers to have tighter collaboration with their suppliers. And so that was a nice tailwind for retail overall, and in particular for our business. And as many of you are aware during that time period as well, there was a nice acceleration of overall IT investments during that time period.
We really saw a nice benefit of that, of having record customer counts during that time period. Because we have a Land and Expand model, there was a long tail on that for us. We saw those tailwinds continuing out through 2023 and even into early 2024. In 2024, we saw a bit more stabilization, I would say, of the end market, and we did have a decline in net customer counts over the previous year. In 2024, we came in with customer counts right around 100 or 200. Then we've seen now a reemergence of the customer count here in 2025. In our 1P customers, which are kind of our core customers, it has been 1,250 through the first three quarters, so much stronger than last year. However, we are seeing now much more pressure on the supplier side of our network, and that has been a result of the global trade dynamics, especially for U.S. suppliers.
What we're seeing is the suppliers primarily bearing the burden of an increased tariff cost and not passing that on to suppliers or to retailers. How that's impacted our business is we've just seen a lot more cost scrutiny from the suppliers. The actual customer count churn has remained pretty constant, but we have seen more downsell in these cost pressures from the supplier side of our network, particularly here in 2025.
Got it. More broadly, how are you thinking about tariffs, the general supply chain uncertainty that we're seeing over the past 12-18 months impacting the business? You mentioned some downsell pressure on your suppliers. How has that exactly manifested in your pricing model? And is there any positive side to this too, where maybe some retailers are also looking to expand the number of suppliers they're working with?
Yeah. So rightly or wrongly, we're very flexible in our customer contracts and have always historically favored making the solution very easy to buy. We have primarily small and medium-sized businesses on the network, and their preference by far for buying is to do that with month-to-month contracts. Now, the downside of month-to-month contracts is, while it's easy to buy on one hand, they are more susceptible to downsell. And so in our pricing model, we primarily scale by how many trading partner connections you have on the network and how many supply chain documents you're sending across those connections.
Well, we've seen customers that have lower volume trading partner connections, or maybe they haven't received an order from a retailer for four or five months. Under this new level of scrutiny, they're actually turning off those connections where maybe in normal times they would have kept those connections going, and that's led to some of those downsell dynamics. I'd say maybe more the bear case or the bull case, if you will, on the overall global trade is that if there is a big shift in the sources of supply for retailers or their suppliers on a geographic standpoint, that SPS is very well equipped to help onboard those new suppliers. So we could see a situation in a shifting source of supply where SPS is able to uptick our enablement programs and gain more access to potential customers there. That's not a dynamic we're yet seeing in the business, but I think we'll need to reach a point in time of, I won't say full clarity, but maybe more clarity than we have right now before I think that would happen.
Yeah. Maybe just to double-click on that, why do you think you're not seeing that today? And does that have to do with the dynamic of where these suppliers are, international versus U.S.? How do you kind of think about that?
Yeah. So when I talk to our customers who are selling to retailers and have a heavy import aspect to their supply chain, there seems to be a general sentiment that long-term, there are certain countries that are probably not great for them to import a lot of products from China in particular, but there's no clear answer on where to go, right? Because the dynamic is constantly changing. And so I think what these customers are waiting for is a little bit more stabilization and clarity, and then if they are going to move locations, they will at that time, but don't feel like they have the clarity at this point in time.
Got it. Shifting gears again to the growth algorithm, you all gave a new growth algorithm at your investor day, high single digits organic growth. How do you get to that growth rate between customer and ARPU growth? You just talked about some of the dynamics with the customer growth given the retail sector dynamics. So how would you kind of segment those growth algos?
Yeah, so the primary driver in our growth algorithm will be ARPU growth, and the reason for that is we've identified a tremendous opportunity within our existing customer base. It's always been there, but I'd say we're more focused on it now to expand the number of trading partners that a customer has on our network, and it kind of makes sense because I described these enablement campaigns before, so most customers, when they join our network, will come through an enablement campaign, they'll add a connection for that one particular retailer, and then it's really our team's responsibility to expand the use of the network across all their customers.
So if we can increase that rate at which those additional trading partner connections are being added, that would increase the velocity of growth and expand that ARPU beyond what it is today. And then the other aspect of the ARPU growth would be the broader product portfolio we have, in particular the Revenue Recovery product category that we built out via a couple acquisitions we did last year. And that is a great cross-selling opportunity for us for a number of our especially medium and large-sized customers. The customer count side, we do expect to continue to grow, but in proportion to the opportunity we have in ARPU, we'd expect more of the growth to be coming on the ARPU side versus the count side.
Yeah. So in order to drive that ARPU growth, you recently announced a new Network-Led Growth motion, which I think gets at that point of trying to drive greater cross-sell across your network of customers. So maybe give us a quick overview of what that go-to-market motion is and how you're leveraging the large network you all have.
Yeah. So this concept of Network-Led Growth is really all about identifying from our network itself additional opportunities for customers to buy from us. So let's use a couple examples. I'm more familiar with U.S. retailers, so I'll just use those. We have Lowe's and Home Depot. So these are rival home improvement stores, big chains in the U.S. Well, we know that many of our customers who trade with Home Depot also trade with Lowe's. And so if we could identify customers who are trading with one and not the other, there's high probability that presents an upsell opportunity for the other trading partner.
And we can glean these things from our network, and then we can automate that through agents and serve those up as sales opportunities for our sales force. Similarly, with Revenue Recovery, we know that if you're trading a certain volume with one of the retailers where we support Revenue Recovery, and based on your shipment volume, that you're a highly likely candidate for Revenue Recovery, and that there should be a strong ROI there. And we do both of these things based on just the data we have in our network and really applying insights and, in many cases, AI agents to go discover these and then serve these up as additional sales opportunities for our sales force.
Got it. Let's touch on that, the M&A to build out this Revenue Recovery business. Give us an overview of what that product portfolio really is and what were the assets that you ended up buying here to bring that into the portfolio?
Yeah. So just to start with the business problem, if you're a supplier to retailers and these retailers have very strict guidelines on how their supply chain needs to work, as well as the digital transaction requirements that are there with the supply chain. So if you make a mistake in that supply chain, you ship to them too late, you ship them too little, you ship them too much, the product is damaged, if it's not labeled correctly, all these things will result in a supply chain penalty. And the way that penalty is levied is they just deduct that amount from your invoice with a very cryptic code that says what the chargeback reason is.
Well, there's a big problem for suppliers to retailers. I mean, first, they want to understand what it is so they can fix the problem in their supply chain. Also, 10% of these chargebacks are mistakes that happen on the retailer system side, and you can actually get recovered for, and so we saw this problem in our customer base, and we thought the fastest way to address this problem was to acquire two of the leading emerging SaaS platforms that address this problem, really taking this from a manual back and forth between suppliers and retailers to a SaaS platform, and so we acquired SupplyPike, which covered most of the major brick-and-mortar retailers in the U.S., and then Carbon6, which provided this type of solution for Amazon on both the 1P seller side and the 3P seller side.
We've put those businesses together now. We have one sales force that's out there selling that for all the retailers we cover and selling it on a couple different models. The first model is you can run your own recovery process. So you have your own people, you'll pay us a subscription fee and use our platform to manage that back and forth with the retailer on the recovery. Or if you don't have your own people, we'll provide that more on a white-glove service basis, and we'll actually manage your recoveries on your behalf. And in that model, we'll just take a portion of the money that's recovered as our take rate on providing that service.
Got it. And one of the other acquisitions you made was Traverse Systems, which I think is really interesting because that product you're actually selling to retailers versus the suppliers have been historically your main customer here. So talk to us a bit about, and you've also rebranded it to Retailer Solutions. So talk to us a bit about what that product portfolio offers retailers, and could this be an area that you further go into as you sell more solutions to retailers here?
Yeah. So we've always been really good when we worked with retailers about getting all these digital connections established. I would say what we haven't historically been so great at is providing a scorecard around how that particular supplier is performing from a supply chain standpoint. And that's really the technology that we got with the Traverse Systems acquisition, is a capability that we can offer to retailers that does all the scorecarding of the supply chain performance of their suppliers. And so now when we go into a retailer, we're able to have a discussion more about supply chain performance and metrics and driving improvement. Of course, a foundational aspect to that is getting all the digital connections in place with your suppliers, but it's really elevated the discussion that we're able to have with executives at retailers by combining the asset we got from Traverse Systems with the service that we've always provided for these enablement programs.
Got it. I wanted to touch on the TAM. You guys put out a refreshed TAM, $11 billion globally, generally about 25% penetrated across your small, medium, and large customer bases. What is the other 75% of the market doing today? Are they using another EDI vendor? Are they doing something in-house? What are they currently doing?
Yeah. So the vast majority of that unpenetrated TAM by us is undigitized connections. So this is still, "Hey, I have an order. I'm going to place that order. I'm going to send it to you electronically in email. You're going to email me back and confirm the order. I'm never going to get any information about the exact date or exact quantity. I'm not going to send you an advanced shipment notice that tells you what's coming to your distribution center." And you would be surprised how many undigitized connections are still out there. T hen there's a portion that is served. And that portion that's served kind of comes in two categories. There is a number of larger technology providers that offer more of a do-it-yourself model. So we see IBM and their Sterling product line in this area, also a number of products that come from OpenText.
They're going to provide you the tooling, but you're going to have to manage all your individual connections with all your retail partners. f they change the rules, you got to go into that tool and change it for every retailer. We also see at the small end, a handful of smaller providers that are offering this type of solution either around a particular industry segment or a particular ERP system. What we don't see is anybody offering this broad network approach, whereas if you join the network once, we ensure your compliance to all your retail partners. And we also aren't seeing anybody penetrate this TAM the way that we are by running these enablement programs. That's been something that we've been working on for 20 years. I think we perfected it, and I think it's been really hard for the competition to replicate.
Yeah. You brought up competition there. So at the investor day, you shared that only about 2% of the time you're losing to direct competitors, and 28% of the time is actually the prospect just makes no change in their decision. So on the direct competition front, who are some of those competitors and why do you win? And on the no change front, why does the prospect not make any change? And what can you do to help make those SPS Commerce customers?
Yeah. So it's clear on the high end of the market, we have these kind of do-it-yourself type approaches. That was the only approach for larger companies, I'd say even 10 years ago when SPS was much more focused on small to medium businesses. I'm confident we'll get at-bats for those opportunities as these companies move through the replacement cycle, their legacy tech, as some of the people that were the EDI specialists that they hired many years ago get new jobs or retire. We'll get those at-bats. Then at the low end of the market, we do have the most compelling technology and the broadest network. We are premium priced. So for those customers that see the value in our network, they're willing to pay for it. But it's a very price-sensitive market, especially in the small customer area.
That is an opportunity for some of our small customers. As our metrics say, we're winning the vast majority of the time. Where customers would usually opt to do nothing, I'd say that's often tied to them in their ERP replacement cycle. We often will gain a new customer at the time that they change out their ERP. In those situations, those ERP changes are big decisions, and sometimes they get delayed and pushed out, and that just happens from time to time.
Got it. I've got a bunch more questions, but I wanted to open it up to the audience if anyone has any questions. All right. Maybe to end things off here, Chad, what do you think investors underappreciate about the SPS Commerce story? Where should they really be digging into here?
Yeah. I think, one, the TAM that you brought up. I mean, we are confident in the long-term opportunity. And I think the question is, what are the market conditions that dictate the pace at which we're able to tackle that and penetrate that total TAM? I think the size and scale of our network is sometimes underappreciated and how great an opportunity that can be, and the future potential that we have over the longer term outside the United States.
Awesome. Well, thanks, Chad. Really appreciate the time today.
Thanks Chris.