Q2 2025 SPS Commerce Inc Earnings Call

July 30, 2025

Assistance. Please signal a conference specialist by pressing star keys, followed by Seattle.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May Press Star then one on your Touchtone phone.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Mr. Amin are blessed check. Please go ahead.

Thank you Roger good afternoon, everyone and thank you for joining us on Sps Commerce second quarter 2025 conference call.

We will make certain statements today, including with respect to our expected financial results go to market strategy and efforts designed to increase our traction and penetration with retailers and other customers.

These statements are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note. These forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to publicly update or revise any forward looking statements whether as a result of new information.

Future events or otherwise.

Please refer to our SEC filings, specifically, our Form 10-K as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website Sps commerce dot com and not the Sec's website SEC Dot Gov. In addition, we are providing a hitch.

Vertical data sheet for easy reference on the Investor Relations section of our website Sps Commerce Dot com.

During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP income per share in our press release and our filings with the SEC each of which is posted on our website you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures.

And with that I will turn the call over to Chad.

Thanks, Rena and good afternoon, everyone. Thank you for joining us today Sps Commerce delivered a strong second quarter results second quarter revenue grew 22% to $187 4 million recurring revenue grew 24%.

Resilience and agility remain top of mind for trading partners across global supply chains, whether a result of tariffs or the need for cost and operational efficiencies.

<unk> is dedicated to supporting the supplier community through today's uncertain times, which we believe will ultimately incentivize them to increase investments in technologies that improve and optimize processes across their vendor networks.

Commerce is the only foodservice CDI solution on the market uniquely positioned to help suppliers effortlessly maintain evi compliance with retailers frequently changing requirements.

Most importantly, our product portfolio enables stronger collaboration between trading partners unlocking greater efficiency cost savings and shared success.

These are dynamics that we believe position Sps for durable growth.

For example, trader Joe's and national chain of over 600 neighborhood grocery stores has been a longstanding sps fulfillment customer in an effort to reduce manual processes improve order selection efficiencies reduced shipping errors and prepare for future growth trader Joe's has recently rolled out edr and compliance Rick.

<unk> across the entire vendor base by partnering with Sps trader Joe's is accelerating progress towards 100% vendor compliance.

My energy supplier relationships remains one of the biggest challenges in retail compliance is an important part of managing supplier performance, but a score carding effort with insightful supplier metrics can help both the retailer and its suppliers perform better together research shows that organizations are systematically track and improve supply.

Our performance can see sales increases of up to 10% and margin improvements of up to 12% when.

When products arrive on time and orders are filled completely retailers can maximize sales opportunities, while keeping operations efficient.

Using sps's supply chain performance management solution, one of the largest grocery retailers in the United States with nearly 500 locations gain actionable insights into their vendors performance and share the data with their trading partners to improve efficiencies across the board the grocer boosted on time and in full performance.

And reduced overall out of stocks, resulting in higher performing and more profitable supply chain in less than one year.

<unk>, a trusted retail brand for farm and home supply products is another recent example of a retailer who uses sps's supply chain performance suite <unk>.

<unk> switch to Sps commerce from another evi provider to increase CDI compliance from three to nearly 100 vendors in an effort to improve order automation and support Omnichannel growth.

The revenue recovery solutions, we've acquired are beginning to deliver value to Sps fulfillment customers as we advance the post merger integration of supply Pike and carbon six we're leveraging our expanded product portfolio to grow wallet share with our existing fulfillment customers. The advantages of a unified platform amplified by the <unk>.

Data across our network are becoming increasingly evident.

For example, all star innovations offers turnkey solutions for taking products from concept to consumer the company has been in Sps fulfillment customer since 2022, and recently started using the revenue recovery solution for retailers, including Walmart target home depot and Amazon.

Sps's unified platform approach as a competitive differentiator and its coverage of retailers expertise and retailer deduction complexities and data on our network.

Leverage order data to estimate customers' recoverable deductions, giving them greater visibility into potential revenue recovery opportunities with their trading partners.

In summary, Sps's product portfolio addresses the pinpoints of both retailers and suppliers are full service approach is designed to be six to successfully implement solutions and improved supply chain partnerships with ongoing support to manage compliance as a result, sps's uniquely and competitively positioned to.

Power participants of the world's largest retail network to work better together today, while helping them build resilience to meet the challenges of tomorrow with that I'll turn it over to Kim to discuss our financial results. Thanks, Chad We had a great second quarter of 2025 revenue was 187 4 million a 20.

2% increase over Q2 of last year and represented our 98th consecutive quarter of revenue from recurring revenues or 24% year over year.

Total number of recurring revenue customers in Q2 with approximately 54500 and <unk> was approximately 13200 <unk>.

As a reminder, in February we closed the acquisition of carbon effects, which added approximately 8500 customers and had an adverse effect on <unk> due to the smaller average customer size of full quarter Q2 impact of <unk> was approximately $1400.

For the quarter adjusted EBITDA increased 27% to $56 1 million compared to $44 2 million in Q2 of last year.

We ended the quarter with total cash and investments of $108 million and repurchased $20 million of Sps shares.

Now turning to guidance for the third quarter of 2025, we expect revenue to be in the range of $191 7 million to $193 2 million, which represents approximately 17% to 18% year over year growth.

We expect adjusted EBITDA to be in the range of $57 9 million to $59 9 million.

We expect fully diluted earnings per share to be in the range of 50 to 54 with fully diluted weighted average shares outstanding of approximately $38 5 million shares.

We expect non-GAAP diluted income per share to be in the range of 96 cents to one dollar with stock based compensation expense of approximately $16 million depreciation expense of approximately $5 6 million and amortization.

<unk> expense of approximately $9 $5 million.

For the full year 2025, we expect revenue to be in the range of 759 million to $763 million, representing approximately 19% to 20% growth over 2024, we expect adjusted EBITDA to be in the range of $230 7 million to $233 $7 million.

Rent growth of approximately 24% to 25% over 2024.

We expect fully diluted earnings per share to be in the range of $2 17 to $2.22 with fully diluted weighted average shares outstanding of approximately $38 3 million shares we expect non-GAAP diluted income per share to be in the range of $3.99 to $4.04 with stock based compensation expense of approximately 60.

$9 million depreciation.

Depreciation expense of approximately $21 8 million and amortization expense for the year of approximately $37 $1 million.

For the remainder of the year on a quarterly basis investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings.

Additionally, based on our interactions with investors over the last several months and their interest in better understanding our growth profile given our recent M&A activity.

We are providing our growth expectations beyond 2025, excluding future acquisitions.

The puts and takes impacting our outlook at this point in time are as follows.

On the retail side demand remains strong as evidenced by enablement activity. So far this year driven by retailers, who are realizing the value of digitized connections to their suppliers and optimizing supply chain performance management of their vendor relationships.

Based on our recent Tam analysis, and the ongoing push for automation and trading partner collaboration we expect enablement activity to remain strong.

On the supplier side, we are currently seeing dynamics impacting some customers within our network such as heightened spend scrutiny and delayed purchasing decisions.

Seeing this directly with our customers and through our channel sales, where some companies are also delaying their mid market ERP purchase decisions.

We attribute the cumulative impact of these dynamics to ongoing uncertainties in the macro environment, including tariffs and their potential impact on consumer demand, which.

Which we have considered in our growth outlook.

As a result beyond 2025, we expect our revenue growth rate, excluding future acquisitions to be at least high single digits.

We expect to remain acquisitive over time in keeping with our disciplined and effective M&A strategy, which has historically added to our growth rate, while strengthening our network and market leadership.

As macro dynamics normalize and global trade heading with headwinds stabilize we remain confident in our ability to capitalize on the growth opportunity across our $11 billion total addressable market.

Add new customers to the network, both inside and outside the U S and drive higher <unk> incremental network connections and cross selling our broader product portfolio.

In addition, given our history of strong operating leverage and the resilience of our SaaS business model, we expect to expand adjusted EBITDA margin by two percentage points annually driven by continued improvement in gross margin and operating efficiencies. We are looking forward to sharing more information about our view of retail.

Industry dynamics, and how our unified product platform aligns with our addressable market during our September 23rd Analyst day, and with that I'd like to open the call to questions.

Thank you.

We will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the keys.

Any time your question has been answered.

If you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily.

Auto store.

The first question comes from the line of Scott Berg with Needham. Please go ahead.

Hi, Jen Kim nice quarter here and thanks for taking my questions here I guess I wanted to focus on the we'll call. It intermediate term or post 25 organic revenue growth rate, Tim that you laid out in the high single digits.

For the puts and takes there, but how do we think about growth by product area, whether it's fulfillment or analytics or however, you're going to think about breaking up the business here on a go forward basis, maybe help us construct how we get to 90% that would be helpful or upper single digits. Thank you.

Sure Scott when you think about what goes into at least that high single digits. It does taking into consideration our current product portfolio.

When you think about our current product portfolio.

And that's the call it the core fulfillment aspect of our portfolio a lot of that is driven by what's happening with community enablement activity.

It's your point, we did give some of those puts and takes so that would hit sort of on that call at that retailer side.

On the analytics side that is a product that as we've discussed in the past passed that does have.

More impact depending on the economy, so that one has.

Then a bit more on negative growth rate relative to fulfillment over time, we see a lot of opportunity for analytics, but we would not anticipate analytics to grow at the same rate of fulfillment.

And on our newer product, which is the revenue recovery.

We have some cross sell motions in place that we've done, but we would expect over time more opportunity to cross sell that product across our customer base in the future.

Very helpful. Thank you Kim and then Chad is we assume out a little bit on the broader macro here Q2 was really the first quarter and this new kind of tariff macro that we're all seeing in today and I know you have more data today 90 days ago than when we spoke at the end of April but.

How do you think about some of the activity of your customers I know Kim.

The longer term guidance talked about some heightened.

<unk>.

Of scrutiny around spend and whatnot.

I guess, if you unpack that a little bit is it really more just I don't know your core fulfillment products or how they think about I don't know geographic expansion, where retailer expansion, obviously that you benefit from but maybe just kind of take us through what the last 90 days journey relative to that macro has been like for you. Thanks.

Yes, yes.

Good question, Scott and I think when we on our last call. We certainly were aware of pending uncertainty and sort of looming uncertainty I think especially relative to the global trade situation, let's say, what we've learned over the last quarter is that that uncertainty.

While initially was uncertainty and I would say business as usual sort of quickly quickly turned to.

Uncertainty.

And to be addressed by a pretty aggressive cost savings measure spin.

Specifically on the supplier side, so while we've seen activity with retailers the actual enablement activity the customer adds.

Very positive from the enablement activity plus the pipeline on the retailer side I'd say all are steady and strong in that area.

The reaction from the supplier side has been.

A little bit more focused on cost spending initiatives and how that's translated to US is it varies a little bit by product. So on the on the analytics side as we've mentioned in previous calls it tends to be a little bit more discretionary. So we may see analytics customers.

Turning off certain data feed connections from certain retailers that may be less volume or less strategic as a means to save costs on the fulfillment side, we really don't see customers cancelling altogether, it's a very sticky product and very key forgive them getting their ongoing.

Orders.

We have seen as them looking at.

Sort of the document plants or the variable piece of their pricing they have with us looking at trading partners that potentially.

We used last year and now maybe Dave no longer have that relationship with that trading partner. So like a lot of analysis, how they could potentially reduce their spend with us.

And it also has slowed down a few of the the deal cycles, just more approval levels things going through more signatures in approving and Thats also the dynamic we've seen on revenue recovery is that.

A little bit more focus on the <unk>.

Ongoing cost of these solutions.

Also a little bit prolonged deal cycle. We're optimistic that this is a point in time approach that these suppliers are using to deal with the uncertainty in that as there becomes more clarity I'd say in the overall global trade and how it will affect certain suppliers.

That will sort of returned to normal conditions there.

Very helpful. Thanks for taking my question.

Thank you.

Next question comes from the line of George crossover with Citi. Please go ahead.

Thanks for taking my questions here I wanted to follow up on this discussion about the current macro I think you specifically highlighted channel sales, which I think tend to skew some of your larger customers is that fair to say that you saw some difference in behavior between maybe certainly you're up market mid market customers versus more traditional.

SMB supplier base or just any color on those dynamics.

Yeah, Yes. Good question because it was nuanced George so what we've been seeing is more pressure in kind of the mid market ERP area. So these are the customers typically.

Under $300 million in revenue, but kind of over $10 million in revenue in those ERP is that they would typically choose in the mid market, that's where we're seeing.

The kind of prolonged decision, making about new erp's.

I need those ERP switches are a nice catalyst for people to come and join the Sps network because when they changed their ERP. It's typical that they would move to a cloud network approach like we have for all their digital connections, we've actually seen fairly healthy demand on the enterprise side.

And some of those deals continue but I'd just highlight the majority of our business is more in this mid market segment versus versus the enterprise.

Okay, Great. That's helpful. And then on the medium term growth outlook, you outlined it sounds like Youre contemplating some level of the current macro situation that you've described here is there any way to parse that out and give us a sense for maybe what our medium term growth outlook in a normalized environment.

Might look like.

Yeah. Good question. So maybe just kind of maybe take one step back on all of this.

Jim and I are engaged with investors over the last several months there has been request for us to provide a view on longer term growth without acquisitions, and I think that makes sense, especially given the volume of M&A that we've done. It has completed in 24 in early 'twenty five also.

Consistent with the way a lot of the other SaaS companies report longer term growth expectations.

We go through a process.

Every summer sort of June early July and recast our strategic plan and our strategic models and we were doing that work in the height of a very uncertain time, when we were seeing.

Some spend scrutiny from customers and certainly factored that into our thinking around the longer term expectations for the business.

I think it's a little difficult to parse exactly how much of the current dynamic.

It.

Is impacting that number and break it into the pieces, but we felt given the current dynamics that we were seeing in the business.

We have quite a bit of confidence still in our 2025 guidance.

But felt that this was the right expectation to set over the longer term.

And I would say, if we do see sort of more <unk>.

<unk> in the macro and maybe more certainty on global trade, we're optimistic that we'll see increased level of spending from our supplier customers.

Great. Thanks for taking the questions.

Thank you next question comes from the line of Lux Im clone with Rothschild and co.

Please go ahead.

Hi, Chad Kim Thanks for the question.

If we take the midpoint of full year revenue guidance. It implies a deceleration in the second half.

But I do appreciate that that does consider cycling out that supply Pike acquisition from August. So just wanted to check within the guidance, what's your expectation on organic revenue growth for the second half of the year.

Sure. So when you think about our expectations for the year, what Youll notice from what our current guide for the year is compared to where it was at the beginning of the year. So what we guided to on our Q4 earnings call. In February you will see the high end of the guidance is the same and the low end has been taken up.

So the midpoint is higher than where we were at the beginning of the year, but outside of that we pretty much just stayed with what our annual expectation is at least at the high end.

So there is no real change in that sense relative to what our expectations are for the year base.

Based on the guidance that we gave in February and based on the expectations of both acquisitions.

And if you do the reverse math on those numbers that got you to call. It a sort of a 10 ish for the year.

Organic growth rate and again, we've maintained the high end and we've we slightly taken up the bottom end.

That's very clear thanks Kim.

And just the same our supply chain system unification, it's been more of a focal point this year from both vendors and customers.

Just wanted to ask have you seen any nitric will pick up in third party.

<unk> is designed to integrate with Sps it's yes.

And the way that your existing partners designed to be integrated.

Okay.

Yes, I would.

I agree that.

The integration of data in supply chain applications and collaboration across the supply chain is a key focus that we're hearing from the market.

I would not say that we've seen any any substantial increase though in sort of requests for partnerships I think we're as having a market leader, leading network and our market leading position.

Been pretty steady and knowing that Sps as the go to partner for some of these supply chain application companies consulting companies and I think we've seen those relationships.

Continue to develop over time, but no material change I think we've been known for many years as the go to partner for this.

For deferred exchange of some.

Fly chain data across our network.

Makes sense thanks for your time.

Thank you.

Question comes from the line of Matt Vanvliet with Cantor. Please go ahead.

Hey, good afternoon, thanks for taking the question.

Historically, you've taken a little bit slower approach to integrate products after acquisition.

On the revenue recovery side, you mentioned some strength there curious on how that pipeline looks how how much are you using the go to market team on a more consolidated basis, knowing that youre going after a couple of different areas of the market there even if the products themselves arent fully integrated yet.

Yes, the post merger integration for both supply Pike and carbon sinks is going.

Going very well and going as expected.

Historically, we have taken a little bit longer to bring the go to market teams together in the case of supply Pike and carbon six.

Because they are going after the same end markets and we will have a much more compelling value proposition, where we can offer the supplier revenue recovery solutions across more retailers and made a lot of sense to pull those solutions and go to market teams together. So we are in the process now.

Chad Collins: It's been pretty steady and known that SPS is the go-to partner for some of these supply chain application companies and consulting companies. And I think we've seen those relationships continue to develop over time, but no material change. I think we've been known for many years as the go-to partner for this exchange of supply chain data across our network.

<unk> Sps as the go to partner for some of these supply chain application companies consulting companies and I think we've seen those relationships.

The supply pipe carbon six go to market teams coming together selling a complete.

Continue to develop over time, but no material change I think we've been known for many years as the go to partner for this.

<unk> solution across all the retailers we support we.

Have not yet integrated the revenue recovery go to market team with our fulfillment team.

For deferred exchange of supply chain data across our network.

We do have a nice.

Paytan: Makes sense. Thanks, Paytan.

Makes sense thanks for your time.

Sort of lead sharing and prospect identification program running for.

Operator: Thank you. Next question comes from the line of Matt Van Vliet with Kanto. Please go ahead.

Thank you.

Next question comes from the line of Matt Vanvliet with Cantor. Please go ahead.

Our go to market team on fulfillment to identify opportunities where there is a need for revenue recovery. So the team is doing that and then the other thing that's really nice about our business and our technology is we can use the network itself to identify those opportunities. So we can look into the network can actually see the trading volume and that can help us identify.

Matt van Vliet: Yeah, good afternoon. Thanks for taking the question. I know historically you've taken a little bit slower approach to integrate products after acquisition, but on the revenue recovery side, you mentioned some strength there. Curious on how that pipeline looks. How much are you using the go-to-market team on a more consolidated basis, knowing that you're going after a couple of different areas of the market there, even if the products themselves aren't fully integrated yet?

Hey, good afternoon, thanks for taking the question.

I know historically, you've taken a little bit slower approach to integrate products after acquisition, but on.

On the revenue recovery side, you mentioned some strength there curious on how that pipeline looks how how much are you using that go to market team on a more consolidated basis, knowing that youre going after a couple of different areas of the market there even if the products themselves arent fully integrated yet.

<unk> for cross selling revenue recovery.

Okay very helpful and then Kim curious on what.

Your head Count addition, plans are for not only the rest of this year, but sort of built into that 200 basis points of margin expansion annually should.

Chad Collins: Yeah, the post-merger integration for both SupplyPike and Carbon6 is going very well and going as expected. Historically, we have taken a little bit longer maybe to bring the go-to-market teams together in the case of SupplyPike and Carbon6 because they're going after the same end markets, and we really have a much more compelling value proposition when we can offer the supplier revenue recovery solutions across more retailers. It made a lot of sense to pull those solutions and go-to-market teams together. So we're in the process now of the SupplyPike and Carbon6 go-to-market teams coming together, selling a complete solution across all the retailers we support.

Yes, the post merger integration for both supply Pike and Carmen <unk> is going.

Should we think about the rate of head count additions, maybe being lower than in past years or how are you guys thinking about that as the business continues to grow.

Going very well and going as expected.

Historically, we have taken a little bit longer maybe to bring the go to market teams together in the case of supply Pike and carbon six.

Sure Matt so.

With any year, we will look to say what resources do we need to make sure. We're meeting the needs of our existing customers as well as the opportunities we see in the future.

We also continue to work on ways to make sure what we're doing we're doing.

Even more efficiently or as efficiently going forward all of that gets taken into account as it relates to what our needs are for head count So safe to assume that we will continue to add head count and resources as needed to support our customer base and the opportunity we see.

The supply Pike and carbon six go to market teams coming together selling a complete.

Solution across all the retailers we support.

Chad Collins: We have not yet integrated the revenue recovery go-to-market team with our fulfillment team, but we do have a nice sort of lead sharing and prospect identification program running for our go-to-market team on fulfillment to identify opportunities where there's a need for revenue recovery. So the team is doing that. And then the other thing that's really nice about our business and our technology is we can use the network itself to identify those opportunities. So we can look into the network and actually see the trading volume, and that can help us identify opportunities for cross-selling revenue recovery.

We have not yet integrated the revenue recovery go to market team with our fulfillment team but.

But we're able to do that more efficiently than in historical years, you're definitely also see that come through in already our gross margin. So if you look at sort of the first half gross margin. This year compare it to call. It annual last year compare it to like annual the year before you're starting to see some of that.

But we do have a nice.

Sort of lead sharing and prospect identification program running for.

Our go to market team on fulfillment to identify opportunities, where there's a need for revenue recovery. So the team is doing that and then the other thing that's really nice about our business and our technology is we can use the network itself to identify those opportunities. So we can look into the network can actually see the trading volume and that can help us identify.

Gross margin improvement come through and Simplistically, that's really growing into various investments. We've made historically so the rate of additions we need to add is at a different rate than where it has been historically.

<unk> for cross selling revenue recovery.

Okay. Thank you.

Matt van Vliet: Okay, very helpful. And then, Kim, curious on what your headcount addition plans are for not only the rest of this year, but sort of built into that 200 basis points of margin expansion annually. Should we think about the rate of headcount additions maybe being lower than in past years, or how are you guys thinking about that as the business continues to grow?

Okay very helpful and then Kim curious on what.

Thank you next question comes from the line of Dylan Becker, but filling Blair. Please go ahead.

Your head Count addition, plans are for not only the rest of this year, but sort of built into that 200 basis points of margin expansion annually.

Hey, Charlie.

I appreciate the questions here, maybe Chad starting with you you talked about kind of a healthy retailer pipeline for enablement campaigns in light of kind of some of the supplier side of the equation being a bit more cautious.

Should we think about the rate of head count additions, maybe being lower than in past years or how are you guys thinking about that as the business continues to grow.

Kim Nelson: Sure, Matt. So as with any year, we will look to say what resources do we need to make sure we're meeting the needs of our existing customers as well as the opportunities we see in the future. We also continue to work on ways to make sure what we're doing, we're doing even more efficiently or as efficiently going forward. All of that gets taken into account as it relates to what our needs are for headcount. So safe to assume that we'll continue to add headcount and resources as needed to support our customer base and the opportunity we see, but we're able to do that more efficiently than in historical years. You definitely also see that come through in already gross margins.

Sure, Matt so as with any year, we will look to say what resources do we need to make sure. We're meeting the needs of our existing customers as well as the opportunities we see in the future.

On spend I'm wondering how you're thinking about kind of the opportunity.

It came entered some of the efficiency side of the equation.

More effective and efficient and your delivery, maybe helping kind of offset that uncertainty and faster time to value.

We also continue to work on ways to make sure what we're doing we're doing.

Those customers live getting those customers maybe compliance.

You know even more efficiently.

Youre thinking about kind of Optionality if maybe.

Sufficiently going forward all of that gets taken into account as it relates to what our needs are for head count.

Drawing down against that pipeline, a little bit faster as somewhat of an offset through efficiency.

Safe to assume that we'll continue to add head count and resources as needed to support our customer base and the opportunity we see.

Yeah, I would say.

That actually ties directly to some of the <unk>.

Investments that <unk> been speaking of that's driving some of this.

We're able to do that more efficiently than in.

No.

Historical years, you're definitely also see that come through in already our gross margin. So if you look at sort of the first half gross margin. This year compare it to call. It annual last year compare it to like annual the year before you're starting to see.

Gross margin improvement so.

And it's not really that we're just doing it solely for the gross margin improvement, it's a much better customer experience when they can onboard to our network.

Kim Nelson: So if you look at sort of the first half gross margin this year, compare it to call it annual last year, compare it to like annual the year before, you're starting to see some of that gross margin improvement come through. And simplistically, that's really growing into various investments we've made historically. So the rate of additions we need to add is at a different rate than where it has been historically.

More quickly and start getting the value of that digitize trading partner connection. So we've really been focused there honestly over the last couple of years and have seen positive improvements.

Some of that gross margin improvement come through and Simplistically, that's really growing into various investments. We've made historically so the rate of additions we need to add is that a different rate than where it has been historically.

Both in terms of the effort of people required to do that but more importantly, the customer experience and the time to value for the customer and I think thats an area, where we're going to continue to be able to improve that experience for the customer keep doing it faster and I think certainly an area, where as we're starting to introduce generative AI and <unk> AI into those.

Matt van Vliet: Okay, thank you.

Okay. Thank you.

Operator: Thank you. Next question comes from the line of Dylan Becker with William Blair. Please go ahead.

Thank you next question comes from the line of Dylan Becker with William Blair. Please go ahead.

Dylan Becker: Hey, Chad. Hey, Kim. Irmina. Appreciate the questions here. Maybe Chad, starting with you, you talked about kind of a healthy retailer pipeline for enablement campaigns. In light of kind of some of the supplier side of the equation being a bit more cautious on spend, wondering how you're thinking about kind of the opportunity to, I think Kim hinted to some of the efficiency side of the equation, but more effective and efficient in your delivery, maybe helping kind of offset that uncertainty and faster time to value, getting those customers live, getting those customers maybe compliant. But you're thinking about kind of optionality of maybe drawing down against that pipeline a little bit faster as somewhat of an offset through efficiency.

Hey, Chad Kim I appreciate the questions here, maybe Chad starting with you you talked about kind of a healthy retailer pipeline for enablement campaigns in light of kind of some of the supplier side of the equation being a bit more cautious.

<unk>, we're very optimistic that we'll be able to continue the improvement there for the customers.

Okay very helpful and then maybe for Tim.

I know, there's some questions obviously on kind of the medium term framework here.

On spend wondering how youre thinking about kind of the opportunity.

Slicing, it as well too and apologies if you mentioned this but in light of some of the supplier side being a bit more cautious how do you think about the mix kind of at a let's call. It high single digit builds between the opportunity that we've highlighted in the past around kind of wallet expansion paired alongside what teams.

He came and did some of the efficiency side of the equation.

More effective and efficient and your delivery, maybe helping kind of offset that uncertainty and faster time to value.

Getting those customers like getting those customers maybe compliance.

But youre thinking about kind of Optionality if maybe.

Drawing down against that pipeline, a little bit faster as somewhat of an offset through efficiency.

To be a slight uptick or some improvement sequentially in the new logo side of the equation to maybe kind of the two pillars that gets you to that high single digit framework. Thank you.

Chad Collins: Yeah, I would say that actually ties directly to some of the investments that Kim's been speaking of that's driving some of this gross margin improvement. So, you know, and it's not really that we're just doing it solely for the gross margin improvement. It's a much better customer experience when they can onboard to our network more quickly and start getting the value of that digitized trading partner connection. So we've really been focused there, honestly, over the last couple of years and have seen positive improvements, both in terms of the effort and people required to do that, but more importantly, the customer experience and the time to value for the customer. And I think that's an area where we're going to continue to be able to improve that experience for the customer, keep doing it faster.

Yes, I would say.

That actually ties directly to some of the.

Sure. So we see opportunities for both to continue to grow over time, adding customers as well as growing that at that <unk> with customers to your point there tends to be a bit more of a correlation depending on what's happening on the community side with the customer adds as it relates to community we have a healthy pipeline.

Investments that <unk> been speaking of that's driving some of this.

No.

Gross margin improvement so.

And it's not really that we're just doing a sweep for the gross margin improvement, it's a much better customer experience when they can onboard to our network.

More quickly and start getting the value of that digitize trading partner connection. So we've really been focused there honestly over the last couple of years and have seen positive improvements.

<unk>.

This year as far as what that mix is between what ultimately translates into a customer add versus an upsell or in <unk>.

Both in terms of the effort and people required to do that but more importantly, the customer experience and the time to value for the customer and I think thats an area, where we're going to continue to be able to improve that experience for the customer keep doing it faster and I think certainly an area, where as we're starting to introduce generative AI and <unk> AI and <unk>.

I really don't have that granularity until closer to.

Basically think of it as like a 90 day window. So in the shorter term if we think about Q3 as an example.

Chad Collins: And I think certainly an area where, as we're starting to introduce generative AI and agentic AI into those processes, we're very optimistic that we'll be able to continue the improvement there for the customers.

Our initial view is probably similar customer adds to Q2 I realize youre asking the question from more of a medium term lens from a medium term lens. We would expect that growth is coming from both areas, but it's challenging to give you exact percentage between the two.

These processes, we're very optimistic that we'll be able to continue the improvement there for the customers.

Dylan Becker: Okay, very helpful. And then maybe for Kim, I know there's some questions, obviously, on kind of the medium-term framework here, but maybe slicing it as well too. And apologies if you mentioned this, but in light of some of the supplier side being a bit more cautious, how do you think about the mix of kind of that eight or that, let's call it that high single-digit build between the opportunity that we've highlighted in the past around kind of wallet expansion, paired alongside what seems to be a slight uptick or some improvement sequentially in the new logo side of the equation too, maybe kind of the two pillars that get you to that high single-digit framework? Thank you.

Okay fair enough.

And then maybe for Tim.

I know, there's some questions obviously on kind of the medium term framework here, but maybe slicing it as well too and apologies if you've mentioned this but in light of some of the supplier side being a bit more cautious how do you think about the mix of kind of at eight.

That customer growth side is so correlated with what's happening with community enablement activity.

Perfectly fair no that's very helpful. Thanks, guys.

Thank you next question comes from the line of Bucklin Stifel. Please go ahead.

All of that high single digit build between.

Hey, Thanks for taking the question staying with the same theme here Chad on the supplier side. When you look at the different geographies you work in the sub verticals of.

The opportunity that we've highlighted in the past around kind of wallet expansion.

Paired alongside what seems to be a slight uptake or some improvement sequentially in the new logo side of the equation to maybe kind of the two pillars that gets you to that high single digit framework. Thank you.

Suppliers is there any particular areas that stand out as the incremental cautiousness or is this really across the board that you are picking up on these trends.

Kim Nelson: Sure. So we see opportunities for both to continue to grow over time, adding customers as well as growing that ARPU with customers. To your point, there tends to be a bit more of a correlation depending on what's happening on the community side with the customer ads. As it relates to community, we have a healthy pipeline this year as far as what that mix is between what ultimately translates into a customer ad versus an upsell or an ARPU. Really don't have that granularity until closer in to basically think of it as like a 90-day out window. So in the shorter term, if we think about Q3 as an example, our sort of initial view is probably similar customer ads to Q2. I realize you're asking the question from more of a medium-term lens.

It's primarily in the U S.

Based suppliers.

The largest proportion of our customers.

But we have not seen the same level of spend scrutiny.

In Europe, and Australia that we have seen in the U S.

Understood and then for.

Hum this year as far as what that mix is between what ultimately translates into a customer add versus an upsell or <unk>.

For you Kim on the adjusted EBITDA margin of 2% annually.

Regardless of any M&A activities, such that if you bought a dilutive asset you would still be delivering 2% annually or is that just 2% organic and we could potentially see the all in performance slightly lower in a given year.

Really don't have that granularity until closer in to.

Basically think of it as like a 90 day window. So in the shorter term if we think about Q3 as an example.

Sure. So the expectations that we provided and that we expect at least high single digits.

And also being able to deliver that two percentage points of EBITDA margin.

Kim Nelson: From a medium-term lens, we would expect that growth is coming from both areas, but it's challenging to give you an exact percentage between the two because that customer growth side is so correlated with what's happening with community enablement activity.

Those statements.

We said sort of excludes acquisitions.

With acquisitions however.

We typically.

Or able to within a 12 month time period and make those accretive. So we have a lot of I'll call it confidence and conviction in our ability to drive that healthy margin expansion in the medium term.

Good with what's happening with community enablement activity.

Dylan Becker: Perfectly fair. No, that's very helpful. Thanks, Kim.

Perfectly fair no that's very helpful. Thanks, guys.

Operator: Thank you. Next question comes from the line of Park Lane. Stephen, please go ahead.

Thank you next question comes from the line of Bucklin Stifel. Please go ahead.

Great. Thanks for the feedback here I appreciate it.

Matt van Vliet: Hey, thanks for taking the question. Staying with the same theme here, Chad, on the supplier side, when you look at the different geographies you work in and the subverticals of suppliers, is there any particular areas that stand out as seeing incremental cautiousness, or is this really across the board that you're picking up on these trends?

Thank you next question comes from the line of Jeff <unk> with <unk>.

Hey, Thanks for taking the question sticking with the same theme here Chad on the supplier side. When you look at the different geographies you work in the sub verticals of.

Colin Please go ahead.

Hey, This is Daniel Schmidt on for Jeff Van re Chad Kim Thanks for the transparency and just the color on 2006 very helpful. Maybe just one more on the customer adds just wanted to confirm on that carbon fixed customer count that that was fully reflected in the Q1 numbers. So those 350 ads.

Suppliers is there any particular areas that stand out as the incremental cautiousness or is this really across the board that you are picking up on these trends.

Chad Collins: It's primarily in the US-based suppliers. Now, that's the largest proportion of our customers, but we have not seen the same level of spend scrutiny in Europe and Australia that we have seen in the US.

It's primarily in the U S based.

Based suppliers.

The largest proportion of our customers.

This quarter, so thats the organic number to sort of look at as sort of the trend going into Q3 Q4.

But we have not seen the same level of spend scrutiny.

Europe, and Australia that we have seen in the U S.

That's correct. So the carbon fix added approximately 8500 customers that was fully reflected in Q1. So the sequential from Q1 to Q2 of approximately $3 50.

Matt van Vliet: Understood. And then for you, Kim, on the adjusted EBITDA margin at 2% annually, is that regardless of any M&A activity such that if you bought a dilutive asset, you would still be delivering 2% annually, or is that just 2% organic and we could potentially see the all-in performance slightly lower in a given year?

Understood and then for you Kim on the adjusted EBITDA margin of 2% annually is that regardless of any M&A activities such that if you bought a dilutive asset you would still be delivering 2% annually or is that just 2% organic and we could potentially see the all in performance slightly lower in a given year.

Think about that is primarily driven by that community enablement activity. So the first party customer.

Customer adds.

Okay. Okay, and then just one as we go forward and we're seeing some of these headwinds traditionally growth has been primarily if you boil it down and fulfillment to the connection growth versus seeing more of the M&A activity and product development activity emphasizing cross sell as we think a little bit more about the mid <unk>.

Kim Nelson: Sure. So the expectations that we provided as that we expect at least high single digits and also being able to deliver that two percentage points of EBITDA margin, those statements that we said sort of exclude acquisitions. With acquisitions, however, we typically are able to, within a 12-month time period, make those accretive. So we have a lot of, I'll call it, confidence and conviction in our ability to drive that healthy margin expansion in the medium term.

Sure. So the expectations that we provided and that we expect at least high single digits.

And also being able to deliver that two percentage points of EBITDA margin.

Those statements then we said sort of excludes acquisitions.

With acquisitions however.

<unk> image that you are painting.

We typically.

For upper single digit growth is that looking for that would be primarily driven by growth in connections are we seeing any of that pivot there to more of the majority of that being driven by cross sell.

Are able to within a 12 month time period and make those accretive. So we have a lot of I'll call it confidence and conviction in our ability to drive that healthy margin expansion in the medium term.

So when you think about our sort of overall growth.

Matt van Vliet: Great. Thanks for the feedback here. Appreciate it.

Great. Thanks for the feedback I appreciate it.

There is a component of it thats, adding new subscribers to our network.

Operator: Thank you. Next question comes from the line of Jeff Van Ree with Craig Hullum. Please go ahead.

Thank you next question comes from the line of Jeff Van <unk> with <unk>.

And that will largely be driven.

In count by the from the community enablement programs.

Colin Please go ahead.

Daniel Hibschman: Hey, this is Daniel Hibschman on for Jeff Van Ree. Chad, Kim, thanks for the transparency and just the color on 26, very helpful. Maybe just one more on the customer ads. Just wanting to confirm on that Carbon6 customer count, but that was fully reflected in the Q1 numbers. So those 350 ads, the scores, so that's the organic number to sort of look at as sort of the trend going into Q3, Q4?

Hey, this is Daniel on for Jeff Van <unk>.

Or that's the largest factor for us, adding new customers to the network.

Ken Thanks for the transparency and just the color on 26 very helpful. Maybe just one more on the customer adds just wanted to confirm on that curbing fixed customer count, but that was fully reflected in the Q1 numbers. So those 350 ads. This.

The second then in terms of <unk> expansion will really come in two buckets, the upselling and the cross selling our solutions the largest opportunity for us with existing customers is up selling more connections on the network, so increasing with fulfillment customers their use of the network.

This quarter, so thats the organic number to sort of look at as sort of the trend going into Q3 Q4.

Kim Nelson: That's correct. So the Carbon6 added approximately 8,500 customers that was fully reflected in Q1. So the sequential from Q1 to Q2 of approximately 350, think about that as primarily driven by that community enablement activity. So the first-party customer ads.

That's correct. So the carbon fix added approximately 8500 customers that was fully reflected in Q1. So the sequential from Q1 to Q2 of approximately $3 50.

<unk>.

That would be the most substantial opportunity for us and then the cross selling would be a secondary opportunity.

Now in our customer treatment strategy, we're focused on both of those.

Think about that is primarily driven by that community enablement activity. So the first party.

But based on the number of customers and the opportunity for remaining connections there'll be the connections as is the largest opportunity there.

Customer adds.

Daniel Hibschman: Okay. Okay. And then just on, as we go forward and we're seeing some of these headwinds, traditionally growth has been primarily, if you boil it down to fulfillment, to the connection growth versus seeing more of the M&A activity and product development activity emphasizing cross-sell. As we think a little bit more about the midterm image that you're painting for upper single-digit growth, is that looking for that to be primarily driven by growth in connections, or are we seeing any of a pivot there to more of the majority of that being driven by cross-sell? Thanks.

Okay, and then just one as we go forward and we're seeing some of these headwinds traditionally growth has been primarily if you boil it down and fulfillment to the connection growth versus seeing more of the M&A activity and product development activity emphasizing cross sell as we think a little bit more about the mid term.

Thanks, Chad Kim.

Thank you next question comes from the line of Mark Chappell with loop capital markets. Please go ahead.

Thank you for taking my question.

Chad given what Youre seeing with your supplier base with the delayed purchase decisions could you just speak to just the general health of your SMB customers and also to the level of churn that you are seeing.

H that Youre painting.

For upper single digit growth is that looking for that to be primarily driven by growth in connections are we seeing any of that pivot there to more of the majority of that being driven by cross sell.

Yes, so from a customer churn perspective.

Chad Collins: So when you think about our sort of overall growth, there's a component of it that's adding new subscribers to our network, and that will largely be driven in count from the community enablement programs where that's the largest factor for us adding new customers to the network. The second then, in terms of ARPU expansion, will really come in two buckets: the upselling and the cross-selling of solutions. The largest opportunity for us with existing customers is upselling more connections on the network. So increasing with fulfillment customers their use of the network, that would be the most substantial opportunity for us. And then the cross-selling would be a secondary opportunity. Now, in our customer treatment strategy, we're focused on both of those. But based on the number of customers and the opportunity for remaining connections, it would be the connections as the largest opportunity there.

So when you think about our sort of overall growth.

Actually been very consistent.

There is a component of it thats, adding new subscribers to our network.

So we are not seeing an increased level of full cancels.

And I think Theres, a normal when you're servicing SMB in your servicing retail there is kind of a just a natural churn that happens with those smaller suppliers, but we haven't seen a difference there where the difference is come is really.

And that will largely be driven.

In counts by the from the community enablement programs.

Where were the largest factor for us, adding new customers to the network.

Customers.

Really studying.

The invoice they get from Sps Commerce, saying, Hey is there any possibility that could get this a little bit lower or owner. Our CFO has asked me to go find any costs in the business right now due to this uncertainty and the tariffs that's where we're seeing more of the pressure with the existing customers and then we are just seeing the slower deal.

Work.

That would be the most substantial opportunity for us and then the cross selling would be a secondary opportunity.

Cycles.

New customers in the larger Upsells and cross sells.

Now in our customer treatment strategy, we're focused on both of those.

But based on the number of customers and the opportunity for remaining connections you'll be the connections as as the largest opportunity there.

So.

I wouldn't attribute this to a massive amount of bankruptcies or insolvencies in the end market at this point, but more just a lot of uncertainty and.

Daniel Hibschman: Thanks, Chad. Kim.

Thanks, Chad Kim.

Strong reaction to that uncertainty by <unk>.

Operator: Thank you. Next question comes from the line of Mark Chappell with Loop Capital Markets. Please go ahead.

Thank you next question comes from the line of Mark Chappell with loop capital markets. Please go ahead.

Cost savings initiatives and the suppliers.

Thank you that's helpful. That's all thanks.

Matt van Vliet: Thank you for taking my question. Chad, given what you're seeing with your supplier base with the delayed purchase decisions, could you just speak to just the general health of your SMB customers and also to the level of churn that you're seeing?

Thank you for taking my question.

Thank you.

A reminder to all the participants that started one to ask a question next.

Next question comes from the line of Naval Chalk C, but not in capital markets. Please go ahead.

Chad Collins: Yeah. So from a customer churn perspective, it's actually been very consistent. So we are not seeing an increased level of full cancels. And I think there's a normal when you're servicing SMB and you're servicing retail, there is kind of just a natural churn that happens with those smaller suppliers. But we haven't seen a difference there. Where the difference has come is really customers really studying the invoice they get from SPS Commerce saying, "Hey, is there any possibility I could get this a little bit lower? Our owner or CFO has asked me to go find any costs in the business right now due to this uncertainty in the tariffs." That's where we're seeing more of the pressure with the existing customers. And then we are just seeing the slower deal cycles on the new customers and the larger upsells and cross-sells.

Yes, so from a customer churn perspective, it's actually been very consistent so.

Yes. Thank you I think you guys have already answered my question.

So we are not seeing an increased level of full cancels.

But I do have two questions first one is when we talked about high single digit growth.

Beyond calendar 'twenty five on an organic basis.

Is that fair to say that that is basically 79%.

So Jaime how we provided our view of our expectations beyond 25 or at least high single digits, we're not giving specificity of exactly what the number is but there's probably somewhat of a standard.

Customers.

No really studying.

The invoice they get from Sps Commerce, saying, Hey is there any possibility that could get this a little bit lower.

I don't know expectation of what.

Our owner our CFO has asked me to go find any costs in the business right now due to this uncertainty and the tariffs that's where we're seeing more of the pressure with the existing customers and then we are just seeing the slower deal cycles on new customers and the larger Upsells and cross sells.

That high single digit means I can't really narrow into a particular number for you but.

Just our expectation is at least high single digits.

Okay. Okay.

I do believe that you've already answered this question, but I will ask one more time.

The parsing between <unk> and customer adds to get to that high single digit growth. It does sound like the primary driver of the.

Chad Collins: So I wouldn't attribute this to a massive amount of bankruptcies or insolvencies in the end market at this point, but more just a lot of uncertainty and a strong reaction to that uncertainty by cost-savings initiatives within the suppliers.

So.

I wouldn't attribute this to a massive amount of bankruptcies or insolvencies in the end market at this point, but more just a lot of uncertainty and.

Deceleration that youre expecting for 25% to 26% is quite a bit <unk>.

And a strong reaction to that uncertainty by.

Is that indeed correct here.

Cost savings initiatives and the suppliers.

So when you think about what makes up our revenue and therefore, the drivers that get us to at least high single digits. Our expectation is in the medium term.

Matt van Vliet: Thank you. That's helpful. That's all. Thanks.

Thank you that's helpful. That's all thanks.

Operator: Thank you. A reminder to all the participants that you may press star and one to ask a question. Next question comes from the line of Nehal Choksi with Norton Capital Markets. Please go ahead.

Thank you.

A reminder to all the participants that have started one to ask a question next question comes from the line of Nathan Chalk C, but not in capital markets. Please go ahead.

That will continue to have growth coming from both customer adds as well as <unk>.

Now the biggest driver we expect to remain on customer adds being as it relates to community and then the opportunity for <unk> to grow over time.

Nehal Chokshi: Yeah. Thank you. I think you guys have already answered my question, but I do have two questions. First one is that when we talk about high single-digit growth beyond calendar 25 on an organic basis, is that fair to say that that is basically 7 to 9 percent?

Yes. Thank you I think you guys have already answered my question.

That hits upon what Chad talked about which there's a lot of opportunity to continue to upsell.

But I do have two questions first one is when we talked about high single digit growth.

<unk> customers.

Beyond calendar 'twenty five on an organic basis.

As well as cross sell those customers over time.

Is that fair to say that that is basically 79%.

And our expectations beyond 25, you would expect.

Kim Nelson: So hi, Nehal. We provided our view of our expectations beyond 25 of at least high single digits. We're not giving specificity of exactly what the number is, but there's probably somewhat of a standard, I don't know, expectation of what that high single digit means. So I can't really narrow into a particular number for you, but just our expectation is at least high single digits.

So we are highly how we provided our view of our expectations beyond 25 or at least high single digits, we're not giving specificity of exactly what the number is but there's probably somewhat of a standard.

Our growth will come from both customer adds as well as ARPA Windows, hopefully gave you a little bit of color on some of the dynamics of what will impact each component.

Okay. Thank you.

I don't know expectation of what.

Thank you.

That high single digit means I can't really narrow into a particular number for you but.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Our expectation is at least high single digits.

Nehal Chokshi: Okay. And I do believe that you've already answered this question, but I will ask it one more time. The parsing between ARPU and customer ads to get to that high single-digit growth, it does sound like the primary driver of the deceleration that you're expecting from 25 to 26 is going to be ARPU. Is that indeed correct here?

Okay. Okay.

Hey, guys.

Do you believe that you've already answered this question, but I will ask one more time.

The parsing between <unk> and customer adds to get to that high single digit growth. It does sound like the primary driver.

<unk> deceleration that youre expecting for 25% to 26% is quite a bit <unk>.

Is that indeed correct here.

Kim Nelson: So when you think about what makes up revenue and therefore the drivers that get us to at least high single digits, our expectation is in the medium term that we'll continue to have growth coming from both customer ads as well as ARPU. Now, the biggest driver we expect to remain on customer ads being as it relates to community and then the opportunity for ARPU to grow over time. That hits upon what Chad talked about, which there's a lot of opportunity to continue to upsell existing customers as well as cross-sell those customers over time. So in our expectations beyond 25, you would expect that our growth will come from both customer ads as well as ARPU. And those hopefully gave you a little bit of color of some of the dynamics of what will impact each component.

So when you think about what makes up our revenue.

Therefore, the drivers that get us to at least high single digits. Our expectation is in the medium term.

That will continue to have growth coming from both customer adds as well as <unk> now.

Now the biggest driver we expect to remain on customer adds being as it relates to community and then the opportunity for <unk> to grow over time.

That hits upon what Chad talked about which there's a lot of opportunity to continue to upsell.

<unk> customers.

As well as cross sell those customers over time.

And our expectations beyond 25, you would expect.

Our growth will come from both customer ads as well as ARPA Windows, hopefully gave you a little bit of color on some of the dynamics of what will impact each component.

Nehal Chokshi: Thank you.

Okay. Thank you.

Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q2 2025 SPS Commerce Inc Earnings Call

Request a DemoDemo

SPSC

SPS Commerce

Earnings