Operator: Good day, and welcome to SPS Commerce's Q3 2026 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. 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 Ms. Irmina Blaszczyk, Investor Relations for SPS Commerce. Please go ahead, ma'am.
Irmina Blaszczyk: Good afternoon, everyone, and thank you for joining us on SPS Commerce Q3 2026 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 that 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.
Irmina Blaszczyk: These documents are available at our website, spscommerce.com, and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on the Investor Relations section of our website, spscommerce.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. With that, I will turn the call over to Chad.
Chad Collins: Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. Supply chain management has reached a critical inflection point across the retail ecosystem. Brands and retailers are adopting AI to transition from reactive operations to proactive execution, expecting clear and quantifiable return on their investment. While AI unlocks powerful operational efficiencies, its true potential is realized when combined with contextual supply chain data. At SPS Commerce, new agentic AI capabilities are combined with the intelligence of a network built on more than 300,000 trading relationships, nearly three decades of proprietary knowledge, and retailer compliance rules that aren't documented anywhere else. For SPS customers, our agentic AI called MAX plays a central role in driving supply chain efficiencies by embedding the SPS network intelligence directly into trading partner workflows and automation systems. As a result, MAX delivers real ROI today.
Chad Collins: Because it runs on network intelligence, that compounds with every new trading connection. It is continually learning to deliver ROI in the future. Building on this foundation, last month, we announced new and expanded capabilities across our product portfolio. These advancements help brands and retailers operate faster and more proactively with greater visibility across their supply chains to achieve immediate and measurable results. MAX, our embedded agentic AI supply chain offering, is now available to all of our fulfillment customers. Grounded in real-world trading behaviors, MAX guides users through daily supply chain workflows, identifies operational anomalies, and prevents costly errors before they occur. Decision Intelligence, an expansion of SPS Analytics, connects sell-through, inventory, and supply chain signals into a unified view organized around retailers' key weekly inventory and forecasting decisions. Visibility Management connects ERP, warehouse management, transportation management, and carrier systems into a single real-time purchase order status view.
Chad Collins: It surfaces potential disruptions before they impact an order or revenue, automatically engaging suppliers to resolve them. While these product innovations represent the next step in our vision for the intelligent supply chain network, the true test is the tangible ROI delivered to our customers. RIP-IT Sports, a high-growth brand selling sporting equipment to major retailers like Dick's Sporting Goods, Walmart, and Amazon, is leaning heavily into AI to expedite efficiency and insight. In its first week live, MAX saved this customer $200,000 by flagging chargebacks and late receivables that the RIP-IT team couldn't see and identified a process error to eliminate future loss. MAX watches every trading partner and explains resolutions in plain language, leveraging retailer-specific compliance patterns that aren't documented elsewhere. MAX recently detected more than 200 shipment status failures between Zevia, a beverage brand, and their 3PL.
Chad Collins: In those orders, neither Zevia nor the ERP were being updated automatically with the correct workflow status. For a customer of this size, we estimate up to $3 million in receivables could have been delayed had those shipments not been realized and invoiced on time. Something Inked, a creative merchandising and custom branding company that works with major sports and entertainment brands uses MAX to accelerate invoice searches and exception monitoring. This customer estimates using MAX will save them hundreds of hours per year and thousands of dollars in overhead. According to their project lead, MAX has become a staple in their daily operations. With MAX now live across all fulfillment customers, adoption of our advanced AI features is accelerating. Upcoming Q4 product launches keep us on track to monetize AI-powered solutions next year.
Chad Collins: SPS Commerce has also embedded agents internally to accelerate fulfillment customer onboarding from contract close to the first live transaction. Since adopting agentic onboarding, hundreds of suppliers have achieved full compliance with new trading partners within 24 hours. Agentic onboarding is also strengthening our competitive position, particularly when new customers plan to integrate their ERP system with the SPS network. In Q3, this accelerated onboarding capability was a deciding factor in securing multiple new customer wins. We are prepared to move as quickly as our customers need us to, and delivering faster time to value. To date, we have completed many complex ERP integration and onboarding projects in less than 30 days, and we expect to shorten these cycles even further as we advance our agentic capabilities. For example, a manufacturer of safety and fall protection gear needed 21 integrations set up and tested in 2 weeks.
Chad Collins: Accelerated onboarding with AI agents helped meet the deadline, and our validation agent flagged incorrect carrier codes and shipping serial IDs that would have caused advance shipping notice compliance issues and potential retailer chargebacks. The customer was able to address both errors before production. Similarly, the world's leading dairy company partnered with SPS Commerce following a major acquisition to rapidly onboard over 70 trading partners and avoid delays in order fulfillment of highly perishable products. With agentic onboarding, SPS accelerated testing and business rule configuration for new connections, successfully executing a high-stakes go live in just weeks. In summary, the progress we have made to date with our agentic transformation initiatives, both across our product portfolio and internally, has exceeded my expectations. I want to recognize all of Team SPS for their agentic first mindset and commitment to this transformation.
Chad Collins: Historically, customers have trusted SPS's vast network intelligence to deliver connectivity and compliance with their trading partners. Today, all of our transaction, compliance, and proprietary data is powering our agentic AI solutions, enabling MAX to detect process disruptions and anomalies. This strong, quantifiable ROI will result in direct monetization of our AI capabilities and drive a higher volume of transactions across our network as customers increasingly rely on SPS solutions as the indispensable intelligence tools they need to manage an efficient supply chain. Notably, we are moving fast while maintaining operational discipline and exceeding our margin targets. With our agentic strategy advancing, we are uniquely positioned to deliver sustainable, profitable growth backed by the combination of AI and SPS's intelligent network, a powerful and durable competitive moat that no one else can match. With that, I'll turn it over to Joe to discuss our financial results.
Joe Del Preto: Thank you, Chad, and welcome everyone. We report a strong Q3 of 2026 as core business growth exceeded expectations while we delivered significant margin expansion. Revenue was $197.6 million, a 4% increase over Q3 of last year. Recurring revenue grew 4% year over year. Two factors impacting the growth rate in the quarter. One is the divestiture of the 3P revenue recovery business on 30 June 2026, and the second factor is the incremental impact from our 1P Amazon Take Rate business. Together, the divestiture and the Amazon Take Rate business negatively impacted revenue growth by 500 basis points in the quarter. In reference to the divestiture of the 3P revenue recovery business, we said on the Q2 call that we expect divestiture to reduce H2 2026 revenue by approximately $10.5 million. We continue to believe the divestiture sharpens our focus on the strategic opportunity with 1P suppliers.
Joe Del Preto: The 1P Amazon opportunity continues to be important to our revenue recovery growth strategy for the long term, with a $750 million addressable market. In reference to the impact from the Amazon Take Rate business for the quarter, it was driven by two factors. First, we saw higher than anticipated conversion of take rate revenue to subscription revenue. While this has created a headwind to revenue in H2 2026, we expect it to benefit the business in the midterm and align with our long-term strategy for revenue recovery. Second, take rate revenue was lower than anticipated, resulting from recent Amazon policy changes that impacted our 1P take rate customers. As a reminder, under the take rate model, revenue is recognized as a percentage of the actual funds successfully recovered from Amazon suppliers, and recovery yields are tied to the retailer policies.
Joe Del Preto: In the quarter, Amazon has implemented certain policy changes which have been unfavorable to recovery yields. Our current go-to-market approach is focused on subscription model. The take rate model remains common in the Amazon revenue recovery market and allows us to capture a larger share of enterprise customers. Looking at our customer growth, the total number of recurring revenue customers in Q3 increased sequentially to 46,700, and an average revenue per customer was 16,200. The divestiture reduced our total customer count by approximately 7,300 3P customers who are smaller than our average customer size, which positively impacted ARPU in Q3. Adjusted EBITDA increased 17% to $70.9 million, or 36% of revenue, outperforming our long-term margin target of 35%. This reflects SPS' strong operational execution as we continue to unlock efficiencies across the organization.
Joe Del Preto: Looking ahead, we plan to provide an updated adjusted EBITDA target on our Q4 conference call. We expect continued margin expansion to be driven by operating leverage and increasing use of onboarding agents, which today is reflected in our gross margin expansion. Adjusted gross margin, which excludes stock-based compensation expense, was 73% in Q3 and improved 170 basis points year over year. Adjusted sales and marketing was 20%, G&A was 13%, and R&D was 7% in Q3, and all declined year over year as a percentage of revenue. Turning to liquidity and cash flows, we ended the quarter with total cash equivalents, and short-term investments of $184 million. Free cash flow for the quarter was $58.5 million, bringing our trailing 12-month free cash flow to $202.6 million, up 37% year over year.
Joe Del Preto: In Q3 2026, we deployed 84% of free cash flow to repurchase $48.8 million of SPS shares. Now turning to guidance. For Q4 2026, we expect revenue to be in the range of $199.3 million to $201.3 million, representing approximately 4% growth at the midpoint, which includes a negative impact from the Amazon revenue recovery take rate business and the divested business. Excluding these impacts, our underlying Q4 revenue growth is expected to be between 8% and 9%. We expect adjusted EBITDA to be in the range of $72.0 million to $74.0 million. We expect fully diluted earnings per share to be in the range of $0.74 to $0.79, with fully diluted weighted average shares outstanding of approximately 36.0 million shares.
Joe Del Preto: We expect non-GAAP diluted income per share to be in the range of $1.31 to $1.36, with stock-based compensation expense of approximately $17.0 million, depreciation expense of approximately $6.1 million, and amortization expense of approximately $12.3 million. For the full year 2026, we expect revenue in the range of $786.9 million to $788.9 million, representing approximately 5% growth over 2025 at the midpoint of the guided range. Excluding the previous mentioned impacts on our underlying full-year 2026 revenue is projected to grow high single digits. We expect adjusted EBITDA to be in the range of $267.4 million to $269.4 million, reflecting an adjusted EBITDA margin of 34% at the midpoint, an increase of approximately 330 basis points compared to full year 2025.
Joe Del Preto: We expect fully diluted earnings per share to be in the range of $2.29 to $2.35, with fully weighted average shares outstanding of approximately 36.6 million shares. We expect non-GAAP diluted income per share to be in the range of $5.05 to $5.11, with stock-based compensation expense of approximately $69.5 million, depreciation expense of approximately $24.1 million, and amortization expense for the year of approximately $40.8 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pre-tax net earnings. In summary, our financial results clearly demonstrate the strong operating leverage embedded in our business model. Expanding our adjusted EBITDA margin to 36% underscores both our commitment to disciplined cost management and the tangible efficiency gains we are unlocking through agentic customer onboarding.
Joe Del Preto: With that, I would like to open the call to questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question for today will come from Scott Berg with Needham. Please go ahead.
Scott Berg: Hi, Chad and Joe. Thanks for taking my questions here. I got a couple things here. Let us start off with the Q4 guidance. It looks like the actual guidance is a little bit below what was implied from the Q3. Given your commentary on the changes at Amazon, I guess the first question is that the driver for all the changes with the implied Q4 revenue guidance? I guess second question within the Amazon impact relates to, is this kind of a permanent change or impact to, I assume that is that revenue recovery business? Should we think about annualizing that difference in terms of the revenue recovery there?
Scott Berg: Or does this get mitigated maybe as you move more of the customers from that transactional, you know, arrangement to more of a subscription?
Joe Del Preto: Yes, Scott, I will take the first part of that. So on the revision of the guidance, Scott, 100% of that was related to these Amazon policy changes and the acceleration of moving customers from take rate to subscription. If we did not have the impact of those changes, we would have raised guidance on the year. So that was the driver.
Chad Collins: Yeah, and I will give you color on the overall strategy. We remain confident in revenue recovery as a product category. If you exclude the Amazon take rate portion, revenue recovery is the fastest-growing portion of our overall business. We have seen these policy change headwinds with Amazon. However, Amazon is a major portion of this ecosystem. We are still bringing on new customers, especially with multiple retailer support, and Amazon is a key component of that, together typically with Walmart and Target as well. And in terms of the revenue model, we have been successful in converting some of the take rate customers. You may recall that Carbon6 was take rate only, and now some of those have converted to subscription. And in fact, that moved a little quicker in the quarter than we had expected, which long term is a positive for us.
Chad Collins: What I will say, though, is the market still is take rate, right? So there still is some take rate out there. Competitors are offering take rate. So it is not like we expect the take rate business to go to zero over time. But I strongly believe that as we add more features consistent with our product strategy, especially on chargeback avoidance, not just on the recovery side, that is going to certainly make the product more compelling overall and customers probably more inclined to pay for that type of capability on a subscription basis.
Scott Berg: Got it. Helpful. For a follow-up question, Chad, can you give some color on what the net new customer environment was like? If we go back to the Q3 call, I know you all talked about some improving trends around enablement campaigns and I think new customers coming from some of your ERP channel partners. Just want to understand if that environment has improved, as you had expected 90 days ago, and will that ultimately drive customer count, ex the Carbon6 divestiture, to still be in line with your expectations to be about flattish for the year from the beginning? Thanks.
Chad Collins: Yeah. Sure, Scott. On the retail programs, the retail activity in the quarter was quite strong as we expected. The activity continues here in Q4, and we are even carrying some momentum into 2027. What I would say on the results in the quarter is that the monetization of those retail programs, based on the retailers they were, did skew a bit more toward ARPU contribution than customer count contribution. On the ERP stuff, still a little bit slower in the mid-market ERP area. I think there is room, as companies sort through their AI and ERP decisions, for that to pick up in the future. Overall, probably close to that sort of net neutral customer count that we had described earlier.
Scott Berg: Great. Thanks for taking my questions.
Operator: Your next question will come from Chris Quintero with Morgan Stanley. Please go ahead.
[Analyst] (Morgan Stanley): Hi, this is Beatrice on for Chris Quintero. Thank you for taking the question. Congrats on the impressive margin progress. Can you unpack where you are seeing the greatest operating leverage, whether that is AI-driven efficiencies in onboarding and customer support, or broader automation or expense discipline, and how much runway remains for the further expansion?
Joe Del Preto: Yeah, thanks for the question. I think there is a couple areas that are really driving that margin improvement overall, and the first I would say on the gross margin side. I think that has been the biggest driver of our overall improvement. There is a couple things going on there. Most of the success there year to date is not related to the agentic onboarding, because that has just been more of a recent rollout that is still ramping. I think that will drive a lot more of the margin improvement over the next 12 to 18 months, which gives me a lot of confidence that there is a lot of room to run on the gross margin line. Most of the year-to-date benefits have come from the process improvements we have talked about that we have made over the last 12 to 15 months.
Joe Del Preto: The team has been really laser-focused on these processes even before the agentic onboarding. They have really been able to build out the team in a way that can scale in a much more efficient manner. So that would be the first area where we are seeing improvements on the gross margin side, driving bottom-line improvements. The second area I would say would be on the G&A side. We have done, over the last couple of years, I have talked about this last time, which is we have had to make some investments in the back office, upgrade some of our systems, some of our infrastructure, and we are starting to see the real economies of scale of those investments. So I would say, historically, I thought G&A was running a little high based on those investments, and you are starting to see that come down.
Joe Del Preto: That is a combination of getting the economies of scale on those investments, but also some of the internal use cases we are starting to see on the AI front within the organization. So it is a combination of those two things are probably the biggest driver. To your question about how we see it going from here, we have a high level of confidence, like I said, that we can continue to drive margin improvements. A lot of the future will be driven by some of the agentic things we are working on. We have already talked about the onboarding, but we are also doing things on the go-to-market side. We are building things across the G&A team as well. So feel really good about what we have accomplished to date, but also see a lot more upside going forward.
[Analyst] (Morgan Stanley): Got it. Thank you. Can you just expand on what the specific Amazon policy changes were? Are these new policy changes from what has impacted you in the past?
Chad Collins: Yeah. These policy changes related to the situation when one of our suppliers makes a short shipment to Amazon, also a process around our ability to redispute around policy, redispute a submission.
Joe Del Preto: Both of them were new in the quarter.
Chad Collins: Right.
[Analyst] (Morgan Stanley): Thank you.
Operator: The next question will come from Dylan Becker with William Blair. Please go ahead.
Jackson Bogli: Hey, everyone. This is Jackson Bogli for Dylan Becker. I was just wondering if you could give us a sense of how customers are responding to MAX now that that's generally available in this quarter, and maybe how you see the impact on day-to-day workflows for customers translating into deeper engagement with the SPS platform over time.
Chad Collins: Yeah, absolutely, Jackson. We're seeing really positive feedback from the customers that are in MAX Chat. In fact, we're seeing quite a bit of return usage so that the product will prompt them to go in, begin usage, really high return usage in the product. As we're moving forward in our development plans for MAX Agents, which will be the primary monetization mechanism going forward, we are already in co-development with a group of about 20 customers in the MAX Agent. We expect the early adopter program for that to be expanding to about 200 customers as we turn from Q4 to Q1. A large number of those customers are heavy MAX Chat users who are very anxious to get access to the new MAX Agent capability that's coming.
Jackson Bogli: Great. That's super helpful. Then maybe one for Joe or Chad, as you look at over the next few years, what gives you the most confidence in the durability of the growth algorithm? Maybe within that, just any comments on capital allocation across buybacks, M&A, and organic investment also that Joe touched on earlier.
Chad Collins: Yeah. Definitely highly confident in the growth algorithm going forward. If you look at our results here, the core really did go strongly and actually exceeded our expectations. Also consistent with how we have been describing the growth algorithm, where we expect to drive more on the ARPU side. Certainly, we can modestly grow customer count, but we expect to drive most of it through the ARPU side. The big drivers of that ARPU growth going forward are going to be the continued expansion with existing customers, primarily driven by adding more connections on the network, the upselling and cross-selling of Analytics and revenue recovery, and now with the emergence of these AI capabilities on top of that will give us another upselling SKU there. What I will add is the steady momentum of us to be able to serve larger and larger customers.
Chad Collins: As we have done a number of things to both our product portfolio and our service delivery model, we are increasingly being able to serve larger and larger customers, which has a positive impact on ARPU.
Joe Del Preto: Yeah, and then on the capital allocation question, right now, we have got our buyback in place. We are buying back in the market every day, and we think that is the best use of capital. Now, obviously over the next 12 to 18 months as things change, we always keep our options open, but right now that is going to be the main focus is buying our stock back with our capital.
Jackson Bogli: Great. Thank you.
Operator: The next question will come from George Kurosawa with Citi. Please go ahead.
George Kurosawa: Okay. Thanks for taking the questions. Maybe just to follow up on that question about growth durability. I know I am a quarter early here, but as we think about 2027, we will all be sharpening our pencils on modeling. You laid out the 8% to 9% exit rate on the core business. Is that maybe a right way to think about the approach for how you guys are thinking about next year, or just maybe put some takes on what might drive this business to sustained growth next year?
Joe Del Preto: Yeah, thanks for the question, George. I think we do not want to get too far ahead of 2027, so obviously I am not going to provide any guidance, but we believe that the momentum we are seeing on the core will continue. As we see right now, we feel really confident about that going into 2027. I think there is a couple things going on from a growth algorithm, and Chad covered it a little bit earlier, but I think the other thing that is going on is that our GRR continues to improve on a year-over-year basis, right? A lot of the things we are investing in as it relates to agentic onboarding, shortening that time it gets to get on board, the things we are doing with MAX and MAX Chat, I think that is going to drive a lot of stickiness in the product.
Joe Del Preto: I think it is going to allow us to increase price over time. I think there is a couple things going on in the core that gives us confidence and kind of the growth algorithm that Chad was talking about and the way we see 2027. Obviously, on the Q4 call, we will provide a little bit more color on 2027.
George Kurosawa: Okay, that is great color. I did want to follow up on this agentic onboarding. Gross margins seem like it saw some healthy expansion in the quarter. To what extent has agentic onboarding impacted Q3? I know you said it is relatively early still. If you just think about the number of maybe onboarding projects that have gone through this process, how has that started to trend? How do you think about that? How do you think about in terms of the share of onboarding that can be done agentically as we think through next year?
Chad Collins: Yeah. I think about the gross margin impact specifically from agentic onboarding, frankly, as kind of minimal. As Joe mentioned earlier, most of that has been driven over work the team has done on the onboarding process in the previous 18 months. However, the agentic onboarding has certainly helped us in the quarter with respect to new customer acquisition. We had several competitive opportunities where the customer was integrating their ERP system with their EDI provider. Those customers specifically chose SPS Commerce based on the speed at which we could onboard them to our network. We think not only will the speed of that onboarding then obviously be more efficient and drive continued gross margin improvements, but truly be a competitive differentiator.
Chad Collins: We will probably unlock a little bit more demand in the market as well, because if you are not facing the several-month implementation, you are probably more likely to go forward with the project. Where we are today is that we have had hundreds of customers that are on our more simple web form onboarding be done in a number of hours with agents, and then I would say a select handful of more complex ERP-integrated projects be done with the agent-assisted onboarding and agent-assisted validation. It has a really big momentum, and we expect more and more projects to be done this way in Q4 and in 2027.
Joe Del Preto: George, I will add one more piece of color there. We have probably got another 12 months of roadmap on agentic onboarding. Like Chad said, we have started with the easier customers, the web fulfillment customers, and as we move across the different ERP integrations, we are knocking those off one at a time. So what you are going to see over the next 12 months is, as we roll out more and more agentic onboarding across different customers, you will see that margin improvement over the next 12 to 18 months, that will set us up for even longer-term improvement.
George Kurosawa: Great color. Thanks for taking the questions.
Operator: The next question will come from Matt VanVliet with Cantor. Please go ahead.
Matt VanVliet: Yeah, good afternoon. Thanks for taking the questions here. I just wanted to dig in a little bit more on the Amazon changes. I guess, how are the economics for the customer contracts differing when they switch to subscription? How should we think about that playing out over a couple year period? And then any other color on what percentage of those customers have actually shifted to the subscription model so far?
Chad Collins: Well, typically, a customer will have a proven history of recoveries at a certain level, and also see the value of the incremental product features that we are adding to help them with the analytics around chargebacks in general, other analytics around the whole recovery process. As they see that value, then there is a conversion point based on the volume of historical recoveries into a new subscription amount. We are leading with subscription in our go-to market. We still do take new business as a take rate when competitive requirements demand that, and there is still some room as the majority of Carbon6 customers we acquired in this area were on take rates. It is still the minority of those customers that have converted to subscription, but that conversion is underway.
Matt VanVliet: Okay. Thank you. Curious on any commentary you have around the overall competitive landscape and how your retailer enablement efforts are going, any traction to speak of there, and just how you are viewing that business longer term.
Chad Collins: Yeah. The retail programs continue to be a great lead source for new supplier customers into our business. Q3 in particular, we had some very large programs, as I mentioned previously. That interaction tended to be more monetized on the ARPU side. There were new customers that came in through those programs as well, but a little bit more skewed to the ARPU side. Demand for that offering, where we are digitally enabling all the suppliers for these big retailers and distributors, we continue to be unique in offering that to the market. As we continue to explain all the benefits of that in the market, seeing some upticks in demand for that solution.
Matt VanVliet: All right. Great. Thank you.
Operator: The next question will come from Lachlan Brown with Rothschild & Co. Please go ahead.
Lachlan Brown: Hi, Chad, Joe. Thanks for the questions. I just want to unpack that you mentioned that you would have raised the full-year revenue guidance had there not been the impact of the Amazon 1P policy and revenue changes. Could you just dive into what went better than expected in the core fulfillment business in the quarter?
Joe Del Preto: Yeah, I think a couple things went better than expected. I think one, Chad talked about this, these retail campaigns that were really strong coming into the quarter, those really converted into higher ARPU. So I think our ARPU was stronger than we expected. The other area is the GRR. It was really solid in the quarter. It continues to increase on a year-over-year basis. And that came ahead of plan. And then we continue to see momentum in the subscription side of the revenue recovery business. So I think the combination of those three things really kind of exceeded our expectations in the quarter.
Lachlan Brown: Thanks. Can you also update us on the campaign pipeline visibility over the next couple of quarters? I guess specifically, how is the current mix tracking between new customer onboardings versus expanding connections on those existing accounts? Last year you noted that holiday season dynamics caused some enablement campaign delays. So I just want to just double-check that you are not seeing the same thing here again this year.
Chad Collins: Yeah. The overall pipeline and activity on programs right now is strong. It will be strong in Q4, and we expect to carry some of that into 2027. We are not anticipating any delays, but some of those programs here for Q4 have not actually kicked off yet, so they could be subject to delay, but we are not anticipating that. I would say the contribution, sometimes difficult until we get the program underway. I would just remind everyone, with our growth algorithm, we do expect a lower growth rate on the customer additions and a higher growth rate on the ARPU. As the programs came in Q3, they came in exactly consistent with that overall growth algorithm.
Lachlan Brown: Very helpful. Thanks.
Operator: The next question will come from Mark Schappel with Loop Capital Markets. Please go ahead.
Mark Schappel: Thanks for taking my question. Chad, could you talk a little bit about what you're seeing in early demand for Decision Intelligence and maybe how it's priced relative to the former analytics offering?
Chad Collins: Well, Mark, great. So what we've done here is, we mentioned this in the last call, we completely re-platformed the technology of our analytics product, and as part of that, went through a renaming exercise. So you'll hear us referring that to Decision Intelligence going forward, and that will also follow our segment reporting in the financials. A couple things that have been real positives on this. One, the customer sentiment and the supporting retention metrics for the customers that have gone onto this new platform are more favorable than the old platform. So we're seeing positive momentum there. And additionally, we're more competitive in new business with this new platform.
Chad Collins: And then I'd say overall, this new platform was really necessary to set us up to execute on our roadmap for Decision Intelligence, which includes a number of AI capabilities, which we expect to be able to launch there in the H1 of 2027. Overall, the new platform, who knows if the new name is helping? I think the new platform certainly is helping, but you'll hear us refer to that as Decision Intelligence going forward.
Mark Schappel: Great. Thank you. Eduardo's been on board now for about a year or so as Chief Commercial Officer in that role. What are some of the more meaningful changes you're making to sales coverage or incentives or even account ownership? What are you planning going forward there?
Chad Collins: Yeah, absolutely. On the retail side, one of the changes we've made is really segmenting that sales force into existing customer account managers and other sales executives focused on new business. This positive momentum in the retail activity right now, I would say that's one of many factors. But between Eduardo and Tony, who leads our retail business, they've done a nice job with those changes, and those have been positive. As we look at our customer treatment strategy on the supplier side, we've really aligned customer success and sales much more closely. I think that has been beneficial to this ARPU expansion as we're driving more expansion with the customers, driving cross-selling. As Joe mentioned, the improved retention metrics, I think, are also coming from those improved customer treatment strategies.
Chad Collins: The team has really done a nice job on the customer treatment strategy work, and that's paying off for the metrics now.
Mark Schappel: Thank you.
Operator: The next question will come from Parker Lane with Stifel. Please go ahead.
Jack McShane: Yeah. Hey, Chad. Hey, Joe. This is Jack McShane on for Parker. Thanks for taking the questions today. I wanted to go back to the topic of growth now hinging a bit more on ARPU and just kind of dig deeper. Is this a temporary mix, or will cross-sell and attach be the material key drivers of the business into the midterm in 2027 and beyond? How do you weigh the opportunities in cross-sell, whether it be new connections, ancillary products like Analytics and MAX?
Chad Collins: Yeah. So there is really three factors driving that ARPU. Certainly the largest one is expansion of the existing customers. It is definitely a land and expand model. We tend to get customers with one trading partner when we land them in one of those retail programs, and then we expand them from there. Obviously, Analytics, revenue recovery are addressable to the medium and large customers that we have. Then we will have the MAX Agent SKU on board in 2027 to be another product there. As I mentioned earlier, as we move more and more of our capabilities with the ERP integrations, we are able to serve medium and large customers. That has a positive impact on ARPU as well. So we continue to drive new customers through the retail programs, through the channel programs.
Chad Collins: But I think, keep in mind, a lot of this customer count every single quarter is being driven by very low revenue customers, both in the adds and both in the churn. But all of those customers that we start off through a retail program as a 1P, we have the potential to expand a portion of those up to be some of our highest value customers from there.
Joe Del Preto: Jack, just to add one, ranking them, I think the expansion of trading partners is still the biggest driver of ARPU, and then after that is the cross-sell of Analytics and revenue recovery. Then next year, obviously, we will have a little bit more to sell with the MAX Agents, and so that would feed into that cross-sell opportunity.
Jack McShane: Great. Yeah, thanks for the color. Then I would love to hear your philosophy, moving into next year as you begin monetizing MAX, how do you plan to strike the balance of broad adoption within your base and monetization that so many of your software peers have been attempting to figure out over the past year or so? Where is that AI budget coming from within your base? Thanks.
Chad Collins: Yeah. Terrific question. We will favor broad adoption. We believe that this provides value, and the more customers have access to it and use it, the value becomes more apparent for them, and that will allow us to take price over the relationship with the customer. So we will be charging for the MAX Agents in 2027, but to your point, our programs are going to be focused on customer adoption in 2027 versus trying to maximize price before the customer really sees the value.
Operator: The next question will come from Clark Wright with D.A. Davidson. Please go ahead.
Clark Wright: Awesome. Thank you. I wanted to touch on the agentic capabilities that you guys are bringing to market. What makes SPS Commerce uniquely positioned to provide the agentic capabilities to organizations versus what can be achieved with off-the-shelf AI offerings?
Chad Collins: Yeah. The data really is what makes the difference here. If you look at the underlying data that is driving our agentic use cases, first, there is all the data that the customer has in our network. Keep in mind, this is usually a superset of their supply chain data. Not all this data is making it back to their ERP systems, or their warehouse management systems, or transportation management systems. There is probably the most robust data set of supply chain data a customer has is going to be on the SPS network. Second is we are seeing major trending across all the major buying organizations that run across our network. Obviously, we are not going to share a customer's competitor's data, but what we can do through our agents is see certain trending with certain trading partners, certain patterns that may exist.
Chad Collins: What is really critical to all this, and honestly, I think underappreciated out there, is the proprietary databases that we have around retailer trading expectations for their supply chain partners. Many of these are undocumented as well. We have these robust rule data sets that dictate exactly how the supply chain is expected to be performed for each of the retailers on our network, and the agents have access to all of that. When we combine the customer's data, the trending data on the network, and these very unique supply chain rule sets we have about each major retailer, that combination is really unlocking some very powerful use cases. If you looked at just more generic AI tools out there, they would not have that same level of access or understanding.
Clark Wright: Appreciate that commentary. Then wanted to potentially ask you just about the policy changes. Is there anything that the company can do proactively to minimize the financial impact of new policy changes like what we have seen in recent years?
Chad Collins: Yeah, I think this strategy of adding more features in our product strategy to be about a total chargeback management and chargeback prevention solution and have less of the value proposition be just about the recoveries, combined with the overall migration to subscription revenue that we discussed. I think those would be a couple things that are mitigating factors. Overall, I will just say that we do have competitors in the market that sell Amazon on a take rate basis. When we offer that, especially in larger enterprise deals, it is helpful in winning new customers. In the quarter, we utilized our overall multi-retailer approach to win some very large enterprise retailers or suppliers onto revenue recovery. So I do think we will need to have some type of offering to take rate at least for the next couple of years based on competitive dynamics.
Clark Wright: Got it. Thank you.
Operator: Again, if you have a question, please press star then 1. Our next question will come from Joe Vruwink with Baird. Please go ahead.
Joe Vruwink: Hi. Great. Thank you. I think of the network, it was set up to support omni-channel fulfillment. We now have the rise of personal agents factoring into the future of commerce. How do you think of that as a driver? I guess there is multiple ways to take it. Customer enablement activity and actually needing to upgrade your supply chain for this as a prospect, and what does SPS need to do on the back end to participate effectively if this is going to be a new channel?
Chad Collins: Well, first congrats to your Brewers, Joe. Great question. I think the commerce agents are going to drive a new level of expectation on the supply chain as a result of the personalization and choices that are going to come from that. I think that will, just like we saw with omni-channel, increase the requirements around collaboration, the timing of collaboration as we move more and more toward these instantaneous delivery expectations. It really puts more need for a network like SPS to facilitate these supply chain transactions. I will also- commerce agents start to move back in the supply chain to merchandising agents and vendor management agents.
Chad Collins: These are the things that we are looking at in the midterm, and I think position SPS very well to further assist retailers in how they are managing their supply chain as agentic technology moves from just the consumer back to more of the supply chain and buying operations in retailers and distributors.
Joe Vruwink: Okay. That is great. Then, maybe Joe, just to be clear on some of the math. I think if I just take the divestment evenly in Q3 and Q4, that is like a 3-point revenue impact. You are talking about 5 points in total to the 1P changes, 2 points or like $4 million. I guess within that, how much is truly a headwind, given the policy changes versus just the mechanical impact where transitioning to a sub that is worth slightly less for a period of time?
Joe Del Preto: Yeah. A majority of it is from the policy changes, Joe. That would be a majority of that impact. The conversion from take rate to subscription is a smaller portion of that.
Joe Vruwink: Okay. Thank you. Go Brewers.
Operator: I am showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may now disconnect.
