SPS Commerce Aktie

Welcome, everyone, to Day 2 of Citi's Global TMT Conference. My name is George Kurosawa. I'm on the software team here at Citi. I'm pleased to be joined by Joe Del Preto, CFO of SPS Commerce. Welcome, Joe.

Nice to be here. Thanks for having me.

Maybe just to start, for anyone newer to the story, if you could just frame the SPS journey, where you feel like the company is at today, the value proposition that you're delivering to your customers.

Yes. So, for sure. So SPS has been around for a long time, right? The business was started in the late '90s and really the age of the Internet really changed the way that suppliers and retailers can, kind of, work together. So at the core, what SPS does is it built a managed network between some of the largest buying organizations, like think of big retailers, grocers, industrial suppliers, industrial distributors and all their suppliers. And we manage all the communication, all the EDI communication, API communication, all the digital requirements between the large retailers and grocers and the suppliers. And the way we did, we took a very different approach.

We built a network. So once you connect to our network, so for example, when one of the suppliers, for example, let's say, a Target supplier connects on our network, they have access to all the other retailers. So for example, they want to also connect with Costco. They don't need to know how to understand how to connect with Costco. They don't need to know what their EDI requirements are or their API requirements. Once they connect with us once, we manage that entire network.

So, over the years, we have about 3,500 buying organizations and a little over 40,000 suppliers, what we call our customers on the network. And we, kind of, manage that network across day-to-day across those different constituents.

Got it. And I want to dive into the business, particularly the MAX products. Maybe just before that, there was some public reporting about MAX disengagement, maybe that you all are potentially exploring a sale. I understand there might be constraints on what you can say, but if there's any, just give you the floor.

Yes. No, obviously, we can't comment on that. And what I would tell you right now, internally, the business is just -- everyone internally is just focused on driving the business forward. So no comment on that, as you can imagine, but we feel really good about the momentum on the business. I'm sure we're going to get into it a little bit, George, but there's a lot of things that are working well right now. And so I think we're pretty positive about the future of SPS.

Okay. Great. And when -- I just think about the timing of your joining, you joined after the 2025 Investor Day, you had established kind of financial framework, high single-digit growth, 70% to 75% gross margins, 35% EBITDA margins. Looking -- having been in the seat a few quarters now, how do you think about that framework now? Are there components of that, that feel maybe more conservative? Maybe just how has your confidence in those targets evolved?

Yes. What I would say is still the same level of high confidence in the growth rate in the high single digits. Nothing's changed there. I do think over the last, what I would say, since Investor Day, I think we've made a lot of strides in the internal use of AI that we believe can drive pretty good margin improvement.

We're not changing. We talked about over about 200 basis points year-over-year in operating margin improvement. But some of the things we're seeing as it relates to agents that are going to help with onboarding, agents that we're building for the go-to-market side and a couple of other areas, we think that we probably -- if you were to say anything was a little bit on the conservative side or I would say there's probably a little bit more room on the margin side over the next couple of years based on some of the things we're seeing internally.

Okay. Interesting. I want to dig into that more later, but maybe we can start on the MAX side on the growth. Obviously, the MAX product set going through the beta process. It seems like through that process, the product has started to evolve. That seems to be morphing into more of a top of funnel product and MAX Monitor moving into more of an agentic type structure. Can you talk about the learnings that you've had? What about the customer behavior signal drove some of those evolutions?

Yes. So we released -- it's now available, GA, for all 40,000 customers of ours on the MAX Chat side or what we're calling MAX Conversation. And the adoption is really high. We're really excited about what we're seeing. And what it's actually allowing us to do, we can see what people are putting into the chat and the problems they're trying to solve through their supply chain. For example, we saw a customer find over $300,000 of missing invoices that they never sent to a customer for orders they delivered. And so what they're able to do is find these issues in their supply chain through various chats.

In that example, it took about 30 chats for them to get to that answer, right? Because they're looking, they're prompting it, they're learning. What we believe is what we're doing is we're using all that information and all the things we're seeing that are people that are putting in the chat, and we're using that to build the agents. So instead of you trying to go through chat and find the supply chain issues, what if we just had an agent, for example, that just made sure that for every single order that you delivered, you created an invoice. And then it alerted you that, hey, by the way, you delivered these orders to Trader Joe's, you have to invoice them. Or by the way, you got these purchase orders from Costco, you have to acknowledge. We see a lot of times where they might receive purchase orders and a lot of the big retailers, there's a certain time horizon in which you have to respond and acknowledge that you received the purchase order from the retailer.

What if we had an agent that did that for you? And then if you think even further along, what if the agent just didn't -- went and did that thing? Because right now, it will tell you, oh, by the way, you didn't send these invoices. Well, what is the next evolution of the agents we're building just went ahead and create those invoices for you. So we think there's a huge amount of upside in the way that the MAX Agents, which is the next phase past chat, and that's what we're going to monetize, can really drive a lot of supply chain efficiencies. And because we built this managed network where we have all the data across all these retailers and grocers and all these suppliers, we think we're best positioned to be able to monetize that information and that data for our customers. So we're pretty excited about where it's headed. We'll probably have our first agents rolled out later this year kind of in beta form. We're working through pricing and packaging right now. And then in 2027, I think you'll see us launch those more broadly.

Got it. It seems like you already alluded to an example here, but just talking through the ROI of AI is kind of a big theme at this conference. how do you feel like the most tangible proof points that you've seen in terms of what you can deliver?

Yes. I think in our case, what we are most excited about is I think we can deliver hard ROI for our customers. We can tell them, for example, these are the purchase orders you missed. These are the invoices you didn't send. These are the drop ship orders that you haven't acknowledged yet. Like, we can tell you, like, right there and then what you're missing and what you're doing. So real ROI. And then on top of that, if you think of -- if we start doing things for you that you had people doing before, for example, like I said, if we can go in and actually fix those things for you and say, by the way, used to have all these people, for example, had to acknowledge purchase orders. What if we just identify the ones acknowledge for them and then the business kept going. You don't need all these people sitting around doing, like, managing the supply chain. So we actually think in our scenario, we can provide hard ROI on our AI because we're actually identifying real issues in your supply chain.

Right. Maybe on the commercialization side, I appreciate it might be a little bit early, but maybe you could talk through how you're thinking initially about exposing customers to this product, how you're thinking about packaging it?

Yes. So we haven't finalized the pricing and packaging yet on the agents. But the way we're thinking about it is the way you'll pay for them are probably based on how many agents do you need, right? We might have a different agent for doing one type of activity versus another. We might have different agents depending on are you integrated with an ERP and that might be a separate agent. So the number of agents that you have running, the quantity of data you're consuming.

So, for example, are these agents consuming a little amount of data or a large amount of data, so some kind of consumption-based approach, probably. And then how frequently are you running these agents? Do you want these things running every day, every second, every week? And so a combination of those things are probably going to drive the way we kind of price and package the agents. Some of them will be more sophisticated. Some of them will be less sophisticated. Are you using our Web Fulfillment product? Are you using System Automation where we're integrating the ERP. So there's a couple of different factors that will probably drive the way we price and package them.

Makes sense. On the build versus buy, maybe another key pillar of the debate here at the conference. How are you seeing that evolve in your customer base? Are there any examples where you've seen customers maybe try to in-house some of the things that SPS has traditionally offered? And what about your product positioning do you feel like maybe insulates you from that?

Yes. I think we are -- so in our space, and George, you probably know this, like, the build versus -- the build yourself has always been something we've competed against. So this is -- for us, this is not a new idea or concept. Our biggest competitors have built tools, do-it-yourself tools. So they give you, for example, a piece of software that you can go build out and you have to manage all your integrations in the different retailers. You have to build all -- you have to stay on top of all the compliance from the retailers, you can do it all yourself. Yes, those tools will be a little bit more efficient with AI, but we're not -- our approach has always been you can go do it yourself, but we believe the managed network approach where you connect once is the better approach. And so we believe with AI, I don't know that, that necessarily changes that dynamic in any way. We actually think we have a bigger value prop because of our managed network and the ability to apply AI to the things we talked about versus do-it-yourself. So that's always been the case in our space, a do-it-yourself versus the network approach. So I don't know that AI dramatically changes that dynamic.

Makes sense. On the 1P Revenue Recovery side, I want to touch on that. You divested the 3P side business that's a little more focused. I think even when you had initially acquired those assets, the plan was always to ramp up the cross-sell motion through the course of 2026. If you could just talk through the maturity of that motion. Do you feel like it's fully ramped up? Are there any incremental investments you need to make there?

Yes. I would not say it's fully ramped up. I think a lot of the first half of this year, we were really focused on this 3P business and whether or not divesting it, what we want to do with it. And so I think that probably distracted us a little bit from the overall kind of go-to-market strategy. Now that, that is divested, what you'll see in the back half of this year going to next year is a real focus on the 1P side of the business, making sure that the sales incentive plans are properly inside of the sales team, like, historically, the -- if you were a rep that was selling into a customer on the fulfillment side, you didn't have any incentive to cross-sell one of our other products. That's going to start to change at the end of this year going into next year where a sales rep will be incentivized to bring in other products into their sales cycle where before, there wasn't a lot of sales incentives to do that.

So I think a lot of that's going to evolve in the back half of this year. We're also moving or leading with the -- on the 1P side, the subscription model, the SupplyPike business we bought in 2024, which is more -- it's all based on subscription base versus take rate. We're leading with that now going forward. We will sell the take rate business, which was the old C6 business on the 1P side. The customer really wants it, but we're trying to migrate customers off of the take rate, because of the volatility and it's less predictable, to the subscription model. So all of that will happen in the back half of this year. So you'll see some advantages of the cross-selling throughout this year, but I think most of that you'll see come through in 2027.

Got it. Maybe sticking on these adjustments to the go-to-market side. I think you started -- retailer campaigns have been the core of the new logo growth driver. It seems like you guys are starting to expand into maybe some new channels to acquire new logos, maybe exploring some traditional SEO. Talk us through what you're thinking there? And to the extent that spend has started, what are you seeing kind of the initial conversion rates, funnel build?

Yes. So, like, the biggest driver of our top of funnel is the retail programs and working with the retailers. And then number two is probably the channel, like, we have a lot of relationships with a lot of the big ERPs and the different VARs, and that's another big driver for us. On the marketing side, it's probably been an underinvested area. And it's probably not so much on the SEO side. It's probably more on a couple of areas. We haven't done a really good job marketing to existing customers, product marketing, for example, letting the customers know about things like Analytics or Revenue Recovery or letting them know about the MAX products that are coming out.

So I think there's a huge opportunity. We've made a lot of enhancements to our existing product that a lot of our existing customers don't know about. So I think, one, product marketing into the existing customer base is a focus area of marketing. And then the other one on the new customer side is more probably upmarket into the mid-market enterprise. So probably less more direct marketing campaigns, more of that account-based marketing versus your traditional SEO type of spend. So that's probably where the marketing team is spending more time. It hasn't been a huge part of our go-to-market budget historically. We're not -- this is not incremental dollars to the budget. It's more about the reallocation of where those resources were before. So we do believe there's an ability to drive more demand, not only within our existing customer base, but new customers with more of a marketing lens.

I see. And then when you think about the return you've had on those initial dollars that started to reallocate, how is that compared to some of the traditional channels?

Yes. What I would say is we're seeing really -- especially on the existing customer side, where we're trying to get in front of our existing customer base and not only on new products, but how do we understand the other retailers they're working with, making sure we have the full penetration, we're seeing some really good early returns on our ability to go out into our existing customer base. It's probably still too early on the net new side because we -- the retail and the channel is such a big part of that. It's definitely driving traffic, but probably not at the level yet where we're like, okay, this is a huge success because it's still so early. And those sales cycles take a little bit longer. Where we're seeing the real success is on the existing customer side.

Got it. Makes sense. On the just traditional enablement campaign piece, that side has been obviously historically a great engine for the business. It has, at times, been a little bit lumpy in terms of how it's driven new logos. Just talk us through your pipeline. Do you feel like the character of those campaigns has been changing at all? Just any patterns that you're seeing there?

Yes. What I would say is we definitely saw pressure in the back half of last year with the number of retail campaigns we were landing. And I think it was a combination of a couple of things. One, I definitely think the impact of the tariffs on the overall -- like the overall macro of our market put a lot of pressure on retailers. And then number two is before this year, or the first time coming into this year, the way the retail team was kind of organized was it was just one team and they had new and existing accounts. As you can imagine, for a sales rep, it was much easier to go and expand within existing retailers and land new programs than land net new retailers. So what happened was we brought a new leader in the middle of last year and coming into this year, what we reorganized the team where we have folks that are hunters and farmers. So we have a team dedicated to going to land net new retailers that we've ever had before and then folks that are focused on existing retailers and expanding within those and adding new programs. Since we've done that, the first half of this year, the number of retail programs on the net new side that we've been able to generate, I think, coming into this quarter was the highest pipeline we've ever seen. So that momentum in the first half of this year is going to lead to the success we expect to see in the back half of this year into next year. So I think it's a combination of a change in the go-to-market strategy. And also the retailers are in a much healthier position than they were a year ago. And so I think the combination of those two, we've talked about this is probably the strongest level of retail campaigns that we've seen over the last 4 or 5 years going into the back half of this year. We're very excited about the momentum we're seeing in that space. And so there's a couple of things that have been driving that.

Is that hunter motion already delivering results? I'd imagine it takes some time to build the pipeline and close some of those opportunities. Is that something that's already...

Already delivering results. We've got those campaigns. We have the campaigns closed, and now we have to go implement them, right? So that's what you'll see in the back half of the year. So the first half of the year, we're out there selling these campaigns. We definitely have a strong pipeline of new campaigns in the back half of the year. But then you have the cycle, you've got to reach out to all the suppliers. You've got to onboard them. And so that will all happen in the back half of this year, early next year. And as you know, that's all part of the land and expand motion. So what happens is when we land these new customers, they usually only end with that one retailer in the retailer program. And then we have a separate team that comes in after the fact and says, okay, now that we've landed this one retailer, let's get the rest of the folks you're working with. And that's kind of the expand motion. And so the near-term impact of landing those new customers from a revenue standpoint is quite small, but that's really the engine that drives the long-term growth is then we can add multiple retailers on top of that.

Right. Right. I think one of the things you initially alluded to talking about the long-term framework where you feel more confident is on the margin side. It seems like SPS, the business model, there's so many opportunities for internal application of AI. Talk us through maybe the top few use cases you're seeing and your progress so far on making improvements there.

Yes. So the top use case is going to be on the onboarding side. So our largest cost of revenue in the organization is the onboarding team. And this is the team that historically would manually onboard every one of our customers onto the network. Whether you're the smallest customer, you got a human being that came in and helped configure your -- the network between you and the retailer. And even on the large side, they'd come in, for example, if we're integrating into your ERP, let's say, NetSuite, they would help you with all your NetSuite configuration, help you integrate into our network.

So that's the largest cost -- that's the largest team at SPS in total. And we talked about a month ago, we did our first fully agentic onboarding for our web fulfillment customers. So not the ERP integrated customers, but think of the Web Fulfillment customer. On average, that would take maybe a day or two for a person to help onboard that customer. The agent can do it in minutes. And we did our first one about a month ago. Now we have hundreds of those a month going on. And so we're making real progress on the ability to identify the onboarding process. And then the next phase that you're going to see that we're starting to build right now are the agents for the system automation customers. So you think about each ERP we integrate with, we've got to build a separate agent to onboard the NetSuite configuration because that's different than the SAP configuration.

So now we're in the process of building agents that will help customers onboard on the System Automation side. And so if you think about overall, what used to take hundreds of people to onboard our customers, we believe, for example, on the System Automation side, let's say, it took you 6 to 9 months to onboard on SPS network manually, we can do that in a few weeks. And so not only will that create a much better customer experience, I think it's quicker time to -- think about time to revenue on those customers. The sooner we can onboard you, the sooner orders are flowing through, the sooner we can add more trading partners. And then on top of that, we believe it's going to really help with the retailers.

So one of the biggest pushbacks we get historically with retailers when we're trying to land new retailers is how long it takes to onboard suppliers. So we go into a retailer, we convince them that, hey, why don't we help make sure all your suppliers are digitally compliant and meeting all your requirements. And they'll say, "Okay, how long does that take? It's going to probably take 6 to 12 months to onboard all your suppliers." Well, now if we can go to them and say, "Hey, we can onboard all your suppliers in a month," it's a much different value prop. So we think there's going to be multiple like impacts of building these onboarding agents. Not only is it going to drive margin, but also we believe it can have a big impact on revenue.

Really interesting. Those initial agentic deployments that you've done, maybe if you could frame how that -- the amount of time savings that you've seen there relative to what a traditional approach would have looked like?

Yes. So on the Web Fulfillment side, I would say it would take on average 1 to 2 days for someone to onboard them. Now that can be done in 15 minutes. And then something that maybe took on the System Automation side, 6 to 9 months, -- now this isn't live yet. We think we can get the 6 to 9 months down to a few weeks. So a pretty dramatic change in the time it takes to onboard. And the customer experience is so much better because what we're doing is what the agent does is it goes out across all the Gong calls and all the conversations sales has had.

It goes through all of the CRM. It goes through all of your -- it knows all your requirements based on the supplier -- based on the retailer you're working with. And so it can do all the configuration with very little input from the customer. And what it will do is say, "Oh, here's the 1 or 2 pieces of information we need from you, we have everything else." And so the customer experience is just much better because they're not sitting on the phone or going back and forth with e-mail with our onboarding agent. So the time it takes them on their end as well, not only is it our time, but it's the customer's time that they have to put forward to do these onboarding as well. And so we think there's a pretty big value prop for our customers there.

It also seems like a faster customer time to value might lend itself to easier cross-sell. I mean, first of all, higher satisfaction, but also you're able to just get them through that process more quickly, get them to value and expose them to some of the new products.

You're exactly right. If you can get -- we're not going to sell you any new products until you're at least onboarded onto the core fulfillment product. And so you're exactly right. The sooner we can get to that motion as well, the better.

Just in terms of the retailer rulebook maintenance, is that maybe thinking through other uses of potential AI. Is the retailer rulebook maintenance -- maybe help us understand -- how large is that in terms of the cost structure? And maybe have you seen any improvements there?

Yes. What I would say there, I think it's one of the huge value -- it's one of our huge sets of proprietary data because only about half of the buying organizations publish the actual requirements. Most of them are unwritten. And only about 1/3 of the changes that they make are actually published. So a lot of the rules that they have are unwritten rules. And so because we've gone about this go-to-market approach where we work with the retailers to drive the supplier compliance, we have access, we get all the information, we get all the data. That itself hasn't dramatically changed.

What we believe agents can help us do is because we have access across the whole network, if we see an issue, for example, with one supplier with Target over here, before we would identify that, it would notify someone on the team and they would go make that configuration change in the network, so then all the other customers get that advantage. That's one big advantage. What if an agent, for example, could identify that on this customer A over here. And then instead of alerting someone on the engineering team to go make this change in the network, it could automatically go through and make that change based on what happened over here. We believe that's where we can get some real advantages to your point on where AI can help, kind of, be more efficient in the way we update the network.

These different initiatives gross margin has already been trending up for the business. Would you attribute any of that to these initiatives yet? Or this is all sort of further upside to come?

No, none of this is hitting our gross margin. Like I said, we did our first agentic onboarding about a month ago. And so this is all probably incremental upside to the margin improvements you've seen. The margin improvement you've seen on the gross margin in the last couple of years has been more fine-tuning all of those manual processes with our customers. One of the biggest friction points, one of the areas of dissatisfaction with our customers is when that onboarding process takes so long. So that team has already been laser-focused on making process improvements there and getting more efficient in the way they do their job. And that's more process people and technology. That's where that historical over the last 12 to 24 months margin improvements come from. None of the stuff I just talked about is built into our margin right now that you see.

On the guidance framework for the rest of the year, I think by our math, you talked about the 1P logo side ending up maybe somewhere flat to slightly up for the year. I think that implies some kind of step-up on the 1P ARPU side. Can you just talk about what do you feel like are the main drivers underpinning that and kind of the durability of ARPU growth going forward?

Yes. I think the biggest thing driving that is the momentum we're seeing within our existing customer base on adding new retailers and the trading partners. So I think last year, we saw a lot of downsells and a lot of pressure when the tariffs came out. Now that we've lapped -- it's been about -- once we get to April, we lapped Liberation Day, we went through all those contracts, we, kind of, rightsized them. What we're seeing from our customers are in a much healthier position. And so what we're seeing, we see them on renewals, we see them adding -- we have more trading partners. They're increasing their document plan.

So we're seeing momentum in that regard. So that's what gives us the most confidence. And then like I said, a lot of the times when we run these retailer programs, yes, we add net new customers. But a lot of the time, we're adding new trading partners to our existing customer base as well, right? So the momentum we're seeing on the retail side, not only is that going to drive more new customers, but it also is a huge expansion lever for us as well. So a combination of the momentum we're seeing on the retail side and then the -- what I would say is the health of our existing customer base and our ability to add more trading partners, starting to cross-sell a little bit of Revenue Recovery, I think the combination of all of those things give us confidence on the ARPU side.

The international story, I think that's something that's kind of come in and out of focus for SPS. Maybe if you could just give us an update on what the progress has been? How does that kind of stack rank in terms of your different initiatives?

Yes. So it's definitely a focus of ours. We're still mostly focused in North America. 91% of our revenue comes from North America. We hired a new European leader late last year. He's done a really good job. We're starting to land our first retail programs over there. It's a little bit different dynamic over there. We haven't really led with the retail programs. What we're trying to do is build out a very similar structure like we do in the U.S. over there. But it's very country specific, right? There's not a lot of -- think about the U.S. market, it's massive and you could have a deck that covers all of the U.S. Well, in Europe, you're going to have -- the retailers are different by country. And so it's a little bit different of a strategy that you have to take over there to build out this kind of retail strategy.

We're starting to see some success. We're seeing success in the U.K. We're seeing some success in Australia. And so I do think there's momentum over there. The new leader there is really strong, and we're starting to figure out what is our local strategy going to be. And then also, we're seeing some momentum on the e-invoicing side. I know we bought a company in that space about 4 or 5 years ago. You've probably seen there's been some new e-invoicing requirements coming out across Europe. Any time these new requirements come out, that's a tailwind for our business because that's something we do. It forces adoption. And so there's a couple of things that we believe are moving in the right direction there. It's not going to be a huge growth driver of the business overall the clears, but it's definitely gaining momentum. And so we feel good about the direction that's going right now. We're happy with the leader that we brought in. And so it's definitely an area that we're focused on. It's just not going to be the biggest driver.

Got it. I want to pause to see if there's any questions in the audience for Joe. Okay. Maybe just on the capital allocation side. You guys have been fairly aggressive with the buyback side. It seems like M&A has -- you haven't undergone anything since Carbon6. Maybe just how you're thinking about the split there between maybe future tuck-ins, further buybacks, organic growth reinvestment.

Yes. I would say right now, we're obviously keeping our eye on M&A. I don't think that's probably the first place we would invest. I think right now, we would continue to buy our stock back. We think that's the best value right now based on where our stock is trading. Now as we go forward, we're constantly monitoring this, right? If things were to change on that front, then obviously, we would look back at M&A. I don't think M&A is off the table forever. I think just right now, that mix right now is more towards buyback versus M&A.

Got it. And then I think we talked through a lot of the components of the margin expansion story that seem really interesting. Maybe you could just talk us through converting that to free cash flow. I think a lot of the guidance framework has been around EBITDA, how do you think about the mechanics there in terms of conversion where that could go?

Yes. So we're focused on that. We actually have a pretty, I would say, pretty good conversion from EBITDA to free cash flow. So that's definitely a focus of us. It's definitely a focus of investors. And so we're always driving towards better free cash flow. I think there's a big opportunity here. I think historically, we've sold more month-to-month than annual contracts. And we have slightly more right now annual versus month-to-month, but I don't think -- we haven't done our pricing and packaging that gave a lot of incentives to buy annual versus monthly. The sales team hasn't been incentivized to sell annual versus monthly. So I do think there's some dynamics in our pricing and packaging. I think there are some dynamics in our sales incentives that you'll see over the next 12 months that can, kind of, I believe, drive even stronger free cash flow and probably close that gap even more between EBITDA and free cash flow. So that's definitely a focus of ours internally.

Okay. We just have a few minutes left here. Maybe if you could just leave investors with some closing thoughts on what gets you most excited about the business going forward?

Yes. I think what gets us most -- gets me most excited a couple of things. One, we've built the biggest managed network in the space. And we believe that the -- with MAX and the agents that we can build that sit on top of that network, we can be the best position to drive efficiency in the supply chain between these large retailers and suppliers. I don't think anyone else in all your do-it-yourself scenarios, you're not going to be able to do that because you don't have the knowledge or the information that we have when you join a network to be able to apply the AI in the same way we do. So we actually think if you wake up 2, 3, 4 years from now, the combination of the margin improvements we're going to get with the internal agents we're building and the way we believe we can apply AI across this managed network, we think we're going to be very well positioned to really kind of grow this business and be the market leader.

Great. Well, we'll leave it there then. Joe, thanks so much for joining us. Thank you, everyone else.

Thank you. Thanks, George.

Good day, and welcome to the SPS Commerce Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Irmina Black, Investor Relations for SPS Commerce. Please go ahead.

Good afternoon, everyone, and thank you for joining us on SPS Commerce Second Quarter 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 and 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 on our website, sdscommerce.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.

And with that, I will turn the call over to John.

Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. At SPS Commerce, our foundation has always been our cloud-based supply chain network. .

Today, our network stands as a massive interconnected retail ecosystem of tens of thousands of suppliers and 3,500 buying organizations including all the major retailers and distributors in North America.

We work with more than 2,000 logistics providers and over 400 technology partners which enables us to integrate our network with all of our customers' supply chains and business systems.

We are protocol agnostic and enable fulfillment models and channels with enterprise-grade security certifications. .

That foundation makes everything that follows possible and represents every AI use case on our network. The SPS Commerce network took over 25 years to get to where it is today. Through its effect and scale, we are building partnerships supporting evolving supply chains and helping our customers grow.

Having recently divested the 3P revenue recovery business, we have sharpened focus on strategic relationships with 1P suppliers who operate multi-retailer trading relationships and benefit from our intelligent supply chain and portfolio solutions.

As the network expands, we continue to capture proprietary intelligence from trading partner activity, transaction patterns, digital specifications and compliance rules strengthening the supply chain rules engine that powers MAX, SPS' AI agent.

By leveraging SPS's network intelligence within everyday workflows MAX enables customers to interact with their supply chains in a more intuitive, proactive and connected way.

Users can instantly compare business requirements and business performance between major retailers like Target and Costco with proactive monitoring, MAXes of 24/7 extension of a customer's team, detecting anomalies and flagging critical business errors.

Max puts the expertise of the SBS network at the customer's fingertips to instantly diagnose business issues and determine actionable solutions shortly in the time it takes to address risks in trading partner relationships.

For example, branch furniture is a fast-growing wholesale brand selling to major retailers like Williams-Sonoma, Lumen and Office Depot. They rely on SPS Commerce to manage order flows across multiple channels and have already experienced significant efficiencies using MAX to resolve order issues in minutes as opposed to days from one of their key retail partners, Max helped achieve 90% weekly time savings in managing overdue orders.

Other customers have recognized tangible results since MAX' beta phase launch. MAX successfully cut a $290,000 invoice failure due to an incorrect UPC code.

It identified 100 stalled drop-ship orders for an outdoor brand. It flagged $70,000 in unacknowledged purchase orders for a food manufacturer. Delivering this immediate ROI, MAX is quickly becoming the default starting point for customers inside the SPS user interface.

They trust MAX' proprietary supply chain expertise, and they are increasingly allowing it to take automated actions on their behalf, continually improving operational efficiencies with our trading partners.

By pairing SPS' network intelligence with our Agentic capabilities, with our first AI-powered customer onboarding, including presale context and account provisioning. We're working toward a future where a Gentek technology can engage in new customer immediately after a deal closes, with more of the onboarding processes shifting to AI as we continue to reduce the time it takes for customers to transact with their trading partners.

Agent assisted customer functions and onboarding as well as the identification of our internal operations are the pillars in our agent strategy already in motion at SPS.

We are also exploring new AI-powered use cases and products, which we believe will drive ARPU expansion and increase the size of our addressable market.

The initial launch of MAX to all SPS fulfillment customers is expected by the end of the summer, and we plan to launch additional products at scale later this year.

One of the key learnings from our beta program is that users of MAX through the chat interface are more likely to explore advanced MAX features and we expect this usage trend will define the path to monetization of our AI solutions.

We are excited about these AI capabilities and the immense value they will bring to our network and so are our customers.

In a recent study of SPS customers, we quantified and validated the value and impact SPS delivers to their business. 83% of customers said that the data in the SPS network improved their AI readiness. 87% cited improved scalability and 100% of the surveyed customers said that without the SPS network, they would need more headcount, more tools and more time or in some cases, simply could not operate at the scale they do today.

They see SCS as a strategic partner in navigating increasing supply chain complexity while they expand their business and trading network.

Chosen Foods, a premier food and beverage company, best known as America's 1 avocado oil brand needed a supply chain that could keep pace with growth across their U.S. and Canadian operations.

Over their decade-long relationship with SPS Commerce, they have scaled from trading partner to dozens of customers, multiple 3PLs and a growing supplier network.

To prepare for their next phase of growth, Chosen Foods migrated to a new ERP and trusted SBS to manage the transition. Through a fully integrated Acumatica deployment, SPS Commerce delivered a unified approach across their order to cash procure to pay and revenue recovery workflows ahead of schedule and with 0 operational downtime.

Crucially, with growing deduction complexities across major retailers like Walmart, Amazon and Target, CS' automated dispute management successfully recovered approximately 30% of outstanding deductions, which represents hundreds of thousands of dollars while helping chosen Foods identify why these deductions occurred and how to prevent them. Other customers realizing real ROI from SPS revenue recovery include Alete, a leader in infant health technology recovered $1.4 million within 6 months of using the solution including 100% recovery on our recent settlement totaling $423,000.

Serta Simmons Bedding one of North America's largest bedding manufacturers save $200,000 by successfully challenging a post audit with a large retailer.

Turning to our analytics business. SPS's new analytics solution is now running on a new enhanced platform that delivers significant gains in both power and scale. This new platform brings an improved user experience while enabling faster time to insight so customers can improve -- can move seamlessly from data to decisions.

It expands what's possible for customers, supporting growing data volumes, broader use cases and future AI predictive capabilities.

With these platform enhancements, our analytics solution helps customers protect revenue, margin and shelf space by catching risks early while uncovering new growth opportunities across products, customers, markets and distribution.

It also gives teams the agility and efficiency to act sooner align inventory, forecasting and planning while strengthening retailer relationships with a single view of performance.

Raffles, a children's clothing company based in Texas is leveraging the platform to gain significantly better sell-through visibility into one of the nation's largest retailers capturing critical insights from data across more than 400 retail locations and the retailers' e-commerce channel.

To sustain this momentum, automated data feeds and scheduled reporting will drive ongoing day-to-day analysis.

Early feedback from ruffle but on the platform's granular product and location insights has been highly positive, prompting this supplier to consider adding another major retailer to their reporting.

In summary, SPS' customer success stories demonstrate that navigating today's increasingly complex supply chain requires an intelligent network as businesses continue to expand across technology platforms and connect with new trading partners, they view SPS Commerce as a vital partner for scaling their operations and improving AI readiness.

No other company can match the unique combination of AI capabilities, 25 years of proprietary data deep domain expertise and an expansive network access to drive this kind of tangible value and collaboration that SPS offers today. With that, I'll turn it over to Joe to discuss our financial results.

Thank you, Chad, and welcome, everyone. We reported a strong second quarter of 2026. The SPS Commerce's core business, which excludes an invested 3P revenue recovery business grew in the high single digits, driven by the acceleration of 1P customer ARPU growth resulting from continued upsell and cross-sell momentum. .

On June 30, we announced the sale of the 3P revenue recovery business. We believe this divestiture sharpens our focus on the strategic opportunity with 1P suppliers who operate multi-retailer trading relationships and are positioned to benefit from our intelligent supply chain network and purchase additional solutions like fulfillment, revenue recovery and analytics.

SPS Commerce received a cash payment of $9.5 million at closing, we incurred a loss on sale of $23.5 million in Q2 2026 in connection with the transaction.

Now let's review our Q2 results. Revenue was $197.8 million, a 6% increase over Q2 of last year. Recurring revenue grew 6% year-over-year. As a result of the sale of the 3P revenue recovery business and its approximately 7,300 customers, the total number of recurring revenue customers in Q2 was approximately [ 46,650 ] and an average revenue per customer was 15,100. In Q2, ARPU skewed higher due to the divestiture's impact on our ARPU calculation which used an average of beginning and end of quarter customer counts.

Because the quarter and divestiture significantly reduced our final customer count, Q2 ARPU reflects full period revenue divided by a lower customer base. Adjusted EBITDA increased to $66.6 million, highlighting the health of our business as we scale, strong operational execution, the realization of past investments and benefits of improving process efficiencies.

Turning to liquidity and cash flow. We ended the quarter with total cash and cash equivalents of $173 million. Free cash for the quarter was $57.4 million, bringing our trailing 12-month free cash flow to $198.7 million, up 40% year-over-year.

In Q2 2026, we deployed nearly 90% of free cash flow to repurchase $51.2 million of SPS shares. Now turning to guidance.

As a reminder, as a result of the divestiture of the 3P revenue recovery business on June 30, 2026 guidance factors in a reduction of approximately $10.5 million to revenue to the second half of 2026.

The divestiture is expected to be neutral to adjusted EBITDA in the second half of 2026. For the third quarter of 2026, we expect revenue to be in the range of $196.3 million to $198.3 million.

We expect adjusted EBITDA to be in the range of $67.4 million to $69.4 million. We expect fully diluted earnings per share in the range of $0.72 to $0.76 with fully weighted average shares outstanding of approximately 36.8 million shares. We expect non-GAAP diluted income per share to be in the range of $1.20 to $1.23 with stock-based compensation expense of approximately $16.4 million, depreciation expense of approximately $5.4 million and amortization expense of approximately $8.5 million.

For the full year 2026, we expect revenue to be in the range of $788.4 million to $793.4 million, representing approximately 5% growth over 2025 at the midpoint of the guided range.

Excluding the impact of the divested business, we expect our core business revenue to grow high single digits. We expect adjusted EBITDA to be in the range of $264.6 million to $269.1 million, reflecting an adjusted EBITDA margin of 34% at the midpoint, an increase of approximately 300 basis points compared to full year 2025.

We expect fully diluted earnings per share to be in the range of $2.24 to $2.33, with fully diluted weighted average shares outstanding of approximately 36.9 million shares.

We expect non-GAAP diluted income per share to be in the range of $4.84 to $4.93 with stock-based compensation expense of approximately $69.8 million, depreciation of approximately $23.4 million and amortization expense for the year of approximately $35.6 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.

In summary, SPS' strong second quarter performance reflects the strength of our core business driven by upsell and cross-sell momentum. We continue to demonstrate operational rigor, exceeding our margin expansion goals while simultaneously rolling out our AI strategy across our network.

With that, I'd like to open the call to questions.

Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. Our first question today will come from Scott Berg with Needham.

I got a couple of questions. Chad, first of all, I want to talk about the divestiture of the third-party revenue recovery business. you've been pretty positive on the long-term outlook of revenue recovery in general. And I know that part has been a little bit of a store in your side, but why divested, why divested now were obviously a month ago, just help us understand the thought process to move on from that segment.

Yes, Scott. So overall, we remain very confident in revenue recovery. We're seeing the cross-selling to our fulfillment customers be good and also seeing new business come in as a kind of a new emerging category of SaaS solutions, where more of that positivity was though is on the 1P side seller. So that are selling primarily wholesale to multiple retailers, Amazon being one of those, but the 1P sellers really can use our whole portfolio of revenue solutions across multiple retailers, whereas the 3P business was -- those were more Amazon Marketplace sellers there didn't turn out to be a lot of overlap with the other parts of our portfolio for those customers. .

I think that, combined with the take rate revenue model and some of the policy changes in 3P we saw from Amazon. All clearly pointed out that the 1P side of this business is much more attractive for us and has much more overlap with our ideal customer profile than the 3P side does.

Got it. That's helpful. And then, Joe, I think we kind of probably understand the number of customers that are leaving the platform with the divestiture seems to be moving around.

But I guess I got a couple of questions on the ARPU side is one, are you calculating any differently than how the company has before I ask you to comment your revenue in the quarter, but obviously lower customer accounts exiting the quarter. And then I guess, secondly, in conjunction with that, how do we think about the impact going into Q3 because of the revenue step up.

Yes. So we didn't calculate it any differently. And I think because we kept the calculation consistent, it kind of skewed in the quarter. And the reason for that was, if you think about the way the calculation works, Scott, it's the average customer count in the beginning and the ending of the period. .

And so we had those 7,300 3P customers in the beginning customer account, but they weren't in the ending customer count -- and then that's compared against the revenue in the quarter and the full 3P revenue was in the quarter, but not the ending customer accounting.

So because of that, the ARPU overall skewed higher than it normally would have. And so that's just -- it's more of the impact in the quarter going forward, if you think about it, we'll just have 1P customers in the beginning of the end of the period.

And so it will be a little bit more consistent going forward than it has been than it was in Q2.

Awesome. And if I may ask a quick third question here, sorry, on the Medica. Joe, can you quantify what the third-party revenue recovery revenues were in the second half '25? I know you said the business is going to grow the rest of the year excluding that. But any further kind of quantification of that I think would be helpful.

Yes, Scott. So the only other color we're providing on 3P business outside of the fact that your point that outside of the divested business, then we'd be growing high single I think the other thing to call out on the full year is we called out the 10.5% in the second half of the year.

And you can assume the first half of this year was slightly lower than that. So you can kind of get a full run rate of the business for 2026.

And our next question will come from Dylan Becker with William Blair.

This is Jackson Bogle on for Dylan Becker. Maybe sticking on the revenue recovery side, now that the focus is solely on the 1P side of that business, -- how are you thinking about the level of resources and investment dedicated to that business going forward? Is that more -- is there more resources being redeployed toward fulfillment and analytics? Or does the retained 1P opportunity still warrant the incremental investment from here?

Yes. So the -- Jackson, the 1P business, I would say, is nearing consistent with our overall margin profile in the business overall. It wasn't that way right out of the gate with divest with the acquisition of Supply Pike and Carbon 6.

But as that has gotten more integrated into our overall business, it's more approaching our overall margin profile. So I wouldn't say it's an area of our business that is sort of receiving oversized investment at this point in time.

And I think the divestiture of the side of that business really helps us. I mean, because there's quite a bit of good customer overlap product portfolio overlap on the network with the 1P side, and definitely think that revenue recovery business is definitely in line with the margin profile of our overall business.

Got it. Super helpful. And then maybe as a follow-up, with ERP migration is still creating a little bit of timing noise.

I mean I would just be curious get your thoughts if you guys are seeing any change in like onboarding duration, I know you guys talked about the AI enabled customer onboarding.

So is that changing anything with like the customer readiness or attach rates once those projects are complete? Or maybe are there areas where migration delays are building like pent-up expansion demand that could release once these go-lives.

Yes. So we're super excited about the progress around agent onboarding -- we did have in the prepared remarks that we did the first fully agentic onboarding. Now keep in mind, that's with the more kind of simple onboarding that we have that's really taking things that would have been previously done in days and getting them down to kind of minutes.

With the more complex onboarding, which is really where we have all the ERP integrations, we do expect that we will continue to make great progress there. We've been making progress there over the last couple of years, speeding that up. That's led to a better customer experience has also helped us on the gross margin.

And as that was really done all before this Agente capability was applied. So we do expect to speed up those more complex ERP onboardings as well. There's just still a little bit more work to do there.

Once we have that in place, that speed to time on the network can be a barrier for adopting the SPS network. So we think any efficiencies we gain there will help with customers and speed up that access to the network.

I wouldn't necessarily say that there's substantial pent-up demand just kind of waiting for this. Admittedly, the ERP market has been a little bit slower in 2025 and so far this year, especially at the kind of medium to large end of that market.

But I do think our speed of onboarding with agentic ERP onboarding is going to be a massive differentiator for us and really speed up customer time to value.

And our next question will come from Chris Kingdee with Morgan Stanley.

Had, Joe, I think the question and ratings here. I want to hear your thoughts on maybe the macro environment and kind of what you're hearing from your customers? We're hearing about higher fuel costs, higher freight costs, the cape economy. I'm just curious kind of what you're hearing and seeing high level from your customers from a macro perspective.

Yes, Chris, I mean, I would say no substantial headwinds we're hearing from our customers relative to the macro we were coming off a tougher 2025, especially on the supplier side of our network where they did cite some headwinds related to tariffs and that did cause some contract rightsizing last year.

We anticipated that, that would dissipate this year as we kind of did get those contracts rightsized and they were onetime, and that's playing out as we expected.

And so I'd say no overwhelming headwind in the macro, of course, things like the fuel prices and still a little bit of looming tariff uncertainty, things that we continue to monitor. But those things are not coming up in our engagement with customers right now.

Got it. And then maybe, Joe, for you, just on the 1P customer counts. If I have my math right, it seems like that went down around 200 quarter-over-quarter. Is that right? And if so, curious what you're seeing on the community enablement side of things and new customer adds?

Yes. No, that's your calculation there is right. We were down a little over 200 sequentially on customer count. .

The driver of that was really just the timing effect of some of the retail enablement programs Keep in mind, those customers that are typically churning or adding that are primarily affecting that customer count tend to be the real low ARPU customers. That's why we're able to still deliver the financial results, even having that customer count there.

The overall pipeline for an enablement activity right now is strong. There's programs that we're running now that will contribute in the second half, plus the remaining pipeline that's to be closed in the second half looks positive.

That said, I would expect for the year were kind of flat to slightly positive on customer count, but I do expect some of that momentum from the second half enablement programs will carry into early 2027.

And our next question will come from George Kurosawa with Citi.

Okay. Great. Maybe if I could just ask about the MAX beta. You had some interesting anecdotes of customers saving in some cases, it sounds like hundreds of thousands of dollars.

I think you've done some work on market sizing. Maybe you could just share updated thoughts there on how you're thinking about a potential uplift maybe in a best case scenario or for a median customer and then how that maybe has evolved your overall thinking on packaging and pricing as the product portfolio continues to expand.

Yes, absolutely. So yes, as you noted and was in the script, we're seeing customers really identify different supply chain anomalies and disruptions using MAX, which today is through the chat feature, that's what they have access to in the beta.

And using that chat feature, they're able to get to some of those those problems in the supply chain get them resolved, and that's resulting in hard ROI savings for them. What we've seen through the good adoption of chat here, is that a lot of the things that customers are doing via chat would be possible to automate with an agent.

So today, it may take them 20 prompts in the chat to get to the right answer. We're seeing that that's something that actually could be automatic, automatically detected and potentially, in some cases, automatically resolved, which is great because we are developing those types of agents on top of this now.

And we believe that those agents that can do things more autonomously in terms of identifying these anomalies and in many cases, resolving them, not only finds the kind of hard ROI in the supply chain savings, but also is going to be a very favorable kind of headcount and efficiency impact for our customers.

So what we're in the process of now is converting the chat piece from the beta into a general availability, all newly deployed customers as of the last month have been onboarded with MAX included and over the course of the next several weeks here kind of through the summer, we'll be making it available to all our other fulfillment customers and we'll be doing that as part of their standard subscription.

But what we believe the major monetization activity will be is when we deliver those agents on top of that, that are more autonomous and self acting that customers will be willing to pay for that.

And that's really where the monetization would come in. And the way that, that would work is there be certain tiering or bundling of the packaging of those autonomous agents running on top and then we would monetize the customers through subscriptions to those bundles.

But what I'd say is it gives us high confidence in this approach is we're already seeing customers using Max Chat to get to these benefits in their supply chain.

And the things that they're finding and doing, we have high confidence we'll be able to automate with the agentic architecture over the top.

Okay. That's great color. And then 1 for Joe, if I may. Just looking at the change in guidance for the second half. It looks like from what we can tell, on the revenue side, it looks like basically the Q2 beat flowed through, excluding the divestiture impact.

On the EBITDA side, it looks like the full beat was not flowed through. So I wonder if you could just maybe comment if there's anything incremental spend, expense timing, conservatism, anything we should keep in mind on the EBITDA line.

Yes, for sure. I think on the EBITDA side, I think there's a couple of things that we contemplated. One, there was some movement of some of the expenses that moved out of Q2 into Q3 and Q4.

And so that was some of it. I think the other piece is we want to make sure we're being very prudent with the way we're approaching our internal AI costs. As we're building out this stuff for MAX, as we're building out our internal agents on the things we're doing internally, we want to make sure we give ourselves enough room to make those investments and make sure that we've got enough flexibility in the cost structure.

And so that's the other part of that and why we didn't flow all that through the year, George.

Our next question will come from Parker Lane with Stifel.

Chad, you talked about some of the advancements you're making on the analytics side of the house. It sounds like there's a new enhanced platform there. So it's good to see that.

I think the revenue side, it was up maybe 1% in the first half of the year. Can you just talk about what you're seeing from a demand perspective around that? I know you had mentioned that historically, it's been seen as maybe more discretionary, and that was an impact to that business last year.

But looking to the second half of the year, what are your expectations around analytics?

Yes. So we're really excited about this new technology revamp. I mean I do think it will help us on the sales side, some of the previous technology had gotten a little sale a little dated.

Our feedback from customers who are up and running on this new capability is, one, just the look and feel and ability to use the system and the prebuilt capabilities are much stronger than they were before, plus there's more tooling for customers to kind of do more on their own.

And then probably the most important thing in all this is it really changes the underlying data architecture of that product, which now sets it up for many more AI features that we'll be able to add to that over time.

So we are optimistic about that outlook for the Analytics business. I think the fact that it is a little bit more discretionary is true, still, but I think with this replatforming, not only will we be in maybe a little bit stronger competitive position, but we should also be in a position then to add more AI features, which I believe will be able to monetize over time.

Got it. And we're coming up on 2 years in the entry into the first party revenue recovery, space with the supply pike deal. I think at the time, there was about 300 customers that overlapped with SPS -- how have you -- how attach rates or adoption rates trended at the 2-year mark relative to back then?

And what are some of the learnings you guys have had on the go-to-market front and how to effectively cross-sell both both into the historical supply pipe base and back into SBS' base.

Yes. Absolutely. So we've had success in both directions, selling fulfillment to supply pipe customers. Obviously, that's not as big a population.

So it's been a little bit less impactful. But the big win has been selling the supply pipe and really now the Amazon 1P that came out of Carbon to the fulfillment customers.

And we've kind of harden that muscle, I'd say, around cross-selling in the organization. We've done some things organizationally to have that work a little better. We've done some things with the sales teams incentives.

And what I think is really powerful in all this is just the signals we get from the network, right? So the network actually tells us based on trading volumes and trading partner relationships who's the most likely candidate in fulfillment for revenue recovery.

And using that data, we're able to specifically go and target those customers, in some cases, come to them with an estimate even just based on our network data on what the potential is for them to recover.

And I think this is critical for us going forward. I mean we've been clear that we expect to drive a higher proportion of our growth on the ARPU. And of course, there's a big opportunity for more connections for fulfillment customers, but cross-selling our analytics and revenue recovery solutions to those fulfillment customers is key to that ARPU growth as well.

Our next question will come from Matt Van led with Cantor.

I guess following up on some of your comments that about the MAX monetization. I guess curious on what you're kind of baking in, in terms of the adoption cycle for existing customers.

And then when do you plan to have some of these bundles in place and, I guess, early stage, but what are you expecting as sort of the uplift if existing customers plan to adopt whether it's a middle or high tier, like how much uplift can they get on an annual basis?

Yes. Yes. Great question. So in terms of the adoption, I mean, if we were to judge it based on the Max chat adoption, I believe we'll have real strong agent adoption because we're already seeing customers sort of if they're onboarded with Max Chat, it's quickly becoming like the main interface point that they use when using any of our applications. They're just sort of starting in Max chat. .

And through that, then I can -- I believe that as some of the things that they're doing in Max Chat, we're able to automate with agents there will be strong interest in having that all be automated. So they don't even need to interact that much with the chat interface.

They still can, but some of the things that are happening on a daily basis or weekly basis or just get automated with the agents.

In terms of the timing of all that, we expect that we will be in a position to be selling agents kind of by late Q4 of this year.

Now obviously, that will take some time to flow through to revenue, but we do think we'll be in a position where we're actually monetizing this agent architecture still here this year.

Now the kind of the degree to which we're able to kind of do uplift on ARPU. That's some of the details that we're working through right now.

I do think the first set of agents that we put out are going to be probably more addressable for the more highly complex customers with more trading relationships.

And over time, we'll be able to bring that back down to more of our medium and small customers over time.

All right. Helpful. And then, Joe, you mentioned on some of the cost structure of it sounded like internal AI usage.

Maybe just help us with the time line of when internally you were really pushing that aggressively for a good portion of the employee base, just to get a sense for sort of when we might lap that and when growth could provide some operating leverage in the model, whether it's later this year or into next year beyond that?

What I would say there, Matt, is a lot of the leverage we're seeing out of the business right now is not based on some of the AI internal use cases that we're starting to talk about.

I think a lot of the efficiencies you've seen in this business have really been driven by economies of scale, just being more operationally efficient over the last 12 months, people looking internally and making sure we're optimizing each of our processes.

So feel really good about how we've somewhat strictly changed this business going forward without using AI. And if I think of the go forward and some of the things we've talked about, about the onboarding process on the go-to-market side, we believe that those will all be additive to some of the things we've already been able to accomplish without the internal use of AI.

So we feel good about the trajectory of the margin going forward, not only this year but going into next year.

As we exit this year, Matt, we'll have a little bit more color on how we think that probably impacts more of the longer-term focus of the business.

Our next question will come from Mark Chappell with Loop Capital Markets.

Chad, you've had a new Chief Commercial Officer on board now for a couple of quarters. I was wondering if you could just talk a little bit about maybe some of the changes that have been made or adjustments that are made to the sales structure, maybe customer segmentation or just even the coverage model for that matter? .

Yes. I would say we did evolve certain things in the go-to-market they were kind of -- happen to be in conjunction with Eduardo's arrival, but I think he's all in line with that.

Some of the things I mentioned earlier around driving a little bit more focus on cross-sell and aligning that as part of our incentive structure also done some things to segment the sales force a little bit more between new and existing.

That has worked effectively, especially on the retail side. And the other thing I would say is Eduardo and his team on our customer success are also responsible for all the customer onboarding activity, and that's an area where we've seen quite a bit of success in are continuing to drive more success as we identify that onboarding process.

So very pleased with the way that Eduardo has come in. He has brought some new ideas to the organization, having worked at some previous very scaled software businesses and just helping us overall mature our capabilities around go-to-market and I will add to part of that is marketing.

We brought in a new Chief Marketing Officer. She's really helped us on some of the demand generation things. I mean the company has been kind of in a luxury position to pretty much solely rely on these retail enablement programs as the source for new customers.

We believe that there over time will be opportunity for -- to drive more new customers through more traditional digital marketing capabilities, and that's something that Maria has brought into our organization.

So the combination is working quite well.

Our next question will come from Jeff Fan Re with Craig Hallum.

This is Daniel on for Jeff Van Re. On the beat this quarter, the last few quarters have been a little bit more in line. Congrats on this quarter, a really nice beat on the top and the bottom.

Just what played out in the quarter that drove the more-than-expected strength here in Q2.

Yes, I think a couple of things. One, we talked about is coming out of Q1. We're not seeing the same amount of pressure, especially on the downsell and gross retention that we saw throughout 2025.

So continues to be a real strength of ours that continues to grow year-over-year and feel really good about the progress we're making on that front.

And then we start to see more momentum within our existing customer base and adding new trading partners. I think we've talked about the land and expand model continues to be a big driver of our growth overall.

And so I think the combination of our ability to expand trading partners within our existing customer base and then the positive momentum on the GRR side were the 2 big drivers on the revenue overperformance.

Okay. And then on the customer count, obviously, that's skewed by the 3P customers exiting the count. But in terms of just the 1P counting down 250 sequentially.

Just thoughts on that, any updated thinking on expectations for customer growth, anything that changed there?

Yes. That was just really due to some timing of the retail enablement programs and how they contributed to customer count in the quarter overall, the retail programs that are up and running, and those are in the pipeline that we have high confidence into the second half that all looks pretty positive.

So I would the second half to contribute sort of a positive customer count but kind of coming in on the year, probably kind of flat to slightly positive on the customer count.

Our next question will come from Lachlan Brown with Roshawn Company.

Had, Joe, thanks for the questions. With your max beta customers, could you just rinse your confidence in being able to convert them when you make MAX generally available at the end of the summer.

Could you talk us through the go-to-market playbook that's in place to transition these accounts at launch? And I guess, any feedback from preliminary customer discussions would be helpful.

Yes. So let me start with the preliminary customer discussions. In this beta. We've been very engaged with customers. I think you can see from some of the detailed examples that we shared in the prepared remarks. We're really engaged with customers, understanding the ROI that they're getting out of MAX. And I'd say this is one of the nice things about having a tool like this.

I mean we see all of their interactions they're able to score their interactions. We have a separate agent that on top of their scoring goes in and scores the interaction. So we really can narrow in and see where customers are getting value out of the Max Chat capability -- in terms of kind of then upselling them from Max chat, which we're using kind of as a gateway into our overall MAX architecture we're going to target those probably larger, more complex customers that have high usage of Max chat -- and utilize -- work with them to convert some of the things they're doing with Max Chat into autonomous agents that we'll just take care of those things automatically for them.

And we think between the ROI that they're driving out of their supply chain and the efficiencies they get then from converting over from chat into an agent and an autonomous agent that there will be pretty high conviction from customers to move over to the more agentic approach, which will be monetizable.

Thanks. And looking at the implied Q4 revenue from the outlook, so just a nice step-up from Q3. Could you just help us on top of the main building blocks behind that acceleration? For example, are there any specific enablement campaigns scheduled for later in the year that gives you that visibility?

Yes, let's walk through a couple of things, and I a talk about it a little bit more on the enablement. I think a couple of things are going on in the business. One, I just talked about it a little bit earlier, the momentum we're seeing on the GRR side. So we continue to see improvements across our customer base.

And so we're in a much better position, I think, going into Q4 and the momentum we're seeing there than we were a year ago. So I think that's the other big driver. And then the second thing is is on the enablement side. We're seeing more of these campaigns come through. We're seeing momentum in the back half of the business.

We have a really strong pipeline. And so we believe there's going to be a solid number of these customers that land in Q4 that's really kind of driving that revenue in the quarter.

Yes. I mean I would just add, although we do -- we see some positivity kind of the big drivers in our revenue performance to finish out the year here are going to be more probably driven by the strong GRR that Joe mentioned in the ARPU expansion. .

We do expect to be positive on the customer count. But the customer count that we drive through these retail programs, certainly, while important, we want to get customers, we want to further penetrate that TAM, tend to be very low ARPU customers when they come in the door. So they are meaningful over the long term, but not as meaningful in the short term to drive revenue.

And our next question will come from Nehal Chokshi with Northland Capital Markets.

Congrats on good quarter. And congrats on the -- as well that the implicit acceleration in the business in the back half, especially in the 4Q here.

And it sounds like it's going to be driven by the improving GRR that you're seeing. Is that -- is the driver of improving GRR MAX? Or is it something else?

Yes. I would say it's a combination of things. I do think a little bit is macro. We did see some headwinds last year in our customer base that drove them to kind of rightsize some contracts. We're not seeing that this year.

The other factor is, I believe, we've made some improvements in our customer treatment strategy. I mentioned that both on the onboarding and also the way that we've organized the sales force to have a little bit more attention, I'd say, to existing customers.

And I think the new innovation that our customers are seeing us with with MAX, with adding revenue recovery to the product portfolio with investing in our analytics product. I think these are all things that show to our customers that they want to be a long-term partner with SPS Commerce.

[Operator Instructions] Our next question will come from Clark Wright with D.A. Davidson.

If we look at the growth mix after the 3P revenue recovery divestiture, how much of the growth now do you expect to come from ARPU expansion versus customer additions?

Yes. Cook, what we've said is kind of in our growth algorithm over the long term, we expect kind of roughly 1/3 of the growth to come from the customer count side and 2/3 to come from ARPU this year, it will obviously probably be slightly more on the ARPU side.

And then if you were -- if you take that to our current expectation for the business to at least high single digits for sort of that low single digits on the customer count and that kind of mid to high on the ARPU growth.

Got it. That's helpful. And then can you help me understand -- in your prepared remarks, you mentioned that SPS Commerce is uniquely positioned to provide agents to automate tasks. .

Can you help me understand why you're uniquely positioned versus other vendors in the market? And what that means going forward as you continue to invest to grow your competitive advantages?

Yes. Yes. So I mean we made that comment in the context of what we're doing in automating collaboration and supply chain transactions between trading partners.

And what we found that is really key to that is the data that we have on the network. So 3 main components there: one, of course, the customers' data on the network.

Often we have more of their supply chain data in our network than they have available to them in the ERP. It's just a broader set of data.

We also see all the kind of macro transaction patterns going across our network. So of course, we can't let 1 customer look at another customer's discrete data, but what we can do is look at trading patterns, especially across the major retailers.

So we may see some differences in the way that Walmart or Target are handling some of their suppliers and see that at a macro level and translate that into some that the suppliers to those retailers need to make? And then maybe most importantly, is over this 25 years of doing this, we have built out very deep proprietary databases of supply chain expectations at the major retailers and distributors in the U.S. have around compliance and supply chain expectations and a lot of this information we have is stuff that's not going to be available in a download of both vendor guide that they're going to provide.

And then a lot of them on the network don't even provide these types of vendor guides and so we're really able to train the agents on this proprietary database, and those agents are really able to guide these suppliers to execute their supply chain in a way that's going to be compliant with their retail and distributor customers.

And I'm 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 your lines at this time.

Good day, and welcome to the SPS Commerce Q1 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the call over to Irmina Blaszczyk. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us on SPS Commerce First Quarter 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. These documents are available on 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 the 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, Irmina, and good afternoon, everyone. Thank you for joining us today. SPS Commerce delivered a solid first quarter. Q1 revenue grew 6% to $192.1 million. Recurring revenue grew 7%, driven by fulfillment growth of 8%. Amid rapidly evolving global supply networks, SPS innovations are critical in addressing trading partner needs across the supply chains of manufacturers, retailers, logistics providers, and brands. Tariffs, geopolitics and risk mitigation are fundamentally restructuring global trade. In this environment, supply chain partners need real-time coordination to respond to disruptions, demand shifts and capacity constraints. And SPS is uniquely positioned to deliver the AI-optimized automation trading partners need at scale.

Before I provide an update on how customers are leveraging our AI-enabled solutions, I'll review current business dynamics across our product portfolio. First, with respect to our revenue recovery business, we continue to manage the headwinds from Amazon's policy changes. For example, to better align pricing with the value we deliver, we are introducing a subscription platform fee to our 3P take rate customers. Joe will be providing further detail. Second, we are pleased with our cross-selling momentum among 1P customers, and I'll share some examples of that shortly. And third, our business without revenue recovery is performing in line with our expectations, with early indications that the invoice scrutiny we observed last year as a result of tariff and macro headwinds is subsiding.

We continue to expect these transitory headwinds will be largely behind us by the end of the second quarter as we remain focused on delivering the solutions our customers need to succeed in a dynamic trade environment. A great example of how suppliers are realizing value from the SPS portfolio is Siete Foods, a customer since 2018. Over the past year, Siete made the transition from a high-growth emerging brand into an enterprise scale operation, driven by their acquisition by PepsiCo and rapid expansion across mass retailers like Walmart, Target, Whole Foods and Costco. As their scale increased, so did the complexity of their supply chain. We worked closely with Siete to modernize their operations and support their goal of full supplier compliance, while integrating tightly with their ERP to ensure they were able to handle higher volumes and evolving retail requirements with greater data consistency across orders, shipments and invoicing workflows.

Recently, Siete became an early adopter of MAX, SPS' AI agent, embedding our proprietary network intelligence directly into day-to-day operations. Their team is using MAX to quickly diagnose issues that previously required manual investigation, such as identifying why shipments failed or invoices were rejected before those issues impact their retail partners. MAX is also helping Siete surface broader operational patterns across thousands of transactions to address the root cause of inefficiencies, enabling them to scale and handle greater order volume with stronger compliance without adding operational overhead.

This customer engagement demonstrates how an SPS partnership evolves beyond trading partner connectivity and compliance to become a core intelligence layer within our customers' supply chains. Siete Foods is one of many brands participating in the MAX beta release, providing valuable insight into how agentic capabilities are being applied and where customers are realizing value across their workflows. For Siete, by catching undetected inventory failures, MAX is projected to protect up to 8% of revenue that would otherwise be lost to stockouts.

Based on feedback from more than 400 MAX beta customers, the biggest impact AI can have on trading partner collaboration is identifying issues early before they cause disruptions. MAX is already demonstrating its ability to do exactly that. SPS is also leveraging agents to improve operational efficiency. Early applications within our agentic network are already driving measurable gains in customer treatment strategies, reinforcing our competitive moat through proprietary network data and intelligence and reducing onboarding and setup time from weeks to days.

In parallel, product engineering has advanced significantly with much of our software development now agent-driven, accelerating innovation cycles and improving productivity. In sales, our data-powered growth strategy is using demand signals from customer activity across our network to identify upsell and cross-sell opportunities. As we continue to advance our network-led go-to-market motion, cross-selling momentum continues to build across our customer base. For example, fulfillment customers are expanding into revenue recovery, while revenue recovery customers are adopting fulfillment, reinforcing the strength of our network and the value of our integrated solutions.

Explore Scientific, a precision optics company that designs and manufactures telescopes, binoculars and other scientific instruments, was a supply-side revenue recovery customer. After spending over a year with a different EDI provider during their NetSuite ERP implementation, they faced ongoing usability challenges, unreliable workflows and incomplete automation, at times, requiring manual order processing just to keep pace. More importantly, these inefficiencies created downstream financial impact, with inconsistent data and limited visibility leading to shipment failures, invoice rejections, delayed payments, and revenue loss through deductions and write-offs.

By transitioning to SPS, Explore Scientific reestablished a reliable operational foundation. With a fully functioning ERP integration and standardized workflows across orders, shipments and invoices, they gained consistent, accurate data flowing across their business. This shift enabled their team to move from reactive problem solving to proactive management, identifying issues earlier, understanding root causes and preventing disruptions before they impact financial outcomes. As their operations stabilized, Explore Scientific expanded their use of SPS solutions, adding analytics and system automation to operate with greater confidence and control.

What began as a need to fix operational gaps has evolved into a broader transformation, positioning Explore Scientific not just to process transactions more efficiently, but to actively protect and recover revenue. Explore Scientific's experience highlights how customers are realizing meaningful value on the SPS network by restoring operational stability and visibility.

In addition to cross-selling our products, we are unlocking incremental growth opportunities by unifying them. For example, Walmart suppliers using SPS fulfillment can now recover overages directly in the SPS solution. This underscores the value of the platform approach and enables trading partners to collaborate better along the entire value chain.

In closing, SPS is well-positioned to capitalize on significant growth opportunities ahead. Our product portfolio continues to advance with AI-driven solutions for both suppliers and retailers powered by proprietary data that improves efficiency and unlocks meaningful value across supply chains. As a result, SPS is the leading intelligent supply chain network embedded in the daily flow of commerce, driving automation, insights and increasingly AI-powered optimization.

Lastly, over the past 16 months, we have added seasoned SaaS leaders to the SPS team who bring the operational rigor necessary to scale our product and go-to-market strategy. And today, I am pleased to formally introduce Joe Del Preto as our new CFO. Joe joined us on March 16, and we're excited to have his expertise on board as we enter this next phase of our journey. Welcome, Joe.

Thank you, Chad, for a warm welcome. This is my first earnings call as SPS CFO. I'd like to take the opportunity to express my excitement and share my reasons for joining SPS Commerce at such a pivotal time. First, I believe SPS is uniquely positioned to capitalize on the dynamics that are driving a growing need for supply chain optimization. Second, with a large global market opportunity, disciplined capital allocation and a clear path to scale, SPS is well equipped to deliver durable growth, margin expansion and long-term shareholder value creation. Lastly, and most importantly, having engaged with the management team and many SPS employees, I'm truly impressed by the strength of the organization's culture. I look forward to being part of such an energetic, driven, and highly collaborative team. I share the organization's strong sense of momentum and enthusiasm for the opportunities that lie ahead.

Now let's review our Q1 results. We reported a solid first quarter of 2026. The core business was strong and continued to show momentum throughout the quarter. However, as Chad called out, we continue to see headwinds in the Amazon portion of our revenue recovery business. Revenue was $192.1 million, a 6% increase over Q1 of last year. Recurring revenue grew 7% year-over-year. The total number of recurring revenue customers in Q1 was approximately 54,200. Consistent with our expectations, the number of 1P customers was flat sequentially, while the number of 3P customers declined by 400. ARPU was approximately $13,550.

As Chad mentioned earlier, we're generating cross-selling momentum across our network, and we remain strategically focused on servicing and expanding the 1P customer base, where we see the greatest cross-selling potential for our products. To improve profitability across our smaller customer cohorts, we are in the process of introducing a subscription platform fee to our 3P take rate customers to better align pricing with the value delivered while helping offset servicing and infrastructure costs associated with these accounts. We expect this change to increase churn within this cohort with a projected decline of up to 4,000 3P suppliers in 2026. We do not anticipate this action to result in a material impact to revenue.

Adjusted EBITDA increased to $57.9 million, and we ended the quarter with total cash and cash equivalents of $154 million. In Q1 2026, we deployed nearly 100% of free cash flow to repurchase $47.1 million of SPS shares.

Now turning to guidance. For the second quarter of 2026, we expect revenue to be in the range of $194.5 million to $196.5 million, which represents approximately 4% year-over-year growth at the midpoint of the guided range. We expect adjusted EBITDA to be in the range of $60.9 million to $62.4 million. We expect fully diluted earnings per share to be in the range of $0.53 to $0.56, with fully diluted weighted average shares outstanding of approximately 37.3 million shares. We expect non-GAAP diluted income per share to be in the range of $1.06 to $1.09, with stock-based compensation expense of approximately $19.0 million, depreciation expense of approximately $5.2 million and amortization expense of approximately $9.4 million.

As we look to the rest of the year, 3 dynamics are shaping our outlook. First, we continue to expect headwinds impacting the Amazon revenue recovery business. Second, excluding Amazon, we expect the revenue recovery business to continue to outpace overall company growth. Third, we expect our business without revenue recovery to continue to perform in line with our expectations. For the full year 2026, we expect revenue to be in the range of $796.0 million to $802.0 million, representing approximately 6% growth over 2025 at the midpoint of the guided range. We expect adjusted EBITDA to be in the range of $262.8 million to $267.3 million, representing growth of approximately 14% to 16% over 2025.

We expect fully diluted earnings per share to be in the range of $2.66 to $2.69 with fully diluted weighted average shares outstanding of approximately 37.3 million shares. We expect non-GAAP diluted income per share to be in the range of $4.73 to $4.76, with stock-based compensation expense of approximately $69.8 million, depreciation expense of approximately $23.0 million and amortization expense for the year of approximately $37.4 million. For the remainder of the year, on a quarterly basis, investors should model approximately 30% effective tax rate calculated on a GAAP pretax net earnings.

To wrap up, I'm encouraged by our momentum entering the year. I'm excited to be part of this driven team, and I'm committed to maintaining the rigor and discipline necessary to scale our success and fully capitalize on the market opportunity in front of us.

With that, we'd like to open the call to questions.

[Operator Instructions] Our first question comes from Scott Berg with Needham & Company.

This is Ian Black on for Scott Berg. When should we expect to see the 3P revenue recovery business start to trough?

Sorry, start to what?

Start to trough.

I can take that question, Ian. This is Joe. I think on the 3P, the way we're kind of explaining a little bit more is the Amazon revenue recovery side of the business. Right now, that continues on a negative trajectory. It probably troughs somewhere in the middle of this year, towards the end of this year. As we enter into 2027, we would probably see a little bit more momentum in that business. But right now, we still see a lot of headwinds in 2026 as it relates to that business.

And then you guys reported some delayed enablement campaigns exiting 2025. What's the progress of those campaigns?

Yes. So overall, our pipeline and activity on the retail relationship management campaigns is quite strong. Some of the specific campaigns that we cited in Q4 that we're going to carry into 2026 have now either closed or are near closure. So that momentum has continued. As these programs sort of affect customer count, keep in mind, there is some delay to actually run the program and get the suppliers on and initiate the invoicing with those suppliers. So we do expect that to affect customer count and be more impactful in the second half of the year versus the first half of the year.

Our next question comes from Parker Lane with Stifel.

Chad, I think you said tariff and macro headwinds that you started to see in the middle of last year should start to dissipate as we lap them this year. Obviously, we've seen more conflict in the Middle East and some talk about what that could mean for global supply chain. Any thoughts on what your customers could be facing or are facing as a result of that? And is there any belief that as you look through the year that, that could have any follow-through effect that maybe knocks that recovery time line off of the 2Q that you outlined?

Yes, absolutely. So we are seeing some of the contract scrutiny driven by the cost pressures from the tariffs from our customers begin to dissipate. You'll remember that most of that took effect beginning the latter half of Q2 last year. So we are cautious in watching sort of how we run through the final renewals that may be more susceptible to that on the annual renewal part of our business. As it relates to the broader kind of global situation, not yet seeing any indicators on that. And as I reflect on this situation versus the tariff situation, we were hearing from our customers more directly that the tariffs were a bit more acute to their business, just immediate impact on their cost of goods sold. And we're not hearing that type of thing from our customers at this point in time, given some of the more global situations that we have out there right now.

Understood. And Joe, maybe one for you. Welcome aboard here, by the way. I think you said about 4,000 third-party customers could churn off the platform as a result of the changes you guys are making. Comparing that to the roughly 7,300 today, what is it about those customers? Is it the smallest of them in nature that would churn off most sensitive to cost? Or is there something else that you would characterize amongst that base that puts them in the category of likely to churn?

Yes. So these are the very smallest of our 3P take rate only Amazon customers. And so they're, for one thing, just not having a high volume of recovery opportunities for us. So they're very, very low revenue customers. And so when we introduced this subscription fee to them, which is quite modest at $19.99 a month, we do -- could find ourselves in some situations with those customers where they periodically process a recovery, but don't feel there's enough volume there to pay a $19.99 per month subscription fee. And that's how we arrived at our churn number. So very -- they're very, very small revenue customers. And in fact, we have a cost to service those customers because they're up on the platform or monitoring their activity, all those things. So we do think that there's some benefit to us from a cost perspective to not service those very low revenue customers if, in fact, they do churn as a result of this platform fee.

Our next question comes from Dylan Becker with William Blair.

Maybe, Chad, starting with you on kind of early takeaways from the MAX program and how customers are kind of implementing it and seeing the value of the network. I guess, just any kind of incremental color you can provide? I know you had a couple of ROI case studies, but maybe also the opportunity outside of the prebuilt agents that you guys are kind of spinning up and offering to clients, maybe the opportunity for those clients to kind of get their hands on it and build their own agents over time, but just kind of how you think about maybe custom-built versus kind of prebuilt deployment over time there as well.

Yes. Great question, Dylan. So let's start with the -- what's happening in the MAX beta. We have 400 customers in the beta now, and the feedback from the customers has been particularly strong. What is interesting is where they're finding a lot of value out of this is when with the tool, they're able to combine their data in our network with the proprietary databases that we have on the major retailers and distributors supply chain expectations for their suppliers. So if you think about the differences that you have in the various rules in terms of shipping an order to a Target or a Walmart or Costco, when you can combine the nuances of some of those rules with your specific data, it allows you to answer questions around, hey, what's the difference for me to acknowledge an order from Target versus the time I need to acknowledge an order from Walmart and how may that affect my workflow.

So it's actually really interesting the things that customers are doing where they're combining these 2 data sources together. And a good example here would be like the one we had in our earnings script called Siete Foods, where they were actually able to use MAX to determine that they had actually more inventory than they -- I'm sorry, less inventory than they believed that they had. It turned out to be some transactions they were doing with one of their supply chain partners, where there were some very detailed things on lot codes and expiration dates that MAX helped them identify and then get their inventory position corrected so that they could make more commitments to sales to their customers. So that's just kind of a hard ROI example where MAX was able to help them with their inventory position and in turn, generate sales.

I think the second part of your question was around kind of customers building agents versus using the agents in the tool. Our approach here is really with the MAX Connect product that we've launched, which is really an MCP endpoint that gives customers access to their network data as well as these proprietary databases that we have around retailer supply chain expectations. We believe that some customers will utilize MAX right within the product itself, but there'll be other situations where the customers will want agent-to-agent interaction. And that's where our MAX Connect product fits in and that is able to handle agent-to-agent communication using MAX Connect.

Fantastic. And maybe for Joe, understand kind of the dynamics on third party, but the core business continuing, it sounds like to kind of track relative to plan. I guess if we think about some of the levers from a margin perspective, we talked historically about gross margin kind of being the biggest one, but it sounds like you have other initiatives underway and kind of maybe improving the unit economics of the third-party piece of the puzzle. I guess, simplistically, how reliant is kind of the 200 basis point target on the growth side of the equation? And how many kind of levers do you have to sustain that trajectory as we kind of navigate through some of these idiosyncratic dynamics?

Yes, Dylan, thanks for the question. What I would say is some of the stuff that Chad was talking about, some of the savings on the 3P side, that's a pretty small probably impact on the EBITDA and our ability to drive the 200 basis points. I think a couple of things -- and you saw this even in Q1, the ability to kind of overperform the guidance we gave. I think there's a couple of levers we have, and Chad mentioned some of this on his prepared remarks related to how we're using AI internally, right? We've seen some really initial success on the time to onboard customers and how much more efficient we can be when we onboard customers internally. He talked about the efficiencies we're seeing on the product engineering side and our ability to iterate much faster.

And so I think what you'll see over the rest of this year as we progress, and there's a huge focus internally on how we can use AI to be more efficient. And that's one of the things I'm really focused on. I think it's -- for me, it's really important as a CFO is working very closely with the IT team on where AI can add the most value internal. And so I do think we're going to -- you're going to end up seeing levers across sales and marketing, R&D and G&A throughout the year. So I think there'll be more to come on future calls on where we're leveraging AI internally to drive margin.

Our next question comes from Chris Quintero with Morgan Stanley.

Chad, Joe, welcome to the call here. I want to ask about the medium-term targets. Obviously, at least high single digits, guiding Q2 to 4% to 5% and totally understand the Amazon headwinds that you're seeing right now. But just curious, is that still the right framework we should be thinking about? And if so, how should we think about the path to getting back to that high single-digit growth rate?

Yes. Yes, Chris, I mean, we do believe that the high single digits over the mid- to long term is the appropriate growth rate for the business. As we both mentioned in the prepared remarks, the headwind is really coming very specifically from this Amazon revenue recovery piece. If you look at the other portions of our business, the revenue recovery without Amazon is growing faster than the overall business. And the business kind of excluding all revenue recovery is really executing per our expectation. So if you take out that headwind, you're definitely back in that high single-digit range, which is consistent with our mid- to long-term expectation for the business.

Yes. And Chris, I'll add a couple more data points there to maybe help you with your question. One, some of the Q2 growth rate, if you think about it sequentially, a lot of that on a year-over-year basis has to do with Q2 this year has the first full year, year-over-year comp for Carbon6. And so I do think that growth rate is probably not directionally where we're headed. If you look at our full year guide and the growth rate there, you kind of do the implied growth rate in Q3 and Q4 to get to the annual guide, you actually see pretty strong re-acceleration of growth in the business.

I think the last thing I'll call out is, and Chad alluded to this, if you remove the Amazon revenue recovery, for example, for our Q1 numbers, you would actually -- the rest of the business is actually already growing in the high single digits. And so I think there's a huge, huge part of our business that is growing in the high single digits. You just can't see it because we're facing these growth headwinds with this Amazon revenue recovery part of our business.

Got it. That's super helpful color and detail there on the core business. Maybe as a follow-up, I wanted to dive a little bit deeper on MAX Connect. we're increasingly hearing that businesses are choosing vendors based on their API strategy and how interoperable they are with broader agents, third-party agents. And so just curious how you're thinking about the openness of MAX Connect and maybe the monetization as agents leverage your network and your data.

Yes, absolutely. So I mean, first, I'd say we have been a very open and API-friendly in our product strategy. In fact, many of the ways our network connects to retailers, especially on the e-commerce and marketplace side is through APIs. So I think sometimes we're a pigeonholed as EDI being the only way we do it, but we're very open, very familiar with the API approaches. And of course, customers have always been able to access our network through APIs specific to the kind of agentic API or kind of more MCP type approach, yes, we think this is very important.

We realize that agent-to-agent workflows are the thing of the future. We're already seeing that inside our business as we deploy internal agents. And we think with that, the data that we have, both the, call it, transactional data, but I will really highlight these databases that we have of retailer and distributor supply chain expectations are very robust. And there are things that we built up over 20 years. Our customers tell us they can't find this information that we have built up over 20 years anywhere else. And that information, we even see it through the MAX beta is becoming very valuable.

And so I think exposing the combination of the network data and these proprietary supply chain databases together are also going to be powerful on the agent-to-agent communication coming through MAX Connect. And we will definitely be monetizing those interactions with MAX Connect over time once we get through this beta period.

Our next question comes from George Kurosawa with Citi.

Joe, look forward to working with you here. Maybe just to start on approach to guidance. This is a few quarters in a row where at least the revenue side has come in towards the lower end of the range. Maybe you could just talk through, has there been any learnings or shift in approach in terms of embedding more conservatism? It sounds like spend is improving. I'm curious if maybe that's something that has not been baked in that could be a source of upside. Just any thoughts there.

Yes. What I would say -- and great to meet you as well, George, and looking forward to working with you as well. What I would say is there's no major change in our guidance philosophy. I think one thing, though, that I want to call out, especially on the annual guide is I kind of mentioned this in my prepared remarks, the Amazon revenue recovery business is really posing a pretty strong headwind for us. And so when we thought about the full year guide, we wanted to make sure that we were factoring all the risks we're seeing in that part of the business. If you were to take that part of the business out, actually, the performance of the rest of the business is in line with our expectations. We actually saw some momentum coming out of Q1 into Q2. So we feel really good about that part of the business.

So I think as it relates to the guidance, I think the only change now is just making sure we're factoring all the risk related to this Amazon revenue recovery. I do think to your point, though, on the EBITDA side, I do think there is going to be upside. We raised the full year guide. We're exploring internally other use cases of AI. But overall, I would say, George, there's not a major change in like guidance philosophy.

Okay. Got it. That's really helpful. And then I did want to double-click on the Amazon revenue recovery. Can you just give us some details on the timing of the rollout of those pricing changes and just the -- maybe the translation of that into churn, just so we can get a sense of that 4,000 customer number, when we expect to see that start to flow into the metrics?

Yes. So we will begin rolling that program out into Q2 and the rollout will go into Q3 a little bit. I do think, though, the churn may happen over time. So we've thought about that even though we're rolling it out in Q2 and early Q3, the churn may come kind of throughout the year.

Our next question comes from Lachlan Brown with Rothschild & Redburn.

Chad, Joe, I appreciate that we're coming up to the cycling of the second quarter '25, where we began to see the lower document volumes within fulfillment. How have these trends been as we exit the first quarter? And just what's the confidence that we'll see strong growth year-on-year in the volume-based component of the business as we head into the coming quarters?

Yes. We definitely haven't seen a dissipation of that headwind related to contract scrutiny, which had customers looking at their document plans and any trading partners that they were able to reduce from their contracts. As we've moved here into 2026, we just haven't seen that same level of pressure that we've seen in '25. And as we've engaged with customers who have future renewals through the year, that does give us more confidence about that dynamic in 2026 versus what was definitely a challenge in 2025.

And with those 400 customers on MAX, how is the consumption usage been through the beta stage? Has that been over or under expectations? And just given you probably have a better understanding of the usage, just has that been helpful in formulating that monetization strategy for MAX?

Yes, absolutely. So first off, I would say the 400 number was above our internal targets. And I think that just speaks to the -- one, the communication of this to our customers, but also them being able to see the benefits to their business of using this even in a beta format. And, like with everything, we've seen some customers where there was really heavy use cases and some of that may -- typically the smaller customers, they're using it, but there's not a ton of volume, just there's not a lot of volume in their business. But all that's going into all of our thinking about how we plan to monetize that.

In fact, our current thinking right now, although we haven't formally come to a conclusion is that we will try to include MAX in a lot of our base subscriptions just to get customers using the feature and then -- but their usage would be throttled somehow. And then based on incremental usage, we have an uptick in their subscriptions based on that incremental usage.

Our next question comes from Joe Vruwink with Baird.

Just on the topic of AI increasing development velocity, you obviously spoke to that and how it's moving forward inside the company. But curious what you're seeing maybe outside the company in terms of suppliers or newer competitors maybe yielding that capability as well. And I'm wondering to what extent maybe AI making automation easier to build could start to remove a supplier or the type of supplier that maybe in the past would look to SPS Commerce to simplify their supply chain complexity and is now maybe thinking of doing that internally?

Yes, Joe, I think it's a good question. I mean what we're seeing is there is still this sort of fundamental difference between a do-it-yourself approach with these connections and being in a proactively managed network like SPS. So the majority of our competitors facilitate a do-it-yourself approach where you do need to go in and manage the connections. Now they do give you good tooling to do that. And more recently, they've given AI tooling to help manage those maps yourself.

But you still do need to manage it yourself, even if you have some level of agents or AI automating that. And we don't believe that for most customers, especially in the small to medium size, which is really the bulk of our customers, that they would ever get the efficiencies from the do-it-yourself approach that they would have in a managed approach. It's a managed network approach where we can make one change that a retailer has and immediately cascades to all our customers just generally leads to a more efficient approach.

The second thing I would say is we're right around the $13,000 average revenue per year for our customers. If a customer is really dedicated to writing out a lot of their enterprise IT stack, I think they're going to go to work on some bigger spend applications before they come down to their $13,000 a year connection to the SPS network. And I think that gives us some protection as well.

Okay. Great. That's helpful. Joe, maybe one for you, just to clear this up. You say the subscription platform change in the Amazon 3P business that's going to yield logo churn, but I think I also heard not a material revenue impact. That's the clarification because the revenue guide is also coming down and it relates to revenue recovery. So are you really saying that there are headwinds, but they're being absorbed in the 1Q, 2Q time frame, and that's really the source of change?

Yes. So Joe, I'll take that one. So kind of two different topics here. I'd say specific to the subscription fee and the churn of those customers, the reason why that's not that material to revenue, although the count in 4,000, the revenue from those 4,000 is quite modest. And for the ones that remain and absorb this platform fee, again, it would be modest, but there's some potential here for even a small revenue uplift there.

So if you kind of net those effects out, that's why we're saying that even with this new policy and the customer churn, there's not a revenue impact there. As it comes to the guide, the guide is really in the reduction in the guide, that's really related to overall headwinds from this Amazon space, which relate to the policy changes that Amazon has made. That's not really -- it relates to the amount of what we can recover for our customers. It's not specific to this introduction of the platform fee.

Our next question comes from Matt VanVliet with Cantor Fitzgerald.

Welcome aboard, Joe. Look forward to working with you again here. I guess when you look at the overall product road map that you had out over the last several months, maybe, how is the ability to get product to market faster using AI tooling in the development area, maybe pulled forward some of those ideas that were on kind of the nice-to-have list, but weren't high enough priority. Where in the business do you think you'll eventually sort of roll out functionality and be able to expand on that $13,000 per year average customer?

Yes, absolutely. So I'd highlight a few different areas that are pretty key to us driving higher ARPU on our customers. So one area would be in the broader revenue recovery business. We continue to execute on our strategy to build out to more retailers. So the more retailers we can support with revenue recovery, the more market that opens up for us there. And so that's been a key part of what we're doing. We're also making a number of enhancements to our analytics product and the underlying technology there and our analytics product to provide some more data access and even AI capabilities within the analytics product, which we're optimistic about.

And then continue to advance our strategies around ERP connections. As an example, we've had a long-standing partnership with NetSuite, making some investments in our NetSuite technology. So customers using NetSuite together with the SPS network can get more full features there. So those would be a few examples of things that are underway in our product road map and have benefited from some of the velocity changes we're experiencing using agentic engineering.

All right. Helpful. And then maybe on the other side of that, how does it sort of raise the bar in terms of an appetite for M&A and maybe what the type of targets you're looking for and ultimately sort of what the outcomes and potential synergies of any future M&A might look like? And Joe, I would love to hear kind of your initial viewpoint on what the M&A strategy might evolve into.

Maybe I'll start first and then Chad can talk about what areas might be interesting. What I would say right now, though, Matt, overall, we're really focused on running the business. And then I think after that, from a capital allocation standpoint, we're focused on buying stock back. And you noticed we bought almost $50 million back, about $47 million in Q1. The Board has authorized up to $300 million in total. And so I think from that standpoint, that's going to be our major focus right now to run the business buy back shares. And then I'll let Chad talk about if we were to get back into M&A, what that might look like or the areas that might be interesting.

Yes. I mean I think Joe is absolutely right. I mean the most efficient use of our capital today is buying back shares. But certainly, over the long term, we view M&A as part of our strategy, really coming from 3 different areas. I mean there's still room to further consolidate in the EDI market. There remain players there. And every time we've added an EDI company, the customers have got more benefit in moving to the SPS network. And those have been very efficient transactions for us, and there's still opportunities out there.

The other area would be broadening our product solutions for our supplier customers as we are driving more and more cross-selling now and that discipline on cross-selling and expanding the ARPU is really getting built into our go-to-market teams. I think we'll have more confidence over time of adding to the product portfolio for those cross-sell opportunities. And activity outside the U.S. has been strong and was strong in 2025 as well. And I think as those businesses outside the U.S. scale, there could be longer-term opportunities to add more scale with acquisitions outside the U.S.

Our next question comes from Jeff Van Rhee with Craig-Hallum Capital Group.

This is Daniel on for Jeff Van Rhee. In regards to the pricing increase for 3P customers, Chad, just the timetable of that, how -- when you came to that conclusion and particularly the degree to which that had already been anticipated in the guidance?

So I'd say overall, I'll answer kind of strategically, and Joe can comment on what was not contemplated in the guidance. So if you look at revenue recovery, if you go all the way back to -- we first entered this with Supply Pike and Supply Pike was 100% subscription business and gave us a broad retailer coverage and a lot in Walmart, but not much in Amazon. We thought there was an opportunity to quickly gain the world's 2 largest retailers in Amazon and Walmart by acquiring Carbon6. The Carbon6 revenue model was more of a take rate model where we just took a portion of what we recovered from customers.

So we've always had these 2 revenue models, and we did have a belief that there are probably portions of the 100% take rate business that we might be able to convert over to a more predictable subscription model or kind of a hybrid model over time. So that's always been a part of our thesis. And so where we decided to start on that was with the very small 3P customers and in particular, those that because they're small in revenue, had some cost to serve question relative to the revenue that we were getting from them. So that's really how that all came about, and I'll defer to Joe on how that was impacted in the guide.

Yes. On the guidance side, I think Chad briefly mentioned this earlier, it's kind of revenue neutral. We believe that there will be some churn and these customers are pretty low value, but I think that will be offset by the customers that do accept the fee. And so I think from a guidance standpoint, you could pretty much assume like a net 0 impact to revenue for the rest of the year.

Okay. That's helpful. And then just for you, Joe, as you're coming on board here, just you could share some of your thoughts on the opportunity you see at SPS to you here? And then any of your top priorities, I know you're early in the seat, but any of your top priorities as you see them stepping into the role?

Yes. I think for me, the things I'm focused on are a couple of things. One, I'm ramping on the business as fast as I can and the industry, right? I want to make sure I have enough understanding to help drive the real strategic business decisions that we need to be making here at SPS. I think the second area is to keep driving the EBITDA that we've seen in this business. They've done a really good job historically driving EBITDA, and I want to make sure we stay on that course. I mentioned this earlier, I think there's real opportunity on the AI front internally to drive leverage, and that will be something I'll be laser-focused on. So those are probably the 2 top priorities for me.

I think at the highest level, to your point, like what are the opportunities? I think Chad has touched on this. The network that we've built between the retailers and suppliers and our ability to use that data and that proprietary data that we have and apply AI against it is a huge opportunity. I know we're very early on the MAX side, but I think there's a lot of upside on where this business can go when you start introducing AI into the product set.

Our next question comes from Mark Schappel with Loop Capital Markets.

Chad, a question for you. There's a new Chief Commercial Officer on board. He is now on board for a little over a quarter now. With the recent expansion of your product portfolio into revenue recovery and AI, maybe you could just talk a little bit about how the commercial team is kind of streamlining the cross-sell motion just to ensure that these products are effectively adopted by your current client base?

Yes, great question. So I would go back and say a lot of the go-to-market motion at SPS historically was focused on acquiring new customers. And as we've established the market-leading position that we have and moved a little bit further in the TAM, there certainly is an opportunity for new customers. But we've been quite open that the larger driver of growth is for us to expand the ARPU with our customers. First and foremost, expanding their total usage of the network. So the majority of these are fulfillment customers where there's still an opportunity to add more connections and features on fulfillment for them to use.

And then secondarily, the cross-sell of revenue recovery and analytics and as we move into the monetization of MAX, obviously, the cross-selling of MAX. So in response to that strategy, I would say both from a sales and marketing standpoint, we focus quite a bit on the engagement with customers and the relationships that we have there, looking after the full customer life cycle and making investments there on customer treatment strategies so that we can retain and grow our customers. And it's not to say there wasn't a track record of doing that, but I think there's just a new operational rigor that Eduardo, together with our new Chief Marketing Officer, Maria, have brought to the organization around those muscles for expansion within existing customers while simultaneously having a very strong motion, especially on the retail side to continue to add new customers.

[Operator Instructions] Our next question comes from Nehal Chokshi with Northland Capital Markets.

Yes. Good to see that the guidance implies that on the back half of '26 that there will be an inflection in the overall revenue growth rate. Now given that the core business or, I guess, excluding the Amazon 3P is already growing high single digits. What is the driver for the inflection in the growth rate that is implicitly being projected here?

Yes. So Nehal, I think the right way to think about the dynamics of the business right now is we have an Amazon revenue recovery portion of the business where there is strong headwinds -- that's frankly, reflective of coming in at the lower end of our range this quarter and the reduction in guidance driven by that effect. That effect is based on policy changes that Amazon has made, which have reduced the amount of revenue that we're able to recover on behalf of our customers there.

Then think about the next portion of our business is all of our revenue recovery business, excluding the Amazon. So this is for all the other retailers, Walmart, Target, Lowe's, Home Depot, all of them. This is growing very nicely. We're seeing great cross-selling momentum in this part of the business. And this part of the revenue recovery is growing faster than the overall business, and that was consistent with our strategy when we entered the revenue recovery area.

Then think of kind of our core business or kind of all of our business without revenue recovery, that is growing consistent with our expectations, and we're seeing some positivity in that some of the challenges we saw in 2025 with downsell and contract scrutiny, they are not at the same level in 2026, and our forward visibility on that is quite positive for the balance of 2026.

So as you think about those sort of 3 segments, are you basically saying the core business is inflecting up in growth because you're basically anniversarying the scrutiny in 3Q?

Yes, that's a large effect of why that's there. We're sort of lapping some of the negative effects we had in 2025. It appears that those are more onetime in nature for 2025, and that will lead to a reacceleration in the back half of '26.

And so if the business, excluding the Amazon 3P is already at high single digits, does that then imply that there's -- it's going to inflect further up beyond high single digits in 3Q '26?

Yes. Right now, we're probably not getting into that outside of our guidance, I think that's what we're committed to. And to the extent that we, throughout the year, getting ahead of that guidance, we'll update you. But right now, I would say is that we would stick with the annual guide that we gave you and where the business will come in and then understanding where the current business is outside of the Amazon revenue recovery. But if that changes throughout the year, we'll let you know.

At this time, there are no more questions, and this concludes our question-and-answer session. Thank you for attending today's presentation. The conference has now concluded. You may now disconnect.

All right. We can go ahead and get started here. So thank you, everyone, for joining us here this morning. My name is Chris Quintero. I am the supply chain software analyst here at Morgan Stanley. And I'm really excited to be joined here by the SPS Commerce team. We've got Kim Nelson, CFO; Chad Collins, CEO. Thank you for joining.

Thank you.

Thanks, Chris.

For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So to kick things off, maybe for investors who are less familiar with the SPS Commerce story, give us a quick overview of what you all do, some of your key products, who are your core customers?

Yes, absolutely. So we operate the world's largest intelligent supply chain network with a focus on retail and distribution industries. And so across our network, retailers and all of their suppliers are able to exchange information about their supply chains, usually around the buying and shipping process. And we have 50,000 participants and 300,000 unique connections on our network. And the way that we monetize all that is typically by working with the retailers who will gain us access to all of their suppliers to help them digitize all those connections with their suppliers. We'll monetize the suppliers for use of our network by the number of connections they have on the network as well as the data that flows across that. Then also on top of that network, we have analytics capability where we pull in data from point of sale.

So the actual end location where products are being sold in retail and clean up that data, service that back. That's great for suppliers because it's very important in their supply chain planning to understand exactly what's being sold at the endpoint. And then we have a new category on the network that we built out through a couple of acquisitions and product development over the last couple of years in the area of revenue recovery. So this is the charge-backs if you have a supply chain error or the penalties that retailers will charge their suppliers for those errors.

Oftentimes, those penalties are not legitimate penalties. And so we help our supplier customers get money back from the retailers when they're erroneously charged for penalties in the supply chain.

Awesome. Kim, after 2 decades at SPS Commerce, you're retiring. So congrats on the retirement here. Joe Del Preto who is joining as CFO. So curious from both of your perspectives, what are some of the key financial priorities you're really excited by him taking over? And what is his perspective going to bring into the company?

Yes. Well, I can start with some of the process we went through. So what I would say is very typical with SPS. We do a lot of succession planning. It's a multiyear process. We want to make sure everything is done in a way that is very seamless. So there's also a nice transition. So both Chad and I obviously were heavily involved in the process as well as the Board. And one of the things that really stood out to me with Joe, he is already a public company CFO. He already is -- has a lot of experience and expertise in the SaaS and the software space.

So from the -- I start there because of investors here in the audience, you are in great hands with Joe, and there's actually a ton of overlap even in the banks that cover SPS and cover where his former employer was. I also think that a focus on really that balanced approach, meaning lots of opportunity to continue to grow, huge opportunities still in front of us with the TAM, but we can do that in a way that also is very profitable.

So we drive a lot of cash flow. We also have the opportunity to expand margins. He brings all of that sort of discipline and skill set. And I would say his approach fits in very well with sort of our strategy, our vision, our culture, our environment. And I think it's going to be great to have him added to the ELT for Chad, and I feel like in great hands for what I would call inning 2 for SPS.

Yes. And I think he's well aligned just to this balanced approach that we have of growth and profitability. We're obviously in a strong position to already generate a lot of cash in our business. Lately, we've been able to utilize that for share repurchase as well, which has been great. Joe is very much aligned with this approach. But I'd still say we've committed 200 basis points of EBITDA margin improvement going forward in the business. And so without sacrificing our long-term opportunity, we do think as we scale, there's continued opportunity for margin expansion. We've showed a lot of that through the gross margin. I think that will continue. And Joe is very much aligned with that disciplined and balanced approach that we'll use going forward.

Let's jump right into the AI debate. Clearly, a lot of investors are concerned about the terminal risk value across all of software, and so from the SPS Commerce perspective, curious what's really your competitive moat? What makes you really defensible against some of these risks from AI startups, large language models.

Yes. So I'll just say -- I mean we're super excited. I know the sentiment for software companies isn't that great out there, but we're seeing, day in and day out, both with new capabilities that we're adding to a product like the new MAX agentic capability we built right into the network, and we've got 3 features that are out in beta right now with customers. We think customers are just going to be able to do the things that they have been doing with SPS in a much more efficient way using this agentic technology and will likely unlock a few new use cases through it as well.

We're also really excited about how it's going to affect our internal operations. We are already seeing big strides in the software development process and how we've agentified a lot of steps there. We're moving on to some of our customer relationship management and how we interact with customers and seeing what steps can be agentified there. So I'll just say, like internally, we're very bullish and excited about these technologies.

I think with the disruption story and compared to some other SaaS companies that are out there, we do see a few things that put, we believe, SPS in a strong position. I mean, first, the data that we have on our network. Data drives a lot of these agentic use cases. And we think we're in a strong position there, both by having the customer-specific data and allowing them to access that data through other workflows and MCP access but also the broader network data that we have, which can be very valuable if served up in the appropriate anonymized ways.

The other thing is we're not a seat-based -- we've always been usage-based. So really, the primary drivers of our model have been about how many trading connections you have on the network and how much information you're flowing across the network, which I think is tied more to how customers are getting value from our solutions.

And then finally, I'd say we're not the largest ticket size, either in most IT organizations. Our average revenue per customer is around $12,000 and so if an organization is going to try to write out some of their other IT applications using agentic technology, I don't think SPS Commerce is going to come to the top of that list nor do I think it's an area they want to go after first, right? We're very sticky. We're core -- I mean for most of our customers, this is the main way they get all their orders from the customers. So it's pretty important for them.

Yes. Yes. So it's small ticket size within the broader kind of IT budget department, it's that usage-based model, it's the customer and the network data that you all get.

Absolutely.

You mentioned it a little bit, let's dig into MAX. Some of the new agentic AI capabilities you all have rolled out. I think there's 3 components. So maybe give us a quick overview of what it is and what makes you really excited about it.

Yes. So first, just from a technical architecture perspective, I think it's important we have our underlying network in all the applications that we sell to our customers are connected and riding on this network. So it kind of has become the platform layer, if you will, for SPS Commerce. And that's the level where we've built MAX and built that agentic capability. And then that allows us to serve it up as specific features in the application level. And so the first 3 features we've done are in our fulfillment product.

So the first is MAX Chat and MAX Chat is right in the user interface. So it has context of where you're at in the application and what you're working on and 2 primary pieces of data that are really helpful that MAX operates on. One is the data that you have in the network. So those could be orders, invoices, et cetera. But probably just as importantly, is MAX has access to all our proprietary retail knowledge in the organization.

So this is -- of course, the rule books that are published by the retailers, but we have 20 years of augmenting all of that with all the specific supply chain requirements that retailers have. And MAX knows all about that. So that allows you to do things like go into MAX Chat and say, "Okay, MAX, what is the time I have to acknowledge a Target order versus the time I have to acknowledge a Walmart order?" and MAX will tell you all the rules that are different about that. And then you can say, okay, "given this, go look at all my orders, MAX, and tell me which orders I need to acknowledge in the next 4 hours to be compliant with Target or Walmart." So kind of a simple example there, but if you start seeing how this combination of your data, plus all these proprietary retail rules can work together to execute that workflow. So that's MAX Chat.

And then MAX Monitor is basically a dedicated agent for every connection you have on our network. So an agent that's looking after all of your connections to all of your customers of course, making sure that, that connection is technically up and running and viable, but maybe more importantly, looking for anomalies on that connection. So if you normally get your orders from Walmart that come in on Tuesday, and they have to be shipped on Thursday. And now it's Wednesday, and you haven't received your Walmart orders, that's something that MAX Monitor will pick up on and identify that.

If you usually send all those invoices for those shipments on Thursday afternoon and now it's Friday morning and you haven't invoiced your customers, that's something the MAX Monitor will pick up on.

And then the final feature is called MAX Connect and MAX Connect is an MCP endpoint, which allows for agent-to-agent communication. So because of the data and rulebook and rich information we have, we do realize that we will play a role in workflows across the enterprise that are going to be driven by agents that are not necessarily SPS agents. And we did something cool at the field kickoff we just had a few weeks ago, where we had one of our large ERP partners. We had our MAX and we actually interacted with both of those together via Claude interface. It could have been any LLM, but then that interface was able to go across data that's in our network, data that was in the customer's ERP system and really provide some unique context around both of that.

And so you can see how those agent to agents can execute workflows that are going to be multi enterprise workflows. And then we think that we'll be able to monetize all those interactions over time once we get out of the beta phase.

Yes. Yes. I know it's a bit early, still in beta phase, but curious what's been some of the early customer feedback? And if you thought, how are you going to monetize this?

Yes. So early customer feedback has been extremely positive. We're somewhere between 50 and 100 customers right now that are actively using this in beta form and I think the most important thing is a bunch of those customers have come back and said, "Hey, don't take this away from me." So I think that's a good sign. And in terms of the monetization, we're still working through that. Expect it to be some kind of monetization to pay a fee to gain access to these features and then have that scale based on the usage of those features based on some sort of usage token concept, most likely.

Got it. Let's talk about the retail sector. It's a big part of the customer base that you all serve here. So I'm curious how those industry dynamics have shaped kind of your growth rate over the past few years? And how do you think about that industry dynamic going forward and how it impacts your growth?

Yes. So we have seen some changes in the retail landscape. Obviously, if we go back to the pandemic period, the pandemic was a big acceleration of retailers' omnichannel initiatives as the shops closed, as buy online, pick up in store became more important as there was a global trade situation where people couldn't get access to certain products, there was a diversification of the supplier base, all of which were favorable tailwinds for SPS Commerce. And because of our land and expand strategy, a lot of that carried out through sort of 2023 time frame. More recently, what we've seen is as a result of some of the global trade policies, a lot of the suppliers on the supplier side of our network have had a lot of just general cost scrutiny in their business as their cost of goods sold have gone up from the tariffs. They've looked at other places and then sometimes, they have found that they were potentially oversubscribed to certain elements of the SPS network.

And so in 2025, we did see a little bit more pressure around contract scrutiny, contract reduction from suppliers. We did not see our customer churn change that's always been constant, but a little bit more pressure on those contracts. We're optimistic. We haven't quite lapped that liberation Day, but we are optimistic that through 2025, we did get those contracts rightsized, and there should be some positive effect as we lap some of those effects we saw in 2025.

Got it. That's helpful context. And one of the concerns I hear from investors is that EDI has been around for a while. It seems like you all are already pretty penetrated from a customer perspective, but you all have put out $11 billion, refreshed TAM, only about 25% penetrated per year analysis into that customer opportunity. So curious about that remaining 75% of customers that are out there. What are they using today? And why they have not been SPS Commerce customers so far?

Yes. So I'll share a couple of examples of customer stories that I think illustrate this. So first, on the retail side, in the last couple of earnings calls, we've highlighted the work we've done with Trader Joe's. So everybody knows Trader Joe's, big neighborhood grocery store. We've actually worked with them for a number of years, and they were really focused on the kind of higher-volume suppliers and getting those digitally connected. In more recent times, we went to them and highlighted all the benefits of having all of their supplier community digitally connected.

They agreed with that, and we ran a successful 100% targeting program with them. Now they're also implementing our supply chain performance management. So it just shows there where, yes, they were doing EDI before but not for all of their suppliers and now seeing the benefits. And so we do see that at retailers where -- of course, they're doing EDI, but maybe not with the full tail of their supply chain. And there is a strong business case to get 100% of your suppliers digitally connected.

Conversely, on the supplier side, I was meeting with a customer who had 2 or 3 of their retail trading partner connections with SPS, but did not have all 25 of their retail trading partner connections with SPS. The 2 that they had, they -- we had actually encountered them through one of our retail enablement programs. And as I sat with them and explained the benefits of getting all 25, they started to see that, hey, if they were connected to the SPS network for all 25, they'd have 1 seamless way to get all this order and information in and out of their ERP system and have a consistent internal operation by being connected to the SPS network. So that's the other piece I highlight.

There's still an opportunity within existing customers for up to us to upsell more trading partner connections in the same account because certainly, we have customers where we absolutely have all of their suppliers. We still have other customers where maybe they're going and downloading certain orders from certain retailers from a portal or getting them e-mailed. And so there really is a benefit of just getting all of their trading partners connected via the SPS network.

Yes. So you've been working with some of your long-standing retail relationships for getting all their suppliers on to the SPS network. If we move on to the ARPU side, you all have given out a new growth algorithm, organic high single-digit growth, at least high single-digit growth. Most of that coming from the ARPU side. So curious from your perspective, as you look forward, where do you expect most of that to come from? Is it the cross-sell, document volumes, connections, where is that growth going to come from?

And on that, maybe if we go back to that TAM, so we do have a global $11 billion TAM within the U.S. $6.5 billion. And then if you look at the 2 components of that, on the U.S. side, it's a little less than 150,000 on the customer side, but up to 45,000 on the ARPU. And so that shows you there's a very large opportunity to ARPU. So now to that point on ARPU there's an opportunity once you've landed the customer, there's ways in which we can upsell as well as cross-sell. Historically, upsell has primarily been that go-to-market muscle and motion. So as Chad talked about, we might initially connect with that supplier through a retailer. We get that one connection. But then that supplier has other connections, other retailers they're doing business with. It's an opportunity for us to win those additional connections. That's that upsell motion. We've proven and demonstrated that for 2-plus decades in that opportunity of increasing ARPU. There's still a very large opportunity there. However, we also now have cross-sell opportunities. We have an analytics product and more recently, we have this revenue recovery product.

So what's great about that is those give opportunities to even surround our customers, not just with our core fulfillment but with other ways in which we can help them in other products. So our TAM does take that into account. And some of those, I also think might be a little bit more relevant for more of those medium and larger-sized customers. So it's a smaller quantity of potential customers, but a very meaningful ARPU associated with that.

Right. The retailer-directed solutions from the Traverse Systems acquisition. I've said this multiple times, but I think that's really interesting and kind of you've always worked with retailers for a long time on the go-to-market side, but now kind of providing more products to them directly. So how do you think about building out that retailer solution product portfolio?

Yes. So really with what we got with Traverse, the supply chain performance management, that was the first offering kind of away from EDI connectivity for the retailer and that relationship management service we provide, but it was very logical because the core reason for the retailer to have all these digital connections is to improve the supply chain performance with their suppliers. But what we are finding with engaging with these retailers is, they didn't have good ways of measuring that. And that's exactly what the Traverse -- the product we got from Traverse has done is provide that whole performance management and score carding.

So now we're able to come to the retailer and say, actually, the ultimate thing you're trying to drive here is better supply chain performance from your suppliers. Here's a tool to measure it. And oh, by the way, step #1 in that process is ensuring you have strong digital connections with all of your suppliers. And that's working very well.

Admittedly, it was a big shift in go-to-market for us to combine this more performance and supply chain-based discussion, but things are looking good in that engagement. And I do think that there over time will be an opportunity to have a product portfolio that's around supply chain performance that retailers will be willing to pay for.

Yes. Let's talk about that go-to-market motion. You all talk about those community enablement programs. Maybe give a quick overview of what those are. And then you've also talked about a network-led growth motion more recently. What is that? And how are you kind of leveraging those network signals to drive upsell, cross-sell?

Yes. Sure. So first, on the retail side, we have an offering that we call relationship management for retailers that is really a process where we go through with the retailer to ensure that they have all of their suppliers digitally connected and compliant. And the way that suppliers can do that, of course, is by joining the SPS network, and we ensure their compliance across that network. The other option is that if suppliers have another means we will do a testing and certification process on behalf of the retailer to make sure that there are suppliers that are coming in that aren't on the SPS network are compliant.

And that motion has worked very well for the company for a number of years because every time we run 1 of those programs, those retailers and distributors are giving us their full list of suppliers. And so it's like a built-in lead generation motion for us. And we do expect that, that will continue, both in working with new retailers, but also going to retailers that we've worked with historically and either doing new fulfillment models, which typically introduce new vendors or suppliers into that and establishing what we call ongoing supplier onboarding where we're just baked in to that retailer or supplier onboarding process, and we get access to every new supplier that they bring into their assortment.

Then on the network led growth side, this is really around how do we look inside our network and see our customers' trading activities that gives us signals to what we might be able to upsell them or cross-sell them on next.

Of course, the usage of the network is 1 area where we can monitor that and do monitor that and drive upsell but also looking at our customers and looking at the volume that they're doing with certain retailers where we do offer revenue recovery for those retailers or we do offer analytics for those retailers. And then based on those volumes would lead -- could send us a signal that tells us they're a likely candidate for cross-sell of revenue recovery or analytics.

And then how is that progressing so far? And when do you expect that to really start contributing meaningfully to the results and the top line here?

Yes. So this year, we have put in place incentives and expectations for our fulfillment sellers around cross-selling objectives, both analytics and revenue recovery. And as part of that process, there's tooling that allows them to get those signals that come off the network. Definitely, there is a shift underway at SPS, where we're developing more of the upsell and cross-sell into our sales methodology to drive that ARPU growth where I'd say, more historically, the company has really been driving most of the growth of the retail programs and access to new customers that have come through that. It's not to say that motion stops, but we want to augment that with a stronger upsell and cross-sell motion in the sales force.

Let's talk about recent results. You all called out some macro weakness over the past 3 quarters and the 2026 revenue guidance came in a little bit at the lower end of your target here. So curious if you can unpack what are some of those drivers that led you to that guidance? And what's the path to getting up towards the higher end?

Sure. So when we think about the guidance, it takes into account how we exited '25. And as you know, with subscription business and SaaS models that sort of -- your starting point matters then as it relates to your GAAP revenue for the next year. So we took that into account. And we also acknowledge some of the dynamics or the headwinds that Chad mentioned as it relates to some of the supplier purchase behavior where they might be down selling, et cetera, and some of those sort of macro headwinds and pressures. So we are still lapping some of that. So when you look at our guidance, we provided our expectations for Q1. We also did for the full year.

In order to get to that full year, there is an implied higher growth rate in the back half of the year than the front half of the year, and that is because of the fact that we're still lapping some of those headwinds very simplistically by -- I think about by the end of Q2, we've completed the lapping of those headwinds. So all of that has been taken into account. We do expect continued opportunities to work with retailers on these community enablement campaigns. Those are certainly an important part of our growth, and we see that strong in '26 albeit a little bit later in the year versus the beginning of the year. The cross-sell motion that Chad talked about was revenue recovery now that we have that combined go-to-market engine. All of those things are now in place, and we'll begin to see the benefit of that, but the way the recurring revenue model works, more of that, you will see show up in the GAAP revenue in the latter part of the year.

Yes, second half of the year. Let's talk about Carbon6. You have to bring down your expectations a little bit for that growth in '25. So walk us through the Amazon policy change that impacted you? What led to that kind of lower growth rate? How do you think about that contributing for 2026?

Yes. So Carbon6 was part of our broader strategy to build out this revenue recovery solution for our customers. We heard from customers that they were really having challenges with their charge-backs, how to manage those. And it's a combination of both getting their money back when these charge-backs are erroneous, which is obviously important to them. But maybe more importantly, how do I go from a mysterious code on an invoice that's showing that I didn't get paid for something to understanding the root cause problem in my supply chain. So it's really this combination of get paid when it was erroneous, but maybe more importantly, get better in your supply chain so you can perform better for your retailers and help grow your business with that retailer.

So that's what customers were telling us that led us to investigation of this particular area. We decided to get to market fastest through acquisition, which first was the SupplyPike acquisition, which is really a SaaS platform for managing all these charge-backs. Biggest focus there on Walmart, Target, some of the more brick-and-mortar retailers. We saw that we could further build this out by the Carbon6 acquisition, which gave us deeper penetration in Amazon, but really allowed us to more quickly have that full retailer portfolio. So that's the overall strategy.

Unfortunately, what we saw on the Amazon side was after a really good performance in this business through the first half of last year that we owned it. We saw some policy changes on Amazon side, which reduced the amount of sort of penalties that Amazon was incurring on their sellers, which reduced the amount of revenue that we could recover on behalf of our customers. And the majority of the -- although for some of the other retailers, it's more of a subscription model.

On Amazon, the historic model for Carbon6 was more on a take rate basis. where we recover the revenue for you and we take our portion of that. And in that take-rate model, when the amount you can recover reduces our revenue opportunity reduces. And so we've monitored the situation, tried to set the right expectations going forward. We do think -- we believe strongly in the overall strategy, and we're seeing great demand, both externally, attracting new customers in on this solution. but also from our fulfillment customers and believe the full portfolio of retailer coverage is very differentiated. We are the market leader in this category.

We also do believe that over time, we'll be able to introduce more of a platform fee for those take rate customers as we bring more analytics and insights to help them improve their supply chain.

You talked a little bit there, maybe a platform fee model. But from the customer perspective, I think you are focusing on 1P customers from Carbon6 versus the 3P smaller ones?

Yes. Yes. So there's 2 models to sell on Amazon. One is more the wholesale model or 1P and then the third party or marketplace model. The customers that we have on the 1P side are much more addressable for the other solutions in our product portfolio, including fulfillment. And so we do expect to focus strategically more on that 1P side of Amazon than we will the 3P side, but there's still a sizable amount of revenue on that 3P side.

Got it. let's talk about margins. You talked about it earlier, committing to 2 percentage points of EBITDA margin expansion. I know most of it is going to be coming from the gross margin side. But when you think about sales and marketing, G&A, are there also areas for efficiency and leverage there?

Yes, absolutely. So to your point, Chris, we have a stated goal of driving 2 percentage points of EBITDA margin expansion on an annual basis, and we believe we can do that without jeopardizing anything in the long term just because of the efficiency of our model. In the shorter term, so specific to what you saw in '25 as well as implied in our expectations for '26. More of that will show up in the gross margins. We have a stated goal of, call it, low to mid-70s from a gross margin, we're more at upper 60s currently.

And that's a lot of scaling and growing into various investments we've made historically. Very simplistically put, we don't need the same amount of sort of time and resources to accomplish a great customer experience, the onboarding process, et cetera. So there'll be continued opportunities to leverage that. But to your point, there are opportunities in other line items as well.

The one caveat I would say is R&D. We think our stated goal, we have a sort of 9% to 12% for R&D, we think, is appropriate. There's certainly efficiencies through AI, but we also have a lot we want to do investing back in that customer experience for product offerings, et cetera. So R&D, we're not looking for really moving off of that on the sales and marketing side.

Going back about a decade ago, we were more like upper 30s percent of revenue. We're now in the lower 20s percent of revenue. We think high teens to low 20s is where that will end up. And then on the G&A side, there's certainly opportunities there. We're more on the, call it, mid- to upper teens, and we think that's more on the lower side of that low double digits is where we can get to over time.

So there's lots of ways in which we'll be able to drive EBITDA margin expansion. We have a stated goal of 35% or at least 35%. It doesn't stop at 35%, but that's our -- sort of our next goalpost we're going after.

Got it. Maybe before I open it up for the audience here, on capital allocation. Last year, I think it was about 75%, 76% of free cash flow went into buybacks. How do you think about -- and now you've -- the Board has authorized $300 million in total. So how do you think about capital allocation going forward, buybacks, M&A?

Yes. So if you think about capital allocation, over time, we think the company has effectively deployed capital in both M&A as well as stock buybacks and of course, investing back in the business. If you look at it and where we're currently at, to your point, you saw in '25, we did repurchase more shares than we typically do. We purchased about $115 million or about 75%, 76% of free cash flow.

We did get increase in authorization, to your point, of up to $300 million for stock buyback. In light of where stock price is, that is a very effective use of capital to deploy for shareholder returns as well as based on where the current stock price is. So with that, you may expect to see a little bit more in the form of stock buybacks, but M&A over time, still, we believe, is something that makes sense for us. But in the shorter term, that the deployment of capital and stock buybacks is very appropriate.

Got it. Any questions from the audience here? All right. Maybe last one here to wrap. As you reflect back on 2025, what are some of the key lessons that you're bringing into 2026 in terms of what worked really well and what are some areas to continue to improve upon?

Yes. So if I look at 2025, it was definitely a time period where our customers were under some challenges, I think, primarily driven by the global trade dynamics and we took a long-term view on that. We have a value at SPS, which is win the day, win tomorrow. And I think as we looked at how we were going to work with those customers, the fact that our churn rate was not impacted by that. We did have some headwinds from a little bit of down sell and contract scrutiny, I think gives us a nice base and really being there for our customers during their more challenging period, I think, sets up SPS for success in the long term.

Awesome. It's fantastic. Thank you, Kim. Thank you, Chad.

Thank you.

Thanks, Chris.

Good day, and welcome to the SPS Commerce Q4 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Irmina Blaszczyk, Investor Relations for SPS Commerce. Please go ahead.

Thank you, Kim. Good afternoon, everyone, and thank you for joining us on SPS Commerce Fourth Quarter and Full Year 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 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. 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.

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

Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today.

The fourth quarter of 2025 marks SPS Commerce's 100th consecutive quarter of revenue growth, highlighting the company's pivotal role in driving efficient collaboration among trading partners as omnichannel retail has evolved and supply chains have grown increasingly complex.

We delivered solid fourth quarter and full year results despite a challenging macroeconomic backdrop and tariff-related uncertainty, which contributed to spend scrutiny and delayed purchase decisions throughout the year, and continued to impact our customers in the fourth quarter. For the full year 2025, revenue grew 18% to $751.5 million. Recurring revenue grew 20%, driven by fulfillment growth of 22% year-over-year. SPS's sustained and profitable growth and ongoing expansion of our network demonstrate our success in delivering the products and services that retailers and suppliers depend on to strengthen their collaboration and drive continuous improvement.

In 2025, we acquired Carbon6 to build on the SPS acquisition of Supply Pike in the prior year and extend the reach of our network with clear leadership in revenue recovery solutions. Revenue recovery represents a $750 million addressable market across 1P U.S. sellers and a significant cross-selling opportunity within our network, which we have highlighted throughout the year. For example, All-Star Innovations offers turnkey solutions for taking products from concept to consumer. They have been an SPS fulfillment customer since 2022 and started using the revenue recovery solution last year for several retailers, including Walmart, Target, Home Depot and Amazon.

CyberPower Systems, a global manufacturer of power protection and management solutions, is a long-standing fulfillment customer. To drive further efficiencies across their supply chain, they leveraged revenue recovery for some of their key customers, including Amazon, Walmart and Home Depot, and recently added Amazon Canada.

Other recent examples of customers who are realizing the benefits of revenue recovery include Outdoor Cap, one of the world's leading headwear manufacturing and importing companies; TaylorMade, an American sports equipment manufacturing company; and eos, a beauty and skin care company; and Bunge, a global agribusiness and food company.

Over the years, we expanded our portfolio of solutions through acquisitions and product innovation to support the evolving needs of our growing network, while strengthening long-standing partnerships, many of which have spanned decades. As we're celebrating 100 consecutive quarters of growth, I wanted to highlight a customer who has partnered us with us throughout that journey.

Wolverine Worldwide is a global marketer of branded footwear, apparel and accessories. They began as a fulfillment customer with a single connection and grew within our network by connecting to additional retailers and eventually subscribing to analytics. Building on this long-standing relationship, we recently supported Wolverine's expansion into Europe, resulting in a successful go-live on fulfillment with over 300 trading partners.

Trader Joe's, a national chain of over 600 neighborhood grocery stores, rolled out EDI requirements across the entire vendor base to reduce manual processes, improve order selection efficiencies, reduce shipping errors and prepare for future growth. With SPS's fulfillment solution, Trader Joe's is accelerating progress toward 100% vendor compliance.

Gemplers, a trusted retail brand for farm and home supply products, recently switched to SPS Commerce in an effort to improve order automation and support omnichannel growth. Gemplers opted for SPS's Supply Chain Performance suite and increased EDI compliance from 3 to nearly 100 vendors.

Petco, a pet retailer who operates in over 1,500 locations in the U.S., Mexico and Puerto Rico, leveraged SPS's retailer management solution to transition over 700 suppliers to standardized digital supply chain requirements. As a result, the retailer reduced manual data reconciliation, delivered measurable efficiency gains and improve trading partner performance tracking.

SPS is committed to ongoing innovation to support customers on their journey to modernize their supply chains. We recently introduced our new agentic capabilities embedded into the SPS supply chain network called MAX. Offering new AI functionality, MAX draws on hundreds of thousands of trading connections, decades of expertise, proprietary network intelligence and billions of transactions to help our customers unlock greater value from AI. Put simply, by leveraging the data across our network SPS is competitively positioned to deliver more meaningful and scalable AI enhancements across our product portfolio to better address the trends that are shaping the future of supply chain collaboration.

With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Chad. We reported a solid fourth quarter of 2025. Revenue was $192.7 million, a 13% increase over Q4 of last year and represented our 100th consecutive quarter of revenue growth. Recurring revenue grew 14% year-over-year. Adjusted EBITDA increased 22% to $60.5 million.

For the year, revenue was $751.5 million, an 18% increase, and recurring revenue grew 20%. The total number of recurring revenue customers was approximately 54,600, as the number of 1P customers was flat sequentially while the number of 3P customers declined by 350.

ARPU for the year increased to approximately 14,350. Adjusted EBITDA grew 24% to $231.4 million. We ended the year with total cash and cash equivalents of $151 million.

In 2025, we deployed 76% of free cash flow to repurchase $115 million of SPS shares. In addition, the Board of Directors approved an increase of $200 million in the current share repurchase program, which came into effect on December 1, 2025, for a total authorization of up to $300 million. This demonstrates our commitment to effectively deploy and return capital to shareholders while maintaining a flexible capital structure.

Now turning to guidance. For the first quarter of 2026, we expect revenue to be in the range of $191.6 million to $193.6 million, which represents approximately 6% year-over-year growth at the midpoint of the guided range. We expect adjusted EBITDA to be in the range of $55.5 million to $57.5 million. We expect fully diluted earnings per share to be in the range of $0.46 to $0.49, with fully diluted weighted average shares outstanding of approximately 38.2 million shares. We expect non-GAAP diluted income per share to be in the range of $0.95 to $0.99, with stock-based compensation expense of approximately $17.2 million, depreciation expense of approximately $4.5 million and amortization expense of approximately $9.6 million.

For the full year 2026, we expect revenue to be in the range of $798.5 million to $806.9 million, representing approximately 7% growth over 2025 at the midpoint of the guided range. We expect adjusted EBITDA to be in the range of $261 million to $265.5 million, representing growth of approximately 13% to 15% over 2025. We expect fully diluted earnings per share to be in the range of $2.50 to $2.58, with fully diluted weighted average shares outstanding of approximately 38.4 million shares. We expect non-GAAP diluted income per share to be in the range of $4.42 to $4.50, with stock-based compensation expense of approximately $67.1 million, depreciation expense of approximately $21.6 million and amortization expense for the year of approximately $38.3 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.

I'd like to now turn the call over to Chad for closing remarks.

Thank you, Kim. Before I conclude my prepared remarks, I'd like to take a moment to acknowledge the announcement in our earnings release that Kim Nelson, our Chief Financial Officer, intends to retire after nearly 20 years with the company. Kim has been a steady and trusted leader through some of the most defining chapters of SPS Commerce's journey, from the IPO to our evolution into a global organization that just achieved 100 consecutive quarters of growth. On behalf of the entire SPS team, I want to thank him for her extraordinary contributions and congratulate her on her well-earned retirement.

In addition, I'm pleased to welcome Joseph Del Preto, who will assume the CFO role as of March 16, 2026. Joe brings more than 20 years of experience leading finance, accounting and operational strategy for high-growth, publicly traded-technology companies, most recently serving as Chief Financial Officer and Treasurer of Sprout Social. With a leadership style that upholds our core values, I'm confident Joe will build on the strong foundation Kim created and help guide SPS through our next chapter of growth. Kim will remain at SPS through the transition process to ensure a seamless succession.

Today, we also announced the addition of 2 new independent directors to our Board in a cooperation agreement with Anson Funds, following extensive engagement with a number of our large investors, including Anson. We are excited to welcome Mike back to the Board and appoint Fumbi, who together bring valuable experience that will help us advance our strategy.

As I pause to reflect on the company's achievements to date, I'd like to take a moment to convey my genuine enthusiasm for the opportunity that lies ahead. We recently wrapped up our annual field kickoff event, and I was encouraged to see the sales team so highly energized by our recent launch of AI-enabled products, which we believe competitively position SPS to deliver unparalleled value to our customers. In addition, our reimagined retail go-to-market strategy is enabling more strategic conversations with retailers, initiating new engagements and cross-selling opportunities across our expanded product portfolio.

Our competitive differentiation and inherent growth levers support our revenue growth expectations of at least high single digits without acquisitions beyond 2026. We expect to increase our adjusted EBITDA margin by 2 percentage points annually as we remain committed to steady margin expansion and free cash flow generation to support ongoing share repurchases and drive shareholder value.

Lastly, I'd like to recognize that our success to date and prospects for the future growth are a testament to SPS Commerce employees worldwide. Their dedication and commitment to excellence underscores my conviction in our $11 billion global addressable market in our next chapter of growth.

With that, I'd like to open the call for questions.

[Operator Instructions] Our first question comes from Scott Berg with Needham.

Before I get to those, I guess, Kim, it's been a really fun ride. I don't know why now is the right time, look forward to catching up on that later, but just know that you will be missed.

Getting to the quarter here, Kim, you talked about a challenging macro environment that persisted in the fourth quarter. When we look at the numbers, I think we'd all agree to come in maybe a touch weaker, although within guidance and what we are used to and accustomed to. What were some of the challenges in the quarter that might have maybe impacted your expectations relative to where the numbers kind of ended up?

Sure, Scott. So as we established our expectations for Q4 going back a quarter ago, as you can imagine, there were different scenarios or parameters of how that could play out. To your point, on the top line, we ended up at the lower end of our revenue guidance. We ended up at the higher end of our adjusted EBITDA guidance.

So specifically on the revenue side, what we saw in Q4 was a continuation of headwinds that we've spoken about in the past. Some of those headwinds with our existing customers, just more challenging time for them, invoice scrutiny, uncertainty, et cetera. And then specific on the revenue recovery side, we actually -- there's nice demand there, so the demand is strong. However, with the take rate model that we have there, we did see more to the lower end of what our expectation would be, along with the Amazon policy changes that have occurred.

Got it. Helpful there. And then I saw the press release on your new MAX agentic AI solutions there. I guess, how do we think about the opportunity there? Is this some functionality that you think you can monetize on an individual SKU basis? Or does this just kind of enhance your products platform and your competitive positioning relative to other competitors out there?

Yes. So as I mentioned in the prepared remarks, super excited about this new capability that we've launched. So it's really an agentic capability that's built right into the network. So it has access to the network itself, plus all our proprietary information about how retailers work and the requirements that retailers have for their supply chain.

So we've sort of surfaced that capability up initially with 3 new features that are in our fulfillment product. The first feature is really a chat feature, which allows the user to have sort of guided workflows into how they process transactions back and forth with their trading partners, as well as full kind of inquiry capabilities around retailer requirements. As an example, asking what are the different shipment requirements or acknowledgment requirements that are different between Walmart and Target.

The second feature is a monitor capability. So think of this almost just like a dedicated agent for a customer that's monitoring all their transaction activities across our network. If there's any anomalies, like an order didn't come as expected or they didn't send invoice out as expected, that monitor capability is going to catch that for customers.

And then the final feature is allowing agent to agent communication. So we know we have a very rich data source in the SPS network, and it's most likely many of our customers will want to interact with that via agent-agent communication. So we've launched a model protocol interface into the network, and that gives full capability for agent-to-agent communication.

In terms of the monetization, this is initially available to beta customers, and we do have customers that are using it in the beta format, with very good feedback. And as we move through that beta, we're going to monitor the customers' usage of that and help that inform the monetization strategy. I absolutely believe this will be a competitive differentiator that will help us on the competitive side of the business and also help us with retention. But as we get to understand more and more about how customers are using this, I think the monetization opportunities will become more clear as well.

And these first 3 features are just the first 3 areas where we're exposing MAX, because it's built right into the network itself. We fully expect to be exposing MAX across the entire product portfolio over time.

Congratulations on the good quarter.

Our next question comes from Matt Van Vliet with Cantor.

Congrats on the retirement, Kim. I guess as we look forward in terms of reviving growth here to maybe levels you're more expecting, what maybe additional resources or investments do you think can be made and drive sort of above-average returns, maybe even pushing beyond some of the community events? Anything that you're already working on and expect to be rolling out here shortly that can help drive the top line performance?

Sure. Yes. So we do expect that for increasing customer count over time, our unique go-to-market with the retail enablement programs will continue to drive a lot of that. And we continue to invest in that area and refine those approaches there. In addition to that, you may have noticed that we brought on a new Chief Marketing Officer and we're advancing the maturity of our marketing capabilities as a way to, one, attract new customers in ways outside the retail enablement program. So that would be incremental to what we already get with the retail programs, as well as market back to our existing customers, highlighting the broad product portfolio and the opportunity that we have with existing customers, both for the cross-sell opportunity for analytics revenue recovery, but also the further penetration within fulfillment, adding more trading partners.

So 2025 was a tough year in our end market. We did see a lot of challenges. And the main driver our customers were telling us about was global trade. So as we sort of lap some of those effects in 2026, have more of the cross-selling momentum from the products going forward, we expect all these will continue to drive long-term growth for SPS.

All right. Very helpful. And then given the changes at Amazon in particular, is there a thought of maybe pulling back some of the resources for the revenue recovery, maybe waiting to see how that plays out a little more in the market over the next several quarters and sort of reassess from there? Or I guess, what is the approach to thinking about continuing to invest in a business that's been underperforming your expectations?

Yes. So I think what you'll see from us with revenue recovery is we do see strong demand for this product in the market. So in terms of our ability to cross-sell it to our fulfillment customers, and especially the demand that we're seeing from the 1P sellers, which the 1P sellers on Amazon line up much more with our ideal customer profile in our typical fulfillment and analytics customer, that's going well. So I think what you'll see is us continue to invest in that 1P area of the business where it very much fits our strategy, it lines up with our ideal customer profile.

And on the third-party side, not that we won't continue to manage that, and there is demand for that product as well, but probably won't get the same level of total focus as the 1P will. And I think over time, there's probably some opportunities as well in this business to drive the mix a little bit more from the take rate model to the subscription model, but that will come over time.

Our next question comes from Dylan Becker with William Blair.

Kim, I'll add my congrats on the retirement. I'm looking forward to catching up in here on what's next. Maybe for you and also for Chad as well too, but as we think about the broader demand backdrop and what we've talked about in the past as some of those initial projects that were pushed into 2026, I guess, could you give us any update on how those have continued to progress? And maybe what's implied kind of in the outlook for 2026 as it pertains to kind of your expectations on the mix of the net new customer side of the equation? Has that has stepped up in 2025? Has that continued as well as kind of some of the cross-selling efforts that's been an area of more kind of resource [indiscernible] as well too?

Sure, Dylan. I'll take that last one first and then I'll hit your other 2. So we would continue to expect that the majority of the revenue growth is coming from that ARPU side of the equation. That does not mean we will not continue to add customers. Our retail go-to-market, as Chad talked about, is a great way through those relationships -- retailer relationship management programs to get in front of new customers. But the mix between the 2 will continue to be more heavily skewed on the ARPU side.

When we think about some of the dynamics as it relates to the retail relationship campaigns, we still see strong demand for that. What we're seeing, however, is that is probably going to be a bit more, call it, back half versus front half, just the timing of when those are coming in. So still very strong demand, but a bit more later in the year versus earlier in the year.

And then as it relates to just some assumptions in our guidance, you may or may not have picked up, if you think about the Q1 sort of the midpoint is 6% top line growth, for the full year, the midpoint is about 7% of top line growth. We are still lapping some of those headwinds that we've talked about in 2025 across our business. And we really get to a point in the back half of the year where we are then -- that we have lapped those headwinds. So we're still facing some of that -- those -- again, it's the headwinds in the year-over-year compares in the front half of the year that we then have lapped in the back half.

Very helpful. And then maybe for Chad, kind of sticking with the topic of the idea of AI. MAX is obviously a part of it, but it does feel like there's been more of an emphasis on kind of an accelerated product momentum. And we've talked in the past about how you guys can leverage the network to deliver value. Maybe how you're thinking about that innovation cadence kind of ticking up and how that can contribute to a lot of the parts that maybe you guys kind of touched on, but obviously, customer retention, potential pricing power, serving [indiscernible] for kind of incremental customer adoption, but really leaning into more of that AI initiative to help kind of continue to support some of the pipeline momentum that you're seeing?

Yes. Absolutely, Dylan. So what we're hearing from our customers is that data is absolutely key to their AI initiatives. And we're a tremendous source of data. So in our network with our fulfillment product that generates massive amounts of retail and distribution data. Obviously, our analytics business is based on data itself. And so we're just uncovering more and more use cases where we can expose that utilizing agentic capability.

So I mentioned a few that are showing up in fulfillment now. I will also mention that we are doing a major technology replatforming to our analytics product, which really allows that data that's in that analytics product to fit just [ being on ] some more modern technologies in our customers' AI use cases a lot more effectively. And I do think that you'll continue to see innovation from us.

But at the heart of that is really the data that's on the network and the insights that customers can get from that. And it's just with the way the agent technology is moving forward, the speed at which that could come, I mean, it is really moving quickly. Very pleased with what the team has done and the time frame they've done it to get MAX in the market.

Our next question comes from Lachlan Brown with Rothschild & Company Redburn.

Kim, congrats on the excellent tenure as CFO. On M&A, your last transaction was over 12 months ago now. So how is the M&A environment at the moment? Conscious that publicly-traded software has materially derated over the last few months. Are you seeing this reflected at all in private valuations? And how competitive are the bidding process at the moment? Are you seeing much private equity?

Yes. So we continue to manage an M&A pipeline and stay active in that market. What I would say is we also have work remaining as we integrate the revenue recovery business into everything we're doing at SPS Commerce, especially on the go-to-market side. And at this point in time as well, share repurchase is an attractive use of the capital that we have.

So we're just balancing out all of those factors. You will see the Board authorized another $200 million of share repurchase, bringing that total to $300 million that they've authorized. And so that can be a definite attractive use of the tremendous free cash flow that this business generates.

That's clear. And on Mass Connect, which supports MCP and agent-to-agent communication, presumably great for supporting the SPS ecosystem and your customers. But given your moat is the retail network data, how do you manage AI peers taking that strategic data out and using it to their benefit? And also, could you potentially look to price this MCP access?

Yes, I think we will price the MCP access. At our field kickoff event we had last week, we did a live demo for our sales team of this MCP interface that -- where we were connected to 1 of our ERP partners and their agent-to-agent communication. And then we utilized, in this case, it was Claude, it could have been any type of chat-based LLM capability, and actually showing how that Claude was able to connect data out of the SPS network and this particular ERP provider's data, and put that together in a way that was very helpful for many customer use cases.

So I think it just exemplifies that this -- we'll have use cases that are directly interacting with MAX, our agents, but we will also have many use cases where we're just a participant in the customer's agent-to-agent workflow. And I'm confident that our data that we're sort of bringing to that workflow will be valuable enough that we'll be able to monetize over time those types of agent-to-agent communications.

Our next question comes from George Kurosawa with Citi.

Okay. I want to echo congratulations to Kim. I wanted to follow up on the discussion from last quarter about some enablement campaigns that, from a timing perspective, pushed out of Q4 into the first half of '26. I wanted to just follow up on when you expect to execute on those. Just looking at the guide, it seems like possibly maybe some of those are skewing more towards Q2 than Q1. Just any color on that trend.

Yes. So those particular ones that did slip here into 2026 are still moving forward. And some of them are actually kind of running at this point in time. What I would say though is, keep in mind, as those programs affect customer count, there can be a little lag in that, so -- because we actually -- they don't really affect the customer count until we're fully up and running and billing those customers. So those programs are continuing, but I would expect them to drive more customer count in the -- probably the latter stages of Q2 and more in Q3 than they will in the first half of the year.

Okay. That's helpful color. And then on the Q3 -- excuse me, the 3P customers for Carbon6, I think you had guided to about 150 net decline in customers. It seems like it came in a little below that. Maybe just any color on your line of sight to maybe those headwinds normalizing, or how long you expect those to persist for?

Yes. So we really do think about the 1P customer count and the 3P customer count quite differently given the comments I made earlier about just the strategic focus. So you'll see our -- in our results, are flat from a 1P customer count, and then down 350 in the 3P side. As we focus more on the 1P side of revenue recovery, which is really where our ideal customer profile lies -- on the 3P side, the dynamics there are -- our focus is on 1P. We're attracting 1P customers in. Often those 1P customers that we attract are existing customers, right, because of this ideal customer profile. So they're not going to positively impact the customer count. Whereas on the 3P side, these are much smaller businesses, they do have a higher churn rate. And so there is going to be just some natural churn based on the size of the customer there.

So you kind of have this dynamic with a little bit higher churn in 3P, and then 1P, which might not always increment up on the customer count side, but sometimes these are existing SPS customers just taking on the revenue recovery solution. So hopefully, that's a little bit more color on those dynamics on customer count between 1P and 3P.

Our next question comes from Chris Quintero with Morgan Stanley.

Kim, congrats on the well-deserved retirement here. I wish you all the best. I actually wanted to follow up on the enablement campaign commentary. So last quarter, you talked about those moving into the first half of this year and now we're talking about those moving to the second half of the year. So I guess, what gives you the confidence that those will actually commit in the second half of the year versus potentially pushing out again to 2027?

Yes. They're definitely moving forward, Chris. What I was really -- when I mentioned maybe pushing out, it was more about just the timing effects of when we start billing those customers, right? So we kind of need to complete the program. The retailer has to go live and then we kick in with the invoicing. So it's not that the programs themselves are directly getting delayed, but just providing a little outlook that the actual customer count impact may come a little bit later.

Got it. That's helpful, Chad. And then I want to ask about the downsell activity, reducing the number of connections, reducing the number of document volumes. Like how far through we are in terms of how much more downside there is to that action? Or is this something that's going to continue throughout the rest of the year? What's your best guess or expectation around the trajectory of those trends?

Sure. So we started to see some of the downsell activity in Q2 of '25, sort of the latter part of Q2 of '25. So our belief is that we'll have lapped the headwinds by the end of the first half of '26, if that makes sense. So that's basically a full year then of that -- those headwinds. So our belief is in the second half of '26, we've lapped that downsell activity and those headwinds that we've experienced. And we have -- that philosophy we have, that is incorporated into our guidance.

Our next question comes from Parker Lane with Stifel.

This is Matthew Kikkert on for Parker. Kim, congratulations on the retirement as well. My first question, I'm curious what levers are you targeting to pull to achieve the EBITDA margin expansion in 2026? Color there would be helpful.

Yes, happy to answer that. So a lot of it is really a continuation of some of the dynamics that you've seen in '25. So when you think about -- I'll start with gross margin as an example. So you may or may not recall that over a multi, multiyear time period, we've made a lot of investment in the overall customer experience. And all right things to do for customers today and customers in the future. But we got ourselves to a position where we were able to now start seeing some of the benefits of that and drive more of the gross margin and those efficiencies. Simply stated, don't necessarily need to add as many folks as we've had to do historically.

You started to see that, call it, very later part of '24. You saw that through '25, and that continues into '26. So gross margin expansion is a meaningful component of that overall anticipated, call it, 2% of EBITDA margin expansion.

That being said, we do see opportunities in other line items as well, particularly in the sales and marketing as well as G&A side. R&D, we do think our level of spend as a percent of revenue is appropriate. We aren't really looking to get more efficient there in total. But the larger component in '26 of the 2 percentage points of EBITDA margin expansion, you would expect to come through gross margin.

Okay. And then secondly, looking at the delays in the enablement pipeline, are you seeing any bright spots from specific [indiscernible] or different size of vendors, or are the delays pretty much across the board?

I'd say the -- pretty consistent across all the -- we have pretty broad definition of retail, which includes kind of the mass merchant, retail, grocery distribution. It's a pretty consistent behavior across all those. Things food related, there has been some favorable dynamics from some of the food safety activities that have been regulations there. But overall, pretty consistent across.

Our next question comes from Jeff Van Rhee with Craig-Hallum.

Maybe just a couple left for me. As you look at the overall softness in the outlook for the quarter and the forward guide, can you quantify -- maybe and break it down between 2 drivers, one just being the macro/general softening at your customers and the willingness to spend versus the percent that is coming from the revenue recovery dynamics. If you had to allocate the weakness in the guide to those 2 factors, which -- how would you weight that?

So Jeff, what I would say is both of those are important in the numbers. Think of it as how we exited '25 impacts your starting point then in '26. And so that has an impact then, obviously, in your Q1, your beginning of '26. And then implied in our guidance, we are lapping those headwinds. And those headwinds actually are both on what you hit upon there, right? It's rightsizing of some contracts as well as some of the dynamics we've seen on the Amazon policy changes. And we do believe that those headwinds, by the second half of the year, we've sort of lapped that. And so that is implied within our guidance for a slight increase in our overall revenue growth second half of the year.

Okay. And then just maybe secondly, the -- on the pricing front, when you look at individual customers, understanding people have maybe downsized the number of connections, but if you look at the pricing and potential pricing pressure on a per connection basis, is there anything you would call out in terms of the customers maybe getting more price sensitive on a per connection basis?

And kind of along those lines, I remember over the years, periodically, things would pop up about EDI versus more real-time API-based connectivity. Have you seen any shift in the base and thereby pricing pressure accordingly?

Yes. No, if you look at it on a per connection basis, I'd say it's consistent. And when customers are typically downsizing, it's because they have lost that business with a particular retailer or based on the way their cost of goods have changed, they're deciding not to do business in certain ways with certain retailers. So it tends to be driven more from that.

On the API side, in most cases, this isn't a choice how to connect. It tends to be more of the kind of wholesale type connections tend to be EDI if it's more modern; in a marketplace, it tends to be more API. And our network does both. So we support both types. And in fact, when it's API connection, a lot of times, there's potentially more value in that for a customer because those API connections tend to be a little bit more complex than the EDI connections.

And Kim, congrats. It's been just a really exceptional tenure. You've been at class act all the way along. So certainly, I wish you all the best.

Our next question comes from Mark Schappel with Loop Capital.

This is Tim on for Mark. I guess I'll ask around the go-to-market strategy. Given the new CTO that you onboarded, is there any changes that we should expect or anticipate over the coming year?

Yes. We're super excited to have Eduardo on the team. Obviously, he played a pivotal role in our big field kickoff event that we just recently had. I wouldn't say you should expect major changes in the go-to-market. But with this wider product portfolio, the opportunity that we have identified to expand ARPU, definitely more customer practices and things that will help us drive the expansion of that ARPU with the customer is priority in our go-to-market. Not an exclusive priority, but driving that ARPU, I think, will be a key component of our strategy and, therefore, a focus going forward.

Our next question comes from Nehal Chokshi with Northland Capital Markets.

Yes. A couple of questions for me. One is that, I'm pretty sure you addressed it, but just to be perfectly clear, why did the 1P customers be flat Q-to-Q? Because over the prior 2 quarters, that was showing good growth again.

Nehal, I can answer that. We mentioned this on last quarter's earnings call as well. This has to do with the timing of some of those relationship management, formerly known as community enablement programs. So the color we had given a quarter ago was the timing of those, instead of being in Q4, was going to be in the first half of 2026. And as such, we signaled that our expectations were that the 1P customer count would be flat sequentially. And that's -- and basically landed right on with what our expectations were.

Great. Okay. And do you expect the pace of the 1P customer adds to return to what you were seeing in the second quarter and third quarter as we go through calendar '26?

Sure. So the biggest driver as it relates to the 1P customer count is related to the relationship management, again, formerly known as the community enablement program. So the timing of those programs will have an impact in the timing of the customer adds. And so some of the dialogue we've had here on the call is we have a strong community enablement pipeline. More of that, however, will be in, call it, the Q2 to second half of the year, which we still run them throughout the year, but more of those would be later on, closer to the second half of the year.

So at this point in time, we would assume that Q1 '26 would also probably be flat to Q4 '25 due to the timing.

Okay. And then general and administrative, that was up 29% year-over-year for calendar '25, where sales and marketing and R&D were up in the teens. Why is the G&A at such an elevated growth rate right now?

Yes. So when you look at G&A as a percent of revenue, you've seen it be, call it, like 15%, 16-ish percent of revenue. There's various costs in there that you would expect. There has been investments we've been making in some of our back-end tools and technology from both the tools and technology as well as the team, augmenting the team, et cetera. We do have a stated goal of 10% to 15% for G&A over time.

This concludes our question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.

My name is Chris Quintero. I am a software analyst on the U.S. equity research team. And I'm really excited to be joined here by Chad Collins, the CEO of SPS Commerce. Chad, thanks for joining us.

Good to be here, Chris.

Awesome. So Chad, maybe to kick things off, for investors who are not familiar with the SPS Commerce story, where does SPS fit within the broader supply chain software landscape? Maybe who are your customers? And what is the value they're getting from adopting your software and services?

Yes, sure. So at SPS Commerce, we operate the world's largest retail network in the cloud that connects retailers to all their merchandise suppliers. And across our network, they're able to exchange information about the supply chain, generally information about orders, items, inventory and shipments so they can collaborate more effectively. And we have sort of a unique go-to-market where we partner with retailers to digitize all these connections to their suppliers, and we do that through an enablement service. And the benefit to the retailer is they get through that program, 100% of their supply chain digitized. The benefit to SPS Commerce is we gain access to all these suppliers who are in our ideal customer profile and give them the opportunity to join the SPS network. And we're doing this for more traditional retailers, general mass merchant retailers plus grocers, distributors in industrial, food service and medical supply distribution.

Got it. And I'm glad you brought the community enablement go-to-market motion, which I think is pretty unique. So let's double-click on that. How does it exactly work? Is it a direct sales force that goes out to the retailers and engages with them? Tell us a little bit more about the details on that go-to-market.

So most retailers and distributors have some sort of vendor or supplier management department that will handle the onboarding of suppliers. What typically happens, though, is the digital requirements, that team is not -- they're not able to keep on top of that as there's a change in the supplier base, ultimately, some of the suppliers end up you're doing business with them in a noncompliant digital way. And that's the preferred method from a supply chain standpoint. So we offer a service to the retailers where we will come in and manage a program to do all the messaging and communication and outreach to all of the suppliers to get them caught up and make sure that 100% of their suppliers have digital connections.

And then ideally, we stay on and offer a service we call ongoing supplier onboarding, which is just built into their normal vendor onboarding process. Anytime they onboard a new vendor, we handle the digital connection for them. And we have a dedicated retail team that works with large retailers and distributors, primarily in the U.S., and we're starting this up in Europe, and they will offer this service to the retailers.

Got it. And I actually want to go back to your background. So before you joined SPS Commerce, you're the CEO of Korber, another supply chain software company. What were some of the lessons from your time there? And what are some of those that you're implementing at SBS?

Yes. So first and foremost, I mean, I rose up from being a systems implementation consultant actually writing code on projects. So the first and foremost, I mean, my philosophy is you really got to know the customer. You really got to know the customers' problems and challenges. And through that, you will develop the right corporate strategy and the right product going forward. And then specifically, some of the things that I learned at Korber, where we really took a business that I was leading called HighJump in the warehouse management space, primarily a U.S. business. We were able to combine that with a larger European operation that the Korber group had and then go on to do M&A in 8 different countries around the world to really build a global offering.

And that's not exactly the same playbook that we're executing at SPS, but at SPS as we do become a more global company and expand outside of the U.S., really helping the company understand what it takes to truly be a global company, both in terms of the product and service you provide, but also the culture that you need have. I think we definitely are a U.S.-centric and I would even sometimes say Minnesota-centric. We're headquartered in Minnesota, the upper north part of the U.S., which comes with its own culture up there company. And I think as we grow and scale the business over time, we'll much more have to become a global company as we did in my time at Korber.

Yes. So clearly, you spent a lot of time in Minnesota. Maybe taking a step back, let's talk about the industry you all operate within. Electronic data interchange. What does that exactly mean for investors who are not familiar with it? And we've seen the advent of APIs. What does that mean for your business? Is this an opportunity? Is this a risk for SPS?

Yes. So maybe there's a few of us in here who can remember a time before the Internet, but not everybody in the room. So before the Internet existed, there was a desire for businesses to still do business digitally. And in the retail industry, in particular, there was a set of standards that were developed called electronic data interface, really to facilitate the ordering and goods movement information. But there was no Internet to transmit this across like there is today. There was no cloud, right? So there was emergence of a certain set of specifications that developed and a concept of a value-added network, which is a very specialized transport mechanism for these messages.

Well, we are way, way past that now, and we have the cloud, and it's very easy to exchange business-to-business transactions. But one element of this has stuck around, which is the actual structure of those -- of that data transmission, so the actual file formats. And that is what today is referred to as EDI. Even though the vast majority of it passes through the regular Internet as do most B2B transactions, a lot of it still is in the same file format. And so on our network, to us, it does not matter if it's EDI or API. APIs tend to be the more modern way to do this. So example I use is a big retailer in the U.S., Target. All of the customers that we have connected to Target, if they are shipping to a Target store directly or Target distribution center, the structure of that data is EDI. And that's just for historic reasons.

If the customer is also connecting to the Target marketplace, which has been invented more recently, that's on APIs. And our network supports those API connections, and so I often get the question about, is API somehow a threat to your business. To us, it doesn't really matter. And in fact, I'd say if it's an API connection, it actually tends to be a more complex connection and I think really requires or there's a larger benefit for having a network handle that API connection. So I think the more and more we move to API connections, the more value there is in a network like SPS.

Got it. And I wanted to touch on the retail sector dynamics that have occurred over the past few years. Could you walk us through what some of those dynamics have been over the past few years, how they've impacted your customer growth, those customer growth rates during that period?

Yes. So I'll go back to the pandemic time period, which was obviously a challenge in many ways. But for the retail industry, really acted as an accelerant on many retailers' omnichannel initiatives. So as shops were shutting down and there was more driving in e-commerce, you did see the assortments of retailers really increase on the e-commerce side. You also saw the acceleration of these omnichannel initiatives like buy online, pick up in store. All these things required retailers to have tighter collaboration with their suppliers. And so that was a nice tailwind for retail overall, and in particular, for our business.

And as many of you are aware, during that time period as well, there was a nice acceleration of overall IT investments during that time period. We really saw a nice benefit of that of having record customer counts during that time period. And because we have a land-and-expand model, there was a long tail on that for us. So we saw those tailwinds continuing out through 2023 and even into early 2024. In 2024, we saw a bit more stabilization, I would say, of the end market. And we did have a decline in net customer counts over the previous year. In 2024, we came in with customer counts right around 100 or 200. And then we've seen now a reemergence of the customer count here in 2025 in our 1P customers, which are kind of our core customers, that should -- has been about -- it has been 1,250 through the first 3 quarters, so much stronger than last year.

However, we are seeing now much more pressure on the supplier side of our network. And that has been a result of the global trade dynamics, especially for U.S. suppliers. So what we're seeing is the suppliers primarily bearing the burden of increased tariff cost and not passing that on to suppliers or to retailers. And how that's impacted our business is we've just seen a lot more cost scrutiny from the suppliers. The actual customer count churn has remained pretty constant, but we have seen more downsell in these cost pressures from the supplier side of our network, particularly here in 2025.

Got it. More broadly, like how are you thinking about tariffs, the general supply chain uncertainty that we're seeing over the past 12, 18 months impacting the business? You mentioned some downsell pressure on your suppliers. How is that exactly manifested in your pricing model? And is there any positive side for this, too, where maybe some retailers are also looking to expand the number of suppliers that they're working with?

Yes. So rightly or wrongly, we're very flexible in our customer contracts and have always historically favored making the solution very easy to buy. We have primarily small- and medium-sized businesses on the network and their preference by far for buying is to do that with month-to-month contracts. Now the downside of month-to-month contracts is while it's easy to buy on one hand, they are more susceptible to downsell. And so in our pricing model, we primarily scale by how many trading partner connections you have on the network and how many supply chain documents you're sending across those connections.

What we've seen customers that have lower volume trading partner connections or maybe they haven't received an order from a retailer for 4, 5 months under this new level of scrutiny, they're actually turning off those connections where maybe in normal times, they would have kept those connections going, and that's led to some of those downsell dynamics. I'd say maybe more the bear case or the bull case, if you will, on the overall global trade is that if there is a big shift in the sources of supply for retailers or their suppliers on the geographic standpoint, that SPS is very well equipped to help onboard those new suppliers. So we could see a situation in a shifting source of supply where SPS is able to uptick our enablement programs and gain more access to potential customers there. That's not a dynamic we're yet seeing in the business, but I think we'll need to reach a point in time of I won't say full clarity, but maybe more clarity than we have right now before I think that would happen.

Yes. Maybe just to double-click on that. Why do you think you're not seeing that today? And does that have to do the dynamic of where these suppliers are international versus U.S.? How do you kind of think about that?

Yes. So when I talk to our customers who are selling to retailers and have a heavy import aspect to their supply chain, there seems to be a general sentiment that long term, there are certain countries that are probably not great for them to import a lot of products from China in particular. But there's no clear answer on where to go, right, because the dynamic is constantly changing. And so I think what these customers are waiting for is a little bit more stabilization and clarity. And then if they are going to move locations, they will at that time, but don't feel like they have the clarity at this point in time.

Got it. Shifting gears again to the growth algorithm. You all gave a new growth algorithm at your Investor Day, high single digits organic growth. How do you get to that growth rate between customer and ARPU growth? You just talked about some of the dynamics with the customer growth given the retail sector dynamics. So how would you kind of segment those growth algos?

Yes. So the primary driver in our growth algorithm will be ARPU growth. And the reason for that is there's a -- we've identified a tremendous opportunity within our existing customer base. It's always been there, but I'd say we're more focused now to expand the number of trading partners that a customer has on our network. And it kind of makes sense because I described these enablement campaigns before. So most customers when they join our network will come through an enablement campaign. They'll add a connection for that one particular retailer. And then it's really our team's responsibility to expand the use of the network across all their customers.

So if we can increase that rate at which those additional trading partner connections are being added, that would increase the velocity of growth and expand that ARPU beyond what it is today. And then the other aspect of the ARPU growth would be the broader product portfolio we have, in particular, the revenue recovery product category that we built out via a couple of acquisitions we did last year. And that is a great cross-selling opportunity us for a number of our -- especially medium and large-sized customers. The customer count side, we do expect to continue to grow. But in proportion to the opportunity we have in ARPU, we'd expect more of the growth to be coming on the ARPU side versus the count side.

Yes. So in order to drive that ARPU growth, you recently announced a new network-led growth motion, which I think gets at that point of trying to drive greater cross-sell across your network of customers. So maybe give us a quick overview of like what that go-to-market motion is and how you're leveraging the large network you all have.

Yes. So this concept of network-led growth is really all about identifying from our network itself, additional opportunities for customers to buy from us. So let's use a couple of examples. I'm more familiar with U.S. retailers, so I'll just use those. We have Lowe's and Home Depot. So these are rival home improvement stores, big chains in the U.S. Well, we know that many of our customers who trade with Home Depot also trade with Lowe's. And so if we could identify customers who are trading with one and not the other, there's a high probability that presents an upsell opportunity for the other trading partner.

And we can glean these things from our network and then we can automate that through agents and serve those up as sales opportunities for our sales force. Similarly, with revenue recovery, we know that if you're trading at a certain volume with one of the retailers where we support revenue recovery and based on your shipment volume, that you're a high likely candidate for revenue recovery and there should be a strong ROI there. And we do both of these things based on just the data we have in our and really applying insights and in many cases, AI agents to go discover these and then serve these up as additional sales opportunities for our sales force.

Got it. Let's touch on that, the M&A to build out this revenue recovery business. Give us an overview of what that product portfolio really is and what were the assets that you ended up buying here to bring that into the portfolio?

Yes. So just to start with the business problem. If you're a supplier to retail and these retailers have very strict guidelines on how their supply chain needs to work as well as the digital transaction requirements that there with the supply chain. So if you make a mistake in that supply chain, you ship to them too late, you ship them too little, you ship them too much, your product is damaged, if it's not labeled correctly, all these things will result in a supply chain penalty. And the way that penalty is levied is they just deduct that amount from your invoice with a very cryptic code that says what the chargeback reason is.

Well, there's a big problem for suppliers to retailers. I mean, first, they want to understand what it is, so they can fix the problem in their supply chain. Also, 10% of these chargebacks are mistakes that happen on the retailer system side and you can actually get recovered for. So if you said you shipped 100 widgets, the retailer said they received 90 and is charging you a penalty for the other 10, but you can prove you actually shipped 100, then you can go get that penalty recovered. And so we saw this problem in our customer base, and we thought the fastest way to address this problem was to acquire 2 of the leading emerging SaaS platforms that address this problem, really taking this from a manual back and forth between suppliers and retailers to a SaaS platform. And so we acquired SupplyPike, which covered most of the major brick-and-mortar retailers in the U.S. and then Carbon6, which provided this type of solution for Amazon on both the 1P seller side and the 3P seller side.

We've put those businesses together now. We have one sales force that's out there selling that for all the retailers we cover and selling it on a couple of different models. The first model is you can run your own recovery process. So you have your own people, you'll pay us a subscription fee and use our platform to manage that back and forth with the retailer on the recovery. Or if you don't have your own people, we'll provide that more on a white glove service basis, and we'll actually manage your recoveries on your behalf. And in that model, we'll just take a portion of the money that's recovered as our take rate on that -- providing that service.

Got it. And one of the other acquisitions you made was Traverse Systems, which I think is really interesting because that product you're actually selling to retailers versus the suppliers have been historically your main customer here. So talk to us a bit about -- and you've also rebranded it to Retailer Solutions. So talk to us a bit about what that product portfolio offers retailers? And could this be an area that you further go into as you sell more solutions to retailers here?

Yes. So we've always been really good when we work with retailers about getting all these digital connections established. I would say what we haven't historically been so great at is providing a scorecard around how that particular supplier is performing from a supply chain standpoint. And that's really the technology that we got with the Traverse Systems acquisition is a capability that we can offer to retailers that does all the scorecarding of the supply chain performance of their suppliers, and so now when we go into a retailer, we're able to have a discussion more about supply chain performance and metrics and driving improvement.

Of course, a foundational aspect to that is getting all the digital connections in place with your suppliers, but it's really elevated the discussion that we're able to have with executives at retailers by combining the asset we got from Traverse Systems with the service that we've always provided for these enablement programs.

Got it. I wanted to touch on the TAM. You guys put out a refreshed TAM, $11 billion globally, generally about 25% penetrated across your small, medium and large customer bases. What is the other 75% of the market doing today? Are they using another EDI vendor? Are they doing something in-house? What are they currently doing?

Yes. So the vast majority of that unpenetrated TAM by us is undigitized connections. So this is still, hey, I have an order, I'm going to place that order. I'm going to send it to you electronically and e-mail. You're going to e-mail me back and confirm the order. I'm never going to get any information about the exact date or exact quantity. I'm not going to send you an advanced shipment notice that tells you what's coming to your distribution center. And you would be surprised how many undigitized connections are still out there. And then there's a portion that is served. And that portion that's served kind of comes in 2 categories. There is a number of larger technology providers that offer more of a do-it-yourself model.

So we see IBM and their Sterling product line in this area, also a number of products that come from OpenText. And they're going to provide you the tooling, but you're going to have to manage all your individual connections with all your retail partners. And if they change the rules, you got to go into that tool and change it for every retailer. We also see at the small end, a handful of smaller providers that are offering this type of solution either around a particular industry segment or a particular ERP system. What we don't see is anybody offering this broad network approach, whereas if you join the network once, we ensure your compliance to all your retail partners. And we also aren't seeing anybody penetrate this TAM the way that we are by running these enablement programs. That's been something that we've been working on for 20 years. I think we perfected it, and I think it's been really hard for the competition to replicate.

Yes, you brought up competition there. So at the Investor Day, you shared that only about 2% of the time you're losing to direct competitors. And 28% of the time is actually the prospect just makes no change in their decision. So on the direct competition front, who are some of those competitors? And why do you win? And on the no change front, why does the prospect not make any change? And what can you do to help make those SPS Commerce customers?

Yes. So it's clear on the high end of the market, we have these kind of do-it-yourself type approaches. That was the only approach for larger companies. say, even 10 years ago when SPS was much more focused on small to medium businesses. I'm confident we'll get at bats for those opportunities as these companies move through the replacement cycle, their legacy tech and some of the people that were the EDI specialists that they hired many years ago, get new jobs or retire, we'll get those at-bats. Then at the low end of the market, we do have the most compelling technology and the broadest network. We are premium price.

So for those customers that see the value in our network, they're willing to pay for it. But it's a very price-sensitive market, especially in the small customer area, and that is an opportunity for some of our small customers. But as our metrics say we're winning the vast majority of the time. Where customers would usually opt to do nothing, I'd say that's often tied to them in their ERP replacement cycle. So we often will have a gain a new customer at the time that they change out their ERP. And in those situations, those ERP changes are big decisions and sometimes they get delayed and pushed out, and that just happens from time to time.

Got it. I've got a bunch more questions, but I wanted to open it up to the audience if anyone has any questions. All right. Maybe to end things off here, Chad, what do you think investors underappreciate about the SPS Commerce story? Where should they really be digging into here?

Yes. I think, one, the TAM that you brought up. I mean, we are confident in the long-term opportunity. And I think the question is what will be the market conditions that dictate the pace at which we're able to tackle that and penetrate that total TAM. I think the size and scale of our network is sometimes underappreciated in how great opportunity that can be and the future potential that we have over the longer term outside the United States.

Awesome. Well, thanks, Chad. Really appreciate the time today.

Good day, and welcome to the SPS Commerce Q3 2025 Earnings Conference Call.[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irmina Blaszczyk, Investor Relations for SPS Commerce. Please go ahead.

Thank you, Dave. Good afternoon, everyone, and thank you for joining us on SPS Commerce Third 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 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. 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. And with that, I will turn the call over to Chad.

Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. SPS Commerce delivered solid third quarter results across our core business despite ongoing macroeconomic uncertainty and continued spend scrutiny. Third quarter revenue grew 16% to $189.9 million and recurring revenue grew 18%. Our fulfillment business grew 20% year-over-year. The net increase of 450 customers exceeded our expectations in the quarter, primarily driven by strong retail relationship management programs.

I'd like to take a moment to review the key dynamics that impacted our revenue recovery business, which came in approximately $3 million below our expectations in Q3. Firstly, we now recognize that there is more seasonality in this business than we had originally anticipated. In Q2, for example, we benefited from a higher-than-expected volume of shipped products related to Amazon Prime Day. Due to the seasonality effect in Q2 and the change in Amazon policy related to inventory capacity for third-party sellers, Q3 shipments came in below our expectations, which resulted in lower-than-forecast revenue recovery rates in the quarter.

We've taken both of these factors into consideration in our updated outlook for that business. Revenue recovery is an important offering within our portfolio. It represents a $750 million addressable market across 1P U.S. sellers and a significant cross-selling opportunity within our network, where we're making progress and building momentum. In addition, we're pleased to report we completed our combined go-to-market strategy ahead of schedule, and we are now better positioned to unlock the full potential of this emerging product category.

For example, Cyber Power Systems, a global manufacturer of power protection and management solutions, has partnered with SPS to modernize their business systems and processes since 2014. As a long-standing fulfillment customer, they recently engaged with SPS to drive further efficiencies across their supply chain, leveraging the revenue recovery solution for some of their key customers, including Amazon, Walmart and Home Depot. Having realized immediate benefits in ROI, Cyber Power Systems is evaluating other revenue recovery opportunities across their retail network.

As we discussed at our Investor Day in September, SPS Commerce is well positioned to capitalize on the long-term growth opportunities driven by an ever-evolving retail ecosystem. Having made strategic acquisitions over the past two years to expand our product portfolio and market reach, we shared updates at Investor Day to address how our product strategy and our reimagined go-to-market motion have evolved to empower the kind of trading partner collaboration that enables supply chains to work like they should.

We also hosted a broad cross-section of customers who provided their perspectives on why they chose to work with SPS and how we help them manage supply chain complexity to strengthen their trading partner ecosystems. Most importantly, you heard firsthand accounts of the return on investment that comes from partnering with SPS, such as driving greater operational efficiency and fueling business growth. An example of a recent partnership is Petco, a pet retailer who operates over 1,500 locations in the U.S., Mexico and Puerto Rico, providing both in-store and online omnichannel services.

Leveraging SPS' retailer management solution, Petco transitioned over 700 suppliers to standardized digital supply chain requirements. As a result, the retailer reduced manual data reconciliation across merchandising and supply chain teams, delivered measurable efficiency gains and improved trading partner performance tracking. To summarize, despite the spend scrutiny we are experiencing this year across some of our customer groups, we believe the ever-evolving retail ecosystem will continue to drive the need for supply chain efficiencies.

With our data-driven solutions, SPS Commerce is competitively positioned to improve collaboration between trading partners. We are the industry's most broadly adopted retail cloud services platform and the world's leading retail network. We provide unmatched value in the data that powers AI-driven use cases and a unique network-led growth motion.

Before we dive into our financial results, I'd like to take a moment to share an important leadership update. After nearly 10 years with SPS Commerce, Dan Juckniess, our Chief Revenue Officer, has decided to retire. He will remain with the company through the end of the year to ensure smooth transition. Dan helped shaped SPS' modern go-to-market organization, growing the sales team in both size and strength. On behalf of SPS Commerce, I wish him all the best in retirement. In addition, I'm excited to share that Eduardo Rosini will be joining the SPS Commerce team as Chief Commercial Officer starting December 1.

In this new role at SPS, Eduardo will strengthen our commitment to total customer relationship, maximizing the entire customer life cycle from acquisition to onboarding, retention and expansion and ensuring we deliver consistent, intentional and customer-first experiences around the world. As SPS continues to scale, this evolution helps us deepen relationships, maximize customer value and stay aligned with how global customers view their partnerships with one trusted full-service connection.

Eduardo brings more than 30 years of growth, go-to-market and full customer life cycle experience across industries and markets, most recently serving as Chief Growth Officer at Sage, VP of Mid-market and Corporate Sales at Intuit and in large-scale commercial leadership roles at Microsoft, operating in North America, South America, EMEA and APAC.

His experience leading global organizations, paired with his passion for people and obsession with customers, make him an ideal fit for SPS' next phase of growth. And with that, I'll turn it over to Kim to discuss our financial results.

Thanks, Chad. We reported a solid third quarter of 2025. Revenue was $189.9 million, a 16% increase over Q3 of last year and represented our 99th consecutive quarter of revenue growth. Recurring revenue grew 18% year-over-year. The total number of recurring revenue customers in Q3 was approximately 54,950, an increase of 450 from the prior quarter. ARPU was approximately $13,300. For the quarter, adjusted EBITDA increased 25% to $60.5 million compared to $48.4 million in Q3 of last year.

We ended the quarter with total cash and investments of $134 million and repurchased $30 million of SPS shares. In addition, the Board of Directors has authorized a new program to repurchase up to $100 million of common stock, which becomes effective on December 1 this year and is expected to expire on December 1, 2027. We expect to fully utilize the current program before its termination on July 26, 2026. Before we dive into guidance, I'd like to highlight the factors currently shaping our fourth quarter and 2025 outlook. First, a continued impact to our revenue recovery business resulting from the dynamics Chad laid out in his prepared remarks.

Second, ongoing invoice scrutiny and delayed purchases affecting spend across our fulfillment customers. Lastly, across retail relationship management programs, several large enablement campaigns were pushed from Q4 into the first half of 2026. As a result, we expect a decline in onetime revenue from testing and certification fees associated with these programs. Now turning to guidance. For the fourth quarter of 2025, we expect revenue to be in the range of $192.7 million to $194.7 million, which represents approximately 13% to 14% year-over-year growth. We expect adjusted EBITDA to be in the range of $58.8 million to $60.8 million.

We expect fully diluted earnings per share to be in the range of $0.53 to $0.57 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 $0.98 to $1.02 with stock-based compensation expense of approximately $15 million, depreciation expense of approximately $5.8 million and amortization expense of approximately $9.5 million. For the full year 2025, we expect revenue to be in the range of $751.6 million to $753.6 million, representing approximately 18% growth over 2024.

We expect adjusted EBITDA to be in the range of $229.7 million to $231.7 million, representing growth of approximately 23% to 24% over 2024. We expect fully diluted earnings per share to be in the range of $2.31 to $2.34 with fully diluted weighted average shares outstanding of approximately 38.1 million shares. We expect non-GAAP diluted income per share to be in the range of $4.10 to $4.15 with stock-based compensation expense of approximately $58.3 million, depreciation expense of approximately $21.1 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, as a result of the dynamics that are impacting our customers and retail partners this year, we are providing our initial outlook for 2026 and expect to deliver revenue growth without future acquisitions of approximately 7% to 8%.

We continue to expect adjusted EBITDA margin expansion of 2 percentage points, driven by continued improvement in gross margin and operating efficiencies. Longer term, we remain confident in our competitive position and market opportunity and our ability to deliver at least high single-digit annual revenue growth without acquisitions and 2 percentage points in annual adjusted EBITDA margin expansion. And with that, I'd like to open the call to questions.

[Operator Instructions] Our first question comes from Scott Berg with Needham.

So I've got a multipart revenue recovery question here. I guess we're all going to have the same questions on this one is, try to help us understand, I guess, when this became apparent in the quarter that the seasonality was a little bit different than you had expected Chad. And as I think about that business going forward, I thought the seasonality in that business was supposed to be stronger in Q4, but it looks like you're reducing your fourth quarter revenues by roughly $6 million, likely all attributed to that business. And then as the natural extension of that is how do we think about that business as impact on that fiscal '26 initial guidance Kim just gave?

Yes, sure. Thanks, Scott. Let me speak maybe to the visibility and how that developed and let Kim speak to the outlook going forward. I'd say late in Q3, we did pick up that the volume of shipments that our customers were sending into Amazon warehouses were a little bit lighter than expected.

In many cases, that can be a leading indicator to revenue that will develop, but I would say not necessarily in all cases. Unfortunately, as we closed out the quarter, we did see a correlation in that reduction of shipments into Amazon warehouses from our customers did result in less revenue than expected. So the shipment visibility kind of became apparent pretty late in Q3, and we really didn't understand the full impact to revenue until we close things out after the quarter ended.

And then when you think about the expectations that we have for the remainder of the year, when you think about the Q4 guidance that we just provided and the variance from that versus the implied Q4 guidance from a quarter ago, the impact on the revenue recovery in that, you should look at that similar as Q3.

So there were three sort of dynamics that I highlighted that went into that, one of them being the revenue recovery, and that component was about similar impact in Q3 and Q4. Then the other two components were a continuation of where we're seeing some invoice scrutiny and delayed purchase decisions as well as some of those retailer enablement campaigns or relationship management campaigns we were initially thinking were going to happen in Q4.

Now those are happening in 2026. And as such, the impact to the P&L in Q4 would be most notable on that onetime revenue of testing and certification just because of the timing of how the subscription revenue works, more of that would show up negatively on the testing and certification in the quarter.

All right. Understood. I guess from a follow-up question, I saw that Dan is leaving. Good luck, Dan. It's been fun working with you, is new Chief Commercial Officer coming in. I guess questions there revolve around what would you expect this new individual to do differently, if anything?

I see his background has been not at one, but at two ERPs that you all certainly partner with today for customers with tightly at least. And just trying to help understand what we might see maybe differently going forward, if anything.

Yes. So let me start with what I think will stay the same, but continuing to improve over time. And that's, first, our differentiated go-to-market that we have with retailer relationship management, where we partner with the retailers to help them establish all their digital connections, that in turn, uncovers suppliers for us and is the largest source of new customers for us.

We've been refining that approach at SPS Commerce for 20 years, and I expect we'll continue to refine that approach for the next 20 years, and it will be great to have Eduardo partner on continued refinements to that, but I expect that will continue. I also expect that our channel go-to-market where we work with a lot of mid-market ERPs will absolutely continue and very excited to what Eduardo can bring to that, which I think will just be a further advancement of that strategy.

Yes, he's worked with a couple -- at a couple of ERP companies that we do partner with, but his whole career has been utilizing a lot of channel to drive mid-market sales, which very much lines up with our business. I think in terms of what may evolve over time that Eduardo will be able to bring us, we'll be really maximizing that expansion and cross-sell motion that we have with existing customers and managing that full life cycle that we have with customers.

We've been quite clear that we believe as our product portfolio expands, the opportunity to increase ARPU is probably going to be the faster growing in our growth algorithm between net new customers and ARPU increases. I think Eduardo's background is really going to help us with that. And then as we become a more global organization and continue with our efforts to expand in Europe, Eduardo certainly brings operating experience across multiple cultures and multiple continents and multiple geographies that I think will help us with that continued growth.

And the next question comes from Chris Quintero with Morgan Stanley.

A lot of moving pieces here. We just went over the revenue recovery piece. But maybe on the organic side, you all called out invoice scrutiny and some of those retail go-to-market programs getting pushed into next year. So just to clarify, are those incremental impacts that you're seeing this quarter versus the last quarter? And why are some of those projects getting pushed out into next year?

Sure. So specific in Q3, Q3 hit our expectations on both of those. The color that I was providing was specific to Q4 and two dynamics in there. So as it relates to 90 days ago, what we were anticipating for the quantity of retail relationship programs and the timing of those programs, that has changed. So instead of many of those happening in Q4, they're now happening earlier in 2026.

So the impact there is on the P&L in 2025. They're not lost programs. It's just the timing of when those are going to happen. Now in some cases, if you think about Q4, it's a really busy time, holiday season. And so it's possible that maybe some of those retailers were a little bit more optimistic of what they thought they would be able to accomplish in Q4.

And in those cases, some of those now are just getting moved into '26, primarily due to the holiday season. And then the second part of that, as it relates to the invoice scrutiny delayed purchase decisions. Again, we hit on that expectation in Q3, but we're starting to see some signs that, that's still continuing on. And in light of that, we wanted to also add that continuation at a little bit higher factored into our updated guidance.

Got it. Okay. So some of the retailers maybe got a little bit over their skis on their expectations for Q4, I guess. As my follow-up, maybe on the network-led growth motion. I know we talked a lot about it at Investor Day, but is there anything you all need to do from an investment standpoint to make that successful? And is there any kind of early evidence that you're seeing how that's progressing or any kind of early proof points?

Yes. I mean we are making investments in this area. I wouldn't describe them as incremental investments to achieve what we want here, more just where we're focusing our team's attention, and we're having great success.

So I think a great example of how this is working is like in revenue recovery, where we're able to get based on the network data, the volume that our customers have trading with certain retail partners where we provide revenue recovery and immediately identify that they are a highly qualified candidate for that revenue recovery solution and automatically serve that up as a leader opportunity to the expansion salesperson that's responsible for that customer so they can engage with them about the benefits they receive from revenue recovery.

That type of motion and triggering it off the network is sort of up and running, and we look forward to continuing to scale that and using that to drive more cross-selling activity. And that's just one example. There's multiple examples where we can identify opportunities right from the network data for further expansion in our customers.

And the next question comes from Matt VanVliet with Cantor.

Obviously, across a lot of the software landscape on the application layer, there's a concern that toolkits from various AI tools and LLM providers are enabling more companies to look internally to maybe build functionality that they don't currently have rather than go out and find a vendor to do that.

Is that at all being mentioned by some of your prospects as to something they're at least exploring and delaying deals? Or any other thoughts there that maybe your stronghold on this position in the market could be cracking a little bit as customers see the -- I guess, the utility of buying something prebuilt isn't as high as it's been for some time?

Well, we are seeing a few headwinds in our demand environment that we mentioned. This AI as a replacement is not one of those things that we're hearing from prospective customers. And I think that's really for a couple of reasons. One is the breadth of the network itself in terms of the rules that are in there and the way that we have built out the compliance capabilities to so many different retailers to where you can connect once and access those.

That's years and years of that intelligence about retailer requirements being built into the network. And quite frankly, it would be very difficult to replicate with LLM or Agentic AI. The second reason is customers are seeing the power of the data that we have in our network and actually seeing that by participating in our network and having access to that data as they advance their AI strategies, the input mechanisms from that data on our network is going to be very powerful to them to execute on their AI strategy.

So it's actually quite complementary there. So I think it's really for those reasons that we're not seeing that as a disruption with the end customers. And then I'd say more broadly about our business and business model, unlike some of the other application providers that provide seat-based licensing, if there's less users and more agents, they're vulnerable because our pricing model is really based on the connections in the network, we think that, that's going to be a more durable model that we have with our customers as more AI kind of takes over.

All right. Helpful. And then I guess as you look towards kind of out to next year and the initial guidance you gave with a little bit of a slowdown, at least relative to where we were expecting, does that change the appetite or the strategy around M&A? And will you potentially look for more tuck-ins that offer a broader set of solutions to appeal to more customers to try to revamp growth? Or anything on that front that you think will be impacted by what's going on today and kind of what the expectations are over the next several quarters?

Yes. I wouldn't necessarily say it drives a change in philosophy. We have a lot of conviction in our M&A philosophy and continue to be active with our M&A pipeline really across what I'd say is kind of a couple of three different areas. One being continued consolidation in the core digital connection or EDI market.

There still are opportunities for further consolidation there. And when we're able to execute on those types of opportunities, one, it's just really good for the customers because they're typically moving from a much smaller network or a point-to-point set of connections and then you move over to our network and really see the benefit of being on this broader connection, our network with lots of connections built in.

The second category is more of the solution expanding or portfolio expanding type acquisitions, similar to what we've done in revenue recovery, and we continue to believe that there'll be more opportunities where we find a solution, it's very applicable to our 50,000-plus customers already on the network and therefore, will drive cross-selling. And a lot of times, we find that these solutions actually get improved by connecting to the network and having access to the data on the network.

And then the third category would be geographic expansion. Admittedly, this one is probably a bit of a lower priority as we continue to drive the execution of our Europe strategy on the back of the TIE Kinetix acquisition. But I think as we continue to get traction in geographies outside of the U.S., we'll be able to use M&A over the long term to continue to build up business and capture more markets outside the U.S.

And the next question comes from George Kurosawa with Citi.

I wanted to dig in on some of the spend scrutiny you called out. This is something you mentioned last quarter as well. Is it right to think of that as being tariff-driven primarily? And then if you could just compare what you saw in Q3 versus Q2. At the time, it seemed like some of that was sort of ring-fenced within your mid-market customers. Have you seen any -- is it more that, that's customer cohort has seen incremental weakness? Or has it maybe spread a little further across the customer base, if that makes sense?

Yes, it makes sense. So I think if we look at customer sentiment right now, and there is some more spend scrutiny coming primarily on the supplier side of our network, I would -- wouldn't say it's exclusively tariff related, but it definitely has a tariff impact.

It does seem that many of our suppliers are absorbing incremental costs for the products that they're selling to retailers and not passing a lot of that on. So therefore, they're looking for other types of cost savings in their organization. And I would say that trend has been consistent. It sort of picked up in Q2 and has carried through Q3.

As it relates to Q3 results, I think that was factored into our original thinking about Q3. The variance that came from Q3 was quite specific to revenue recovery and related to some of the shipment volume changes for Amazon third-party customers.

Okay. Great. And then as a follow-up on that line of thinking in the revenue recovery space, is there any way you can help us think through the performance of maybe the SupplyPike assets versus Carbon6, just to get a better feel for if there's anything sort of underlying happening in this market or if this is just exclusively a function of Amazon-specific dynamics?

Yes. So first, I'll say we have high conviction over the long term in this revenue recovery opportunity. We're seeing very strong interest in it and demand from our fulfillment customers and have some great early adopter customers on the fulfillment side who have taken it. We also believe in the strategy where we were quick to build out a comprehensive set of solutions that one covered a wide set of retailers and two, offered both models kind of a SaaS subscription model and Take Rate model. We're also pleased with the work that we've done integrating those teams across SupplyPike and Carbon6 now into a common go-to-market team that is offering all retailers and offering both sort of pricing models to customers based on their specific needs.

The headwinds that we saw as a result of shipments in Q3 was exclusive to the 3P side of that business. So if you think all of SupplyPike and the retailers they support are primarily 1P, meaning they're shipping wholesale or direct to store for certain retailers. A good portion of the Carbon6 fits with that because it's the 1P model in Amazon.

And then there's another portion of Carbon6 that is the 3P. The variability we saw was in the 3P area. We have not seen much disruption in the 1P area. And as we think strategically, the 3P part of the business is certainly important to us, and it was a sizable portion of Carbon6, and we will continue with that piece of the business.

But we really think of the 1P side as a lot more strategic for us because that 1P seller really lines up with our ideal customer profile on fulfillment. And so therefore, we think over time, we're likely to have a broader product portfolio for that 1P seller. And therefore, the fact that the 1P was the piece that was a little less disrupted, probably a little bit more favorable for us.

And the next question comes from Parker Lane with Stifel.

Kim, maybe if we look to the 7% to 8% outlook you have for '26 initially here, can you just go into the assumptions on the macro environment that are embedded in that? Is that assuming any sort of normalization or improvement in the environment that you're outlining for 4Q? Anything you can offer there?

Yes. So Parker, what I would say is our initial guidance that is on the -- call it, the lower end of the high single digits takes into account the dynamics that we're seeing this year. And obviously, the way recurring revenue works, there are certain aspects of the dynamic this year that just naturally, right, feeds into next year.

And so I think of it more a mid-ish case, meaning we're reflecting what's happened this year, but we also do have optimism as it relates to the business and the opportunity next year that has been taken into account as well. And taking all of that into account, our best view is, call it, that lower end of the high single digit of 7% to 8%.

Got it. And Chad, you just alluded to the new go-to-market team that's combined here for revenue recovery. Can you just talk about how quickly you anticipate that you'll start seeing some of the benefits from that new structure? Is that something that can impact 4Q? Or is it more of a couple of quarters for the team to get its feet underneath it and start to execute?

Yes. So we are seeing some early success in pipeline development and pipeline management and moving deals forward with that combined approach in terms of the -- on the Amazon side, where we did see the headwinds in shipment, actually, some of the new customer acquisition has been tracking ahead of where we expected, which gives us conviction about the total market opportunity.

The thing about Q4, I would say, is most of the customers that we sign up in Q4 are not going to have a meaningful impact on revenue in either the subscription or the take rate model. So I think continued benefits from this new go-to-market are more likely to have may show up kind of through the P&L in the second half of 2027 in a more meaningful way or 2026, excuse me, than in Q4.

And the next question comes from Mark Schappel with Loop Capital.

This is Tim Greaves on for Mark. I guess I want to ask around -- with leveraging your customer change events such as ERP and WMS replacements. Could you provide some directional insight on activity levels you observed there with ERP and WMS replacements, like anything upgrades over the past quarter or two?

Yes. Those -- majority of those change events, which lead to new customers for us are on the ERP side. WMS can be one of them, but I'd say the majority of them are on the ERP side. We have seen some softness in ERP -- sort of changeout or replacement market. And that has come mostly in the area of the what we call the mid-market ERPs. So meaning the very high-end enterprise ERPs, we don't do a ton of business there, but we have seen those deals go through as expected.

And the very low end, the small kind of QuickBooks type systems, those actually have moved forward in more of the mid-market ERPs, the Sage, the Microsoft, the NetSuite, in these areas, we have seen some softness in that market, which then kind of slows down the ability to capture new customers via these change events.

[Operator Instructions] Our next question comes from Dylan Becker with William Blair.

This is Jackson Bogli on for Dylan Becker. I was wondering if you could go into the new logo side of the equation here. We saw a little bit of a step-up in the quarter. I was just curious to get your thoughts on how we should think about the new logo momentum going into 2026 despite enablement campaigns getting pushed out, but maybe how you're feeling about going into 2026 with some new logo momentum behind you?

Sure, Jackson. So through the first three quarters of this year, we've added a net 1,100 customers. So to your point, that's at a much higher clip than last year -- last year -- well, and that number excludes M&A. And then last year, the number, excluding M&A was 300 for the year. So to your point, we're at a much accelerated rate. And that's primarily driven by these retailer relationship management programs. In Q3, we also exceeded that expectation. We had assumed it would end up being, call it, a net 350. It ended up closer to a net 450 based on those activities.

So that's great momentum. Specific -- I know you're asking about next year, but I'm just going to give a little color about Q4. So specific to Q4, because of the comments that I made in the prepared remarks, where we have a fair number of those relationship management programs that are pushing from our original expectation of Q4 into 2026, super logical reason why with the holiday season, but knowing that, that is different than we originally anticipated. Our lens for Q4, when we look at our net customer add perspective, we're assuming similar churn to what we've seen in the last couple of quarters.

But since those -- many of those programs have moved out, our expectation for net customer adds in Q4, we expect that number is flat to slightly down potentially in Q4. Again, just that's really timing driven. So then when we think about 2026, we really like the pipeline that we're seeing on relationship management programs.

At this point, similar to what we would have shared at Analyst Day, when we think of that mix of what gets us to that high single-digit growth rate, the expectation would be that customer adds are certainly a part of it, but a larger portion of that growth would be coming from the ARPU side of the equation.

Nothing's changed there relative to our expectation of the mix being more on the ARPU side and less being on the customer growth side, both important, but similar comments to Analyst Day would still remain.

Great. That's helpful. And then one follow-up, if I could. We saw continued margin expansion in the quarter. And I was curious, we've talked about AI a little bit in this call, but what areas are you guys looking to really lean into to drive that further operating leverage in line with your long-term model and maybe how that leads to better network monetization and that AI differentiation building that competitive moat that you guys have?

Yes. Jackson, thanks for picking up on the expanding margins. A lot of that coming from the gross margin. And the driver there in the gross margin is primarily the investments that we have made in our customer experience and in particular, our customer onboarding to the network. That's become much more efficient and that leads to a better customer experience, and that efficiency also has led to some margin improvement.

There's continued improvement that we will drive there, first and foremost, to improve that customer experience and then secondarily, to have that efficiency drive better margin for us. Also, I would say, on the G&A lines and sales and marketing lines, as we continue to scale the business, we think we will get continued efficiency there over time and work towards the targets that we have in our long-term model. You did mention AI.

I would say we do have internal initiatives now to apply AI technology to continue that efficiency journey and looking, first and foremost, at our go-to-market teams, so a combination of marketing and sales and our customer success teams. One, those are probably the most meaningful workflows in terms of they're all customer-facing workflows. That's also where a lot of our people are today. So we think we continue to drive efficiencies that way as well.

And the next question comes from Joe Vruwink with Baird.

Carbon6 and SupplyPike, when they were originally announced, I think they added to $65 million in revenue in fiscal 2025, bringing a faster rate of growth with it. If I annualize this $3 million to $12 million for a year, it's taking off a double-digit proportion from those businesses.

Is that the right way to think of it? And then if I do that into next year, and I'm subtracting off their elevated or what was an elevated growth rate, can you maybe talk about the embedded assumption for revenue recovery within that 7% to 8%? It maybe seems like that side of the business is in line to below the 7% to 8% and the SBS fulfillment business is still kind of above there, but I want to be sure on all that analysis.

Sure. So when we think about that business and we think about it first for the year 2025, we're in around, call it -- within, call it, 10-ish percent of what our original expectations were. When we think about what next year that business represents for us, we still do expect that, that grows at a faster click than our core business.

And keep in mind the comments that Chad added, when we think about the cross-sell muscle here, now that we have the combined go-to-market strategy and the combined teams in place, we do believe there's a lot of opportunity for us in 2026 to really flex that cross-sell muscle. We have some at bats that have worked well for us this year, but it's still very early on. So the fact that we're going to have that for all of next year has also been taken into account and leaves us with strong conviction that, that business still will grow at a faster click than the core business next year.

Okay. That's helpful. And then going back to the customer count, if my math is right, it looks like the 3P side of the count is down maybe 500 logos or 5% since the start of the year. One question, how much of that is churn that you're okay with going back to Chad's comments of you're inheriting a business, but now you're looking to refine it and optimize it for what's going to be more enduring for you going forward?

And then the silver lining of this question is that if you add the 500 logos back to those 1,100 number you were talking about earlier at the corporate level, 1,600 added for legacy SPS Commerce is a pretty good number. And I wanted to just ask kind of where that's being driven within the environment of spend through the need.

Sure. So when you think about the customer count, to your point, we show the number as total customers, but then we do break that out within supplemental in the 10-Q. So if you think about the 3P side of the business in the quarter in Q3, the 3P customer count declined approximately 150. So just as a reminder, when we acquired the Carbon6 business, that added about 8,500 customers, of which the vast majority were 3P, about 8,200 of that 8,500 were 3P.

So what we've seen in that business is specific -- it's actually specific in Q3, where that is down approximately 150. And when I think about the business, one, there tends to just be more churn, right, in that 3P business. It's also a much smaller ASP per customer. And there's also some, I'd call them, nonstrategic ancillary type products that we offer to 3P customers. And in those areas, we have seen some of that churn off. Our expectation would be in some of those areas, we'd expect to see that 3P customer count decline a little bit, very immaterial on the overall revenue, but that trend we saw in Q3, we would expect that, that trend would also continue into Q4 and beyond.

So when you think about the business overall, there's the 1P side and the 3P side. The 1P side has much larger revenue per customer or ARPU per customer. The quantity of customers acquired was much skewed to the 3P side. Again, we definitely see a bit more churn there and also the nonstrategic part of the business. But where we saw a decline, really, I would characterize that as really starting in Q3 at that sort of net 150 and wouldn't be imprudent to assume that we're sort of at that clicked going forward as well.

Then last thing, to your point, that means the -- over the 1P customers actually grew more. So the net 450 would actually be a higher number when you're looking at the 1P customer adds to your point.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, everyone. I think we're at time. So we'll go ahead and get started. Welcome to the SPS Commerce 2025 Investor Day. We appreciate you all joining us here in-person, and thank you to all those on the webcast. Today's agenda includes presentations from the SPS leadership team, a moderated customer panel discussion. And at the end of the program, we'll open it up for questions.

Before we begin, we will look at our forward-looking statement. I'd like to remind everyone that our presentation contains forward-looking statements, which are subject to risks and uncertainties as outlined in our SEC filings. We'll also be discussing non-GAAP measures. Reconciliations to comparable GAAP measures can be found at the end of the Investor Day presentation, which will be posted on our Investor Relations website and on our SEC filings page.

To that, we are ready to start. And I'll introduce Chad Collins, CEO of SPS Commerce, to discuss our growth strategy.

Thanks Irmina. Well, a very warm welcome from me, especially for those of you who came to my hometown for the last 25 years, Minneapolis and also our headquarters location and home of about half of our 3,000 employees, about half of them are based in the Minneapolis-St. Paul area. So thanks for joining.

So for those of you who are a little maybe less familiar with the story, SPS Commerce, we operate a network in the cloud. And that network connects retailers to all of their suppliers to exchange supply chain information and facilitate collaboration for efficient supply chain processes. We are really servicing three main end-market groups. First, retailers, and I'll point out that, of course, that includes the retailers you traditionally think of like Target right down the street here, we have a pretty broad definition of retail. So also included in there are grocers. And also included there are distributors.

And within distribution, that could be industrial distribution, food service distribution, medical supply distribution, really large buying organizations that are purchasing finished goods and then reselling them fit into our definition of retailers. And of course, we all have all the vendors or suppliers to those organizations and then also the third-party logistics providers that often sit in the middle of those transactions between retailers and their suppliers.

And by using our network, then these three market segments really get the benefit of improved speed to market. They can improve their sales growth and the margin on those sales and lots of benefits both on the retail side and the supplier side for reduced operating costs for using our network. So our purpose statement here at SPS is really to power the connections that move the world of commerce forward. And kind of the heart of that is really this idea of connections based on our network. And the power of the network and the connections that we make on that network and also the connections we make with customers and one another really powers everything that we do here at SPS and is frankly, quite motivating for our employees.

In fact, I joined SPS just about 2 years ago, and I've worked in supply chain software my whole career first as a consultant putting in systems and then as a leader of other software companies. And all those years I've worked in supply chain software, I've seen all this investment that organizations make, whether it's warehouse management or transportation management or planning in the four walls of their operation. But I've always felt like supply chain was really inherently multiparticipant and the right types of technology to solve that multiparticipant problem is really a network technology.

So after working in this industry for years, I always saw the power of the network, and that was one of the things that really drew me to SPS because when you can put multiple participants on the network, then that really facilitates the collaboration. I always say, no matter how good your systems are inside the four walls, if you can't get the right product at the right place, at the right time from your suppliers, nothing else downstream from that really matters.

And we'll talk today a lot about the network. And Mike, our Chief Product Officer, who's up next, will walk you through all the applications on the network. But I think that is an important thing for you to understand is that although we sell and have a price list of applications, they're all powered by the network. And everything we do is connected to that network. So both the things of products we've had like fulfillment for a very long time, but now even the newly acquired products like revenue recovery are getting lots of value by being connected to this network. So think of a set of value-added applications that are all benefiting and contributing to that underlying network.

Jamie will walk you through -- Jamie is our Chief Technology Officer. He'll walk you through a few details on that network. But one of the important things that he'll highlight is this idea of being protocol agnostic. So certainly, we do a lot of EDI transactions on the network, but we also do have a lot of endpoints that are API. And in some cases, for less sophisticated users of the network, they can be file-based. So for us, how customers connect to the network is a lot less important than getting them connected to the network.

And consistently, we're chosen over our competition for a few reasons. One is our deep expertise in retail and distribution supply chains. So we really have a great understanding and a lot of domain expertise around the expectations that retailers and suppliers have -- retailers and distributors have on their supplier organizations and oftentimes the complex rule sets that are involved in that. We've then developed internal processes especially you'll hear today about our retail go-to-market, where we've perfected this process of helping retailers do the outreach and digitally onboard their suppliers, and we've been very unique in that internal process.

And then, of course, our technology platforms. And then what we're seeing increasingly now is customers choosing us because of the actual data inside of that network. So there's been a definite view of having more data can help with supply chain decisions and having more data can help power AI decision-making. And so increasingly, customers are coming to us because not only they see the business processes that can run on our network, but they see the power of the data that's in our network. So we've had many waves in the retail industry or retail ecosystem that SPS has grown through.

In the early days, there was this effort to fully digitize in the development of e-commerce. We saw that e-commerce then shift into omnichannel fulfillment, really more advances in e-commerce, the idea that you could use a store as a site of replenishment for e-commerce orders that also brought in the advancements of buy online, pick up in store. And then what we saw during the pandemic was really all these retailers had road maps for what they were doing in e-commerce. And once the brick-and-mortar stores had to close or were substantially impacted by the pandemic, we saw a big acceleration of the omnichannel initiatives throughout the pandemic.

And one of the big accelerations that was there was the rise of drop ship e-commerce. So that rise of drop ship e-commerce really did create an opportunity for SPS to help facilitate the connecting of lots of suppliers to retailers to facilitate that drop ship e-commerce. And so through these waves, they've certainly seen different trends and how they've impacted our business, especially in terms of how we've been able to add customers and increase average revenue per customer through those time periods.

So in that sort of 2010 through 2016 time period, where we have the digitization and the rise of e-commerce, keep in mind here during the same time period, you have an early penetration of the TAM, right? So SPS has always been a leader in getting the long tail of the suppliers digitized. So you saw healthy growth rates, both in terms of our ability to add customers on a percentage basis as well as increase the ARPU. Then as we sort of saw these early omnichannel initiatives, us penetrate the TAM a little bit more in that 2017 through 2019 period, a bit of a flattening of some of those growth dynamics. And then when we had this pull forward in the pandemic, a very large acceleration in the customer count driven not exclusively, but very substantially by the rise in the drop ship e-commerce that I spoke of earlier.

If you look at where we're at right now, we're seeing a bit of a normalization on the omnichannel initiatives of retailers. They pulled certain things forward. These omnichannel initiatives continue, and we will be the benefit, but we certainly did see some pull forward. And now in this period 2023 through 2024, we have more of a stabilization of the deployment of those omnichannel initiatives from retailers and quite frankly, we have pretty widespread uncertainty related to the current global trade environment. How this has impacted us is we have seen steady growth in our average revenue per customer, but a bit of a slowing on the customer count, especially in the year 2024. And Kim will walk you through a little bit more on the dynamics of customer increases over the years and what we're going to see going forward.

So a question we often get is, especially in light of our new long-term expectation on the top line of high single digits, hey, what are the some of the factors that went into this high single-digit expectation that you're setting with us now? So certainly, there was a bit of a pandemic pull-in of demand. And you might say, hey, the pandemic was a long time ago. Why was that affecting you? Why didn't we see that sooner? Well, because of our land and expand model, that did sort of carry all the way through into 2023 time period. We've also been impacted by the lower net customer adds in 2024. Now while this was primarily driven through the 2024 programs focused on retailers we've historically worked with more, which did increase the revenue of the suppliers that were connected to those retailers, but didn't have as much impact on the customer adds.

And then finally, there's certainly macro uncertainty and global trade uncertainty, which is impacting the entire retail ecosystem at the moment. But on the more positive side about the dynamics, I'd say there are some new retail dynamics that are macro factors and longer-term tailwinds for our business, which I'll explain. We do have a large and lots of room to penetrate the total addressable market. And I think the more uncertainty we see in the supply chain, once things stabilize, that typically drives an increased need for supply chain collaboration as a result of that uncertainty and that need for collaboration typically drives supply chain technology and software investments.

So if you look at some of the dynamics that is happening in retail right now, you have a rapid emergence of new brands. And so the barriers to entry for new consumer brands have probably never been lower. So brands can access consumers directly through Shopify or Amazon Marketplace, and they can promote their brands in unique ways, primarily through social media marketing and gain access to consumers. And so we're seeing an increase in the total number of brands in the retail ecosystem. And often when these brands gain traction on the Amazon Marketplace or via Shopify, they then get contracts with traditional brick-and-mortar retailers, which introduces all the new requirements to do business and operate the supply chain in the way that the retailers are expecting.

We also see quite a bit of expansion into new marketplaces on the retailer side. So we're seeing retailers expand their business from the buying and selling goods of just moving into this marketplace model, and that creates new opportunities for us in the retail ecosystem. And we think longer term, once there's more certainty in the global trade environment, we'll see some degree of supplier rebalancing based on geographies and no one is better positioned to help onboard new suppliers than SPS Commerce and our differentiated approach of helping retailers onboard their suppliers.

So on the TAM, just under a year ago, we refreshed our total addressable market. We did a complete bottoms-up analysis using specific companies and specific SIC codes in the U.S. and expanding and extrapolating that to the global TAM. And we identified that there's a $6.5 billion opportunity for us in the U.S., and that's just over $11 billion on a global basis. And the way that works and kind of I think -- a simple way to think about our business is we're adding new customers, and we're increasing the average revenue of those customers that are in our network.

So we believe through this TAM analysis that there's an opportunity to increase from just over the 50,000 customers we have today to 275,000 customers globally on our network and increase that average revenue per customer from just over $13,000 to over $40,000, primarily driven by increasing their use of the network with new connections and then secondarily by adding and cross-selling products to those customers to increase the revenue.

We'll -- I'll talk quite a bit about our go-to-market strategies, but we really organize our go-to-market strategies in two categories. One is landing new customers, so increasing the number of customers on the network and then expanding the use of those customers. And so we'll dive into each of these go-to-market strategies in the go-to-market section. And so I want to introduce you to the team. A lot of you get to only see Kim and I, but there's a great team supporting the whole company here. So next up will be Mike Svatek. He's our Chief Product Officer. Mike, you want to wave your hand in the back there. Mike joined us about 8 months ago. He's got a deep background in retail technology and supply chain technology, typically focused on launching innovative new products and managing a portfolio of products.

Jamie Thingelstad has been at SPS for quite a while as our Chief Technology Officer. You're going to hear from him today about the power of the network itself and lots of examples of AI use cases that we have in our organization. Many of you will know Kim, our CFO. She'll walk us through the numbers. Also joining us today is Erica Koenig, our Head of HR; and our new Chief Marketing Officer, Maria Pergolino, who has a deep background in leading the marketing organizations of multiple SaaS companies. Not able to be with us here today because he's got a customer commitment is Dan Juckniess, our Chief Revenue Officer.

So I just want to leave you with one idea and one maybe theme of the day, and you're going to hear this kind of throughout the various presentations. SPS has had a nice growth over the years in what I would describe as a sales-led growth model, meaning we have lots of salespeople. They're out there running relationship management programs to gain new customers. They're dealing with customers to upsell and cross-sell those customers, I'd say much more of a traditional manual prospecting and selling approach. And we will certainly continue that going forward. But to augment that approach, you'll hear a lot today about a concept that we have called network-led growth.

And this is actually where we're getting demand signals about our customers from their activities on the network itself, and that becomes a signal to us for upsell and cross-sell opportunities. We can also use the network data itself to prospect new customers. And so this is very unique in a SaaS model to have these types of insights about the market and about your customers from the data that you have on the network itself. And we'll walk you through a few of these examples, but I think this is really a powerful -- think of it as kind of next chapter of growth opportunity for SPS to actually use our network to identify needs that our customers have.

And then although today, it's mostly requiring salespeople to intervene with that, over the longer term, we strongly believe there's going to be opportunities to pick up those signals and actually convert customers directly in the product and so that they can increase their usage of SPS directly through the product and without actually interacting with the salesperson. But what you'll hear a lot about today is this concept of network-led growth.

And with that, I think I'll hand it back to Irmina.

Thank you, Chad. So what we heard Chad just talk about is obviously product strategy, network-led growth and how important that network is to SPS' differentiation in the market. I'll let Mike come up and dive deeper into the product strategy and the contribution that network has to that.

All right. Good morning, everybody. Good to see everybody here in person and for those who are online, thanks for following along. My name is Mike Svatek. I'm our Chief Product Officer. And I'm going to take you through our general thoughts on product strategy and also dive a little bit into some detail around the new products that we've launched, our new retail go-to-market motion as well as talking about sort of our traditional, if you will, supplier products. But without further ado, we'll jump in.

If you think about SPS over the long haul, really we've been focused on the perfect order. Think about supply chain excellence and what that means. So it means a retailer putting in an order, it means that supplier receiving that order, acknowledging it, packing it, getting it shipped either directly or through a 3PL, carrier hands it off. It's received hopefully, right, at a retailer. It is then inbounded right into that dock. But it's also when it's received, everything shows up, right? So it's at the right location, it's on time and it's in full. That's what essentially the SPS network and our fulfillment products have been built around.

A lot of the concepts in that revolve around timeliness of data and automation, right? Automation is absolutely key and core to what we do at SPS, and we continue to invest in there. But one of the things I want to land with you today is the critical nature of collaboration in the supply chain and how we're drawing a string through every product and every piece of innovation that we're developing now and for the future to make sure we're bringing forth collaboration in the supply chain.

So why does collaboration matter? Well, when you look at the various roles of different actors in the supply chain, whether you're a 3PL, a retailer or a supplier, or other forms of actors as well, what you have is a complex, highly interdependent value chain, not only within your own business, where the current step depends heavily on the prior step and influences the future step. You also have a situation where we're repeating this process daily, weekly, monthly, sometimes by the dozens, sometimes by the millions, high-velocity value chain and one that's interconnected with your trading partners.

And so the opportunity here to automate clearly has been big, and it's what's been driving our business. The opportunity to collaborate, we think, is even greater. In an era where supply chains are being disrupted, in an area where there is a requirement just for more agility, not only because of the disruption, but also because of the opportunities we're seeing in the market, that drives collaboration. The other thing that's driving collaboration is we're now in an era where data is much more available than it's ever been. Back to what Chad said earlier, the power and the value that we see in the data and the network itself is not only encouraging, it's also enabling our customers to collaborate better to create those kinds of efficiencies they're looking for in their supply chain. So we're focused both on collaboration critically, but also critically automation moving ahead.

Now when you look at the various value chains in our customer base, there's a broad spectrum of places we're already adding value, whether you're a 3PL, a retailer, or a supplier. And our customers have enjoyed those benefits, but they're asking more from us. We're having conversations. My team certainly, our sales team, our services team, our executive team are in constant contact with our customers and our partners, looking for where are those next opportunities for us to advance our innovation to provide even more value to them.

As we look at those opportunities, we're following build, buy, and partner strategies. Let me kind of unpack why we would approach each and give you an example of each. So on the build side, we're looking for those opportunities in the market and our customer base where we can extend our core. So from our core, we look at the ability to take native organic development to extend that, not only leveraging the applications we have today, but critically the data and the network that we have today to bring to market something new. A good example of this would be our solution for manufacturing, which we launched earlier this year. If you think about what manufacturing is, if you're a supplier that's on our network today, you're likely trading with a retailer, that's the distribution chain.

Well, now we can take our capabilities that were organically built over many years, improve now with manufacturing capabilities and invert that. So that same supplier can now deploy SPS into their supply chain so that they're getting raw materials delivered or potentially finished goods or co-man materials sort of delivered in where they can then act in the traditional supplier fashion. So not only on the distribution chain, but now also on the supply chain for the same customer in the same network. That's a great expansion of our organic capabilities through a build motion.

Now on the buy side, we're constantly looking for the highest value opportunities within our customer base to add value, which are highly complementary to our core and are also proven. So examples here are our recent acquisitions of Carbon6 and SupplyPike, where as we looked across our supply base, we saw a significant opportunity to help them accelerate their ability to recover revenue. In the case of a deduction that was perhaps erroneous, the opportunity to identify that in an automated way and then go through the correct dispute processes with those retailers to recover that revenue. And in other cases, going through that process and discovering that the deduction was true and fair and giving them an opportunity to get better as well. So this is -- was a great opportunity for us to acquire two of the best platforms in the market, assimilate that into the SPS portfolio and then connect it to our network to start getting disproportionate value.

The last area is partner, and there's a wide range of places where we may partner. What guides our philosophy here, again, is critically always focusing on the needs of the market and the customer to identify an area where we can add a new capability or potentially a new product line to the mix. One area that -- and typically, we would do this in an area where the nature of the engineering or the technical work to be done isn't core to us, right? There may be this problem has been solved in a different industry or maybe there's a horizontal software platform that provides this. We would then adopt that and then apply that in a vertical software motion for our particular industry and then bring that to market.

So an example here would be a capability that we have launched over the summer, which allows us to extend the range of order channels to the e-mail inbox. So if you think about a vast array of suppliers that we have in our network today, you'd be surprised by the number of retailers or the suppliers rather that are still receiving orders via their inbox, and now we can immediately and instantly in real time attach to that and pull that information right into our network, just like we do with all their other orders.

So let's talk about that network. As we're pulling orders in, what's unique about our network? Why are we able to do what we do so well? Well, there's two sort of concepts I want to land real quickly about the network. First of all, our network enjoys classic network effects, meaning that by adding an incremental participant to the network, whatever that participant's role may be, 3PL supplier retailer, it adds value to the other participants in the network, classic network effect.

There's also a secondary effect here as well. meaning that as we add new applications or an existing participant in the network launches new capabilities in the network through our application, it creates additional value for the participants as well. So we have a double network effect happening today. Let me give you an example of the second one. If you're a retailer who's leveraging SPS to manage your supply chain, you have brought on potentially through our retail go-to-market motion, many of your suppliers into the network. And you're having a very healthy, very productive trading relationship with them through our network.

Now as a retailer, you decide, I'm going to go ahead and unlock my point of sale or my sell-through data into that same network to benefit my supplier base. Why would I want to do that? Well, through that motion, the suppliers now have access to point-of-sale data. They have access to basically sale velocity. They can see inventory positions. And what that retailer has done is they've unlocked collaboration. They've allowed that supplier to have access to the information that they see. Therefore, that supplier is spending their energy, their time, their efforts, making sure that their distribution chain, the retailer in this case, has an accurate inventory position. They're not going to sell out. They're not going to stock out, so they're never going to miss a sale. And so that form of collaboration emerged because we -- because that retailer decided to unlock that point-of-sale data on the network. So that's a form of collaboration.

So a couple of takeaways really, I think, at least at this point in the presentation around the network, so -- and the applications. One is that the applications are fundamentally data-powered. What do we mean by that? Well, we're not the type of application that you have -- where it's a productivity application where you log in, do your work, log out and it sits there dormant until you get back into it and use it again, right? Our applications are deeply and fundamentally connected to the network. They are working for our customers 24 hours a day, 365 days a year to basically progress all of those supply chain use cases that our customers rely on us for.

Secondly, they're able to detect within the network signals that are an opportunity for them to improve their business. So that may be a signal that allows better sell-through. That may be a signal that allows them to recover revenue. It may be a signal that allows them to work with a supplier or in reverse, the supplier work with the retailer to tune their performance in the network to make sure that we're getting stuff delivered on time and in full. So those signals emerge in our network and our applications today and increasingly so in the future, we'll be aware of those signals and be able to act on those.

Secondly, all of our applications are system integrated. What that means is the network fundamentally, as it's been built out over decades and an increasing rate is connected into primary core systems of record at our customers. This is a really important point. We're directly connected to ERPs. We're directly connected to WMSs, TMSs, IMSs, OMSs as well as e-commerce platforms. And so the fundamental motion in our customers' businesses is directed into our networks and our applications have access to that.

So the last part I'll sort of leave you with on the network is that the way that we deliver value through the network is expert-led, again, based on decades of experience and increasingly with the data aperture that we have and our ability to process that data, we land a customer experience through the deployment of our products, through best practices and prescriptive techniques that ensure that when -- whether you're a supplier 3PL or a retailer, you're not struggling to understand how to get value through our network. We're going to land it with prescriptive recommendations, then we're going to follow that all the way through implementation.

And importantly, we're going to continue to monitor and assess the health of that relationship throughout the tenure that they have with SPS. So it really is expert-led and expert managed. Most of the way -- so the primary way to date that we've gotten customers into the network is through our retail go-to-market. And so for those who have been following SPS for a while, you'll recognize the term community. And so community has been that very powerful motion where we have a retailer collaborate with us to unlock their supplier base and bring them into the network. And that motion certainly continues and it continues to be core to what we do.

One of the exciting things we've been able to achieve in the last year is with the notion of collaboration, we saw an opportunity in our customer base to make that not only just bring them into the network to build the network itself to enable collaboration or to enable trading. But when you think about -- once you have that, you want to squeeze every ounce of value out of that relationship you can for both parties. And so through that, that rationale led us to acquire Traverse. So Traverse is the platform today that's known as SPS Performance Management. So performance management is the platform where retailers and suppliers can collaborate at a forensic level and discover areas for improvement, whether that be by SKU, whether that be by product category, whether it be by location, whether it be something specific to an order or shipping process, et cetera.

Traverse launched us into sort of the collaboration space for the retailer. We call that performance management. We then took our -- what traditionally was known as community and up-leveled and sort of reimagined that entire motion as well. So together with Traverse and what used to be community, we've reimagined this entire portfolio as essentially a retail supply chain performance and essentially with relationship management have gone through the process of identifying the nature of the relationship itself is what's core. Again, back to collaboration, it's one thing to get someone into the network, but it's the ongoing persistent relationship management that lands the best practices and the outcomes that network is looking for.

So this is a suite. Our performance suite works together, and it works together really well. Why? Because the supply chain performance suite essentially can be bought separately or together. So what do I mean by that? On the relationship management side, our retailers are already enjoying the benefit of bringing their suppliers into the network. As they have been in our network, our traditional retailers, they can now expand very easily and very quickly by adding performance management to that.

Now conversely, as we land new retailers into our network, they may choose to start with performance management because there may be a set number, a small number of relationships where they feel like there's an opportunity to tune the performance. So they'll land there, tune that performance with this application. And now once they have those -- that rhythm down and they've got that relationship established in an optimized way, they now want to extend that to the rest of their supply chain and therefore, would take advantage of our relationship management offering. So it's through these two that are complementary that work together as a suite where we're enabling retailers to get the right items at the right price. We're keeping the right margin intact and ultimately, the right inventory position because we never want to miss a sale.

There's one last leg of the stool on our retail go-to-market, and that's bringing our expertise to bear. So you might be surprised that a lot of retailers struggle with priorities. They do struggle with execution. They sometimes struggle with alignment on strategy internally and what to do in terms of when it comes to their supply chain. If you think about how cross-functional supply chain is, you've got merchants involved, you've got your buyers involved, you've got your operations involved. Oftentimes, when you identify an opportunity to improve your supply chain, it is a cross-functional effort to get people agree. Sometimes you also don't have the data there. Sometimes you don't know what the sequence of steps that there are -- you should be taking to unlock that value. That's where we've come forth with our expertise and launched a new service offering that we call supply chain health assessment.

So the health assessment allows us, whether it be an existing customer or a new customer, to go -- to physically go into their office, to work with their executive team, to work with the leadership team across supply chain operations as well to understand day-to-day, month-to-month, quarter-to-quarter, what are their processes. We also get access to all of their data, so we can quantitatively analyze the data ourselves. And through really a consultative approach, we then deliver to that relevant set of leaders within that retailer, a prescriptive set of recommendations to improve the performance of their supply chain.

Now unsurprisingly, as you might imagine, some of those -- many of those recommendations do revolve around the types of problems we can solve with our relationship management, our performance management offering. Also, in the spirit of being a trusted partner, some of those recommendations are recommendations we can't solve directly. So we'll bring a partner in to help there. And sometimes those recommendations are simple tweaks to how the retailer runs their business or thinks about their business, and those are problems they can correct on their own with our recommendation. So we're very excited about this offering because it really does allow us to be in that position where we can bring our expertise to bear and be a trusted partner to our retailers.

And if you're a retailer, whether you're large, medium or small or whether you're unsophisticated or very sophisticated, we've tuned both the service offering as well as the suite itself to be able to accommodate wherever you are in your maturity cycle. So we'll meet our retailers where they are and continue to look for those opportunities to advance it one opportunity at a time. So I've talked a lot so far about the network. We've also talked about our new retail go-to-market.

I want to spend kind of the last part of the presentation here talking about our supplier products. So we continue to invest significant dollars and significant resources into ensuring that we're world-class in terms of our capabilities there. And importantly, our technology remains on the leading edge. To kind of refresh a little bit for those who haven't had an opportunity potentially to understand how these products lay out, our fulfillment product is probably what we're best known for. It's where we got our start. We continue to invest there. We've got some very, very exciting, I think, innovations coming up that Jamie will touch on a little bit later in his technology session. But just know that we continue to plan to be a winner in this space, and we're very excited about the AI potential that's going to drive this through our network.

On the assortment side, the assortment continues to be a very important and critical process and product for us that takes that item data from suppliers. It normalizes it, it harmonizes it, and then it allows that data to be distributed through the supply chain, not only to enable supply chain processes, but importantly, for the marketing and the sales of those products through other channel, whether it be a brick-and-mortar channel, whether it be online, whether it be a marketplace or social.

Analytics is an area that I am very excited about. If you think about the applications of AI, if you think about the applications of large-scale compute, with point-of-sale data married with retail supply chain data, there are a significant number of new insights and capabilities we see coming over time with analytics. Today, you see a product that is really well-regarded in our supplier base, and it's helping them make those critical decisions around inventory, not only production planning for suppliers themselves, but also helping them stay on top of inventory position through the retail supply chain channel and also allowing them to see and forecast their own demand because they have access to that retail shopping behavior. And you'll hear a little bit later on from our panelists on kind of their use of the analytics and how it's helping their businesses.

Lastly, an area that I think we're all very excited about is our new revenue recovery offering. And again, this is the combination of SupplyPike and Carbon6, those two products have been integrated and folded in both organizationally and technologically into the SPS fold. They have access to our network at this point. And so as you see the acceleration through many of the macros that Chad pointed out earlier, we're also seeing great opportunity there for those brands to jump into that platform, to jump into that offering, tied to our network to look for those opportunities to not only get paid when they need to, but also get better in terms of their operational execution.

So I couldn't be more excited about the position that we're in. We have a broad product suite at this point, spanning everything from retail to supplier to 3PL to distribution, to carrier and so forth. There's quite a few actors in the supply chain that we've got a great offering for. Each of the areas that you see on here continue to get incremental investment every year and every quarter. We have significant road maps ahead. And the key on the road map, I just want to land with you is that they're focused on these three areas.

So the road maps will include collaboration as a core thread that we're pulling through all of these products. They'll continue to ensure that the products themselves are tightly integrated into the network so that they can be network-driven applications that are running 365, 24/7, and also being able to pick out those signals from the network to act on behalf of the customers. And lastly, we'll deliver those products with the expertise and prescriptive recommendations that our customers expect and that we know will lead to great value for them.

So as we execute that product strategy and that development, our goal is to ensure that the supply chain is not just working, but it's working as it should through those capabilities. And with that, I would like to -- if I can...

[Presentation]

What we just saw in the video was how SPS products come to life. And Mike also talked about how those products help trading partners collaborate better along the value chain, how the SPS network powers products and solutions. And he also introduced the new reimagined go-to-market strategy. And I'd like to ask Chad to come up and do a deeper dive on that for us.

All right. So we talked about all those great products in the network. So what are we doing to get them in the hands of more customers. So we have a proven go-to-market that, quite frankly, has been differentiated for many years that I want to hit on first. And this is the way that we work with retailers. So retailers typically have change events in their supply chain. Maybe they're opening a new fulfillment model, maybe they want more information about particular shipments. Maybe they need to be compliant with the new food safety regulation and therefore, get new information from their suppliers.

All these are change events that happen on the retail side. And then SPS will come in and work with that retailer to facilitate communicating the new requirements to the suppliers and then onboarding the suppliers to those new requirements. So think of this as a mix of people, process and technology to get that done. But by far, a very differentiated lead source for us. And these programs are the way that SPS gets the vast majority, not exclusively, but the vast majority of our customers through these retail programs.

And I will enforce that our win rates remain extremely high. So this is a snapshot of win rates in the first half of this year. But these trends within 0.5%, I'd say, or so, have been consistent over the years. You'll see that we are winning 70% of the opportunities. And the most common when we have an opportunity that's a lost opportunity is that the prospective customer or customer decides not to do anything. You can see a very small portion of those opportunities are lost to competition. And these rates, in the first half of this year have been, as I mentioned, consistent over many years before that.

So let's dive into some of the specific ways our go-to-market works. So first, on the land new customers, we have three mechanisms there, retail programs, channel partners, and global expansion, and then I'll go into how we're expanding with our customers and some of the details of that as well. But first, let's get into these retail programs. So this is what I mentioned. This is the most differentiated go-to-market motion that SPS has had. It's never been replicated by one of our competitors. And over 20 years, we've advanced this go-to-market motion and really perfected the way that we work with retailers.

So we're really enabling critical data exchange for those retailers and that's facilitated by getting a commitment from the suppliers for new and existing suppliers to that retailer's requirement. That really drives the ability of the retailer then to monitor the supply chain performance of their suppliers and get needed information they need in their supply chain to operate the downstream processes. And I want to highlight in that blue box there, just a few of the elements that are really core to this methodology.

First, we work with the retailer and have clear vision lock on what the value of this program will mean to the retailer. We drive solid executive alignment between SPS and the executives on the retailer side because this does tend to be a pretty big change management activity inside the retailer and also with their suppliers. We're committed to getting quality supplier information. And you might be surprised here, but often when we run these programs, there's not good list of suppliers within the retailers. There's certainly not good contact information for the right people inside the suppliers. So we really hone in on getting that supplier data really solid at the retailer.

And then an important element is either the merchandising organization or the buyer organization and a distributor, we really get locked in from them in the support of that organization. So it's viewed much more as a business project than it is an IT project, and that's critical because if you're going to go out to your vendors or suppliers, they need to know that the buyers that they're working with are in support of this program that's going forward. And then there's quite a bit of collaboration that happens between the SPS team and the retailer team around all of this. And this is a proven methodology. It's been refined over the last 20 years. And everything from the communications that go out to how we handle escalations from vendors, all that's been perfected. And often, the processes are enabled by underlying technology in our platform.

And so these retail relationship management programs are really critical to what we do. And I just want to point out that when we get a new retail program, that can really result in three ways that the supplier will interact with SPS. So the first way is maybe that supplier has never had a digital requirement overall from any of their customers. This is the first time they're getting a digital requirement. So that might be common in like some of those Shopify brands I mentioned. Now they get an agreement with Target or Walmart. They have to do these digital messages. That's very common then for that customer to join the SPS network for the first time that they're going to need to meet that digital requirement.

The second scenario is we could have an existing SPS customer. And now that we've driven demand through a particular retailer's requirement, they don't yet have that connection for that retailer, and they will add the connection for that retailer on top of their existing SPS connections. Now finally, there may be situations where that supplier has some other technological way to meet the requirement. They could have old sort of on-premise software that they're managing themselves. They could be using a smaller competitor.

And if that's the case, what will happen is that supplier has the option to go through a testing and certification process with SPS. So we are ensuring that they are compliant with the retailer, but they don't join the SPS network at that point in time. But what do we do with all those testing and certification customers? We put them into our CRM, we market to them. We put them into our sales territories. And we believe over time, all those testing and certification customers will convert to at the SPS network because we're the leader in the market and have the broadest network.

So let's look at an example of how we've worked with a retailer. This is Williams-Sonoma. Many of you may know them, the home furnishings. They operate under multiple brands, Williams-Sonoma, Pottery Barn, others. So we first started working with them in 2018. They came to us for support of their drop-ship e-commerce program across multiple brands. And so we ran a program to enable all their drop ship e-commerce vendors. Then we ran another program working with the Pottery Barn brand. And they wanted to get more digital connections for their ship to distribution center customers.

Then they have another brand in their portfolio called Rejuvenation. We then added a bunch of suppliers through a program for ship to distribution center for that rejuvenation brand. And then what we've achieved now with the Pottery Barn brands is the sort of ideal state that we can work with the retailers, and that's what we call ongoing supplier onboarding. And that is just where we are baked into the retailers' vendor onboarding process. Every time they onboard a new vendor, they notify SPS Commerce, and then we take them through a process of either being compliant with them by joining our network or taking them through a testing and certification process.

So you can see that based on our relationship here, we have constant lead flow coming from Pottery Barn about potential suppliers to add to our network. And now we've also identified an opportunity with them, for them to share point-of-sale data with their suppliers and are working on with them to do that across our network. So just a great example of how we get into a retailer, we're successful with one program, and then we can expand that and then move that into the desired state of this ongoing supplier onboarding, which is sort of evergreen lead generation for SPS Commerce.

The other piece of our go-to-market where we win new customers is through what we call our channels go-to-market. And typically, a big change event that drives adoption of the SPS network is the change out of an ERP system or a supply chain system. So in this go-to-market, we work with the systems providers themselves and also all the consultants and VARs that are around these ecosystems. And we're identifying when they move ERP systems, and that would be most typically moving from an on-premise system to a cloud-based system, that's a very logical time for them to move all their digital connections with their customers at that same time.

So the nice thing about these opportunities that are driven through the channel's go-to-market strategy is they tend to be a little bit larger deals for us because if you're going to move all your trading partners at one time, it does tend to be a bigger opportunity. Whereas in the retail relationship management, we may get one connection and then need to expand with that customer. Typically, on the opportunities coming from channel, they tend to be a little bit larger.

And then the new opportunity for us is this global expansion, and we've been particularly focused on Europe for the last couple of years on the back of our TIE Kinetix acquisition, which really gave us a beachhead into Europe. Now keep in mind, SPS has had customers in Europe for many years, thousands of customers, frankly. And -- but most of those have been driven from retail relationship programs for U.S. retailers where the supplier happened to be in Europe, and we just sold and serviced them from the U.S.

Now we have more focus in on expansion in Europe. We have decided that the SPS fulfillment product and network will be our lead products in Europe. We've retrained the sales force in Europe to lead with those products. And we've also embarked on selling relationship management programs to retailers in Europe and proud to report that we have won our first retail relationship management program in Europe, and we'll be executing on that in the coming months. So those are the ways that we gain new customers and add them to the network. And then there's lots of opportunities to grow the customers that we already have.

So the first area is expanding with the customer. And quite frankly, this tends to be a little bit more customer-driven than it tends to be driven through our sales force. And so some examples of that is that if we have a supplier on our network and they win new business with a new retailer, typically, they will contact us and add the connections for that retailer, and that often comes to with increased volume on our network, and they'd be likely to increase the data plan they have on our network.

Also, as suppliers grow, they may increase the use of third-party logistics providers. Those are additional connections that we can monetize on our network. And now we're seeing increased use of suppliers wanting to sell on multiple marketplaces, and that has been a driver of growth and expanded use of the network. So what we see is that as the customer gets on our network and they grow their business, they increase the use of the network. And certainly, we need to process these transactions and things, but I'd describe this much more of a hand-raising motion from our customers than a direct selling motion from our customers.

There's other situations where we're actually able to use the signals on our network and drive a selling motion into the customer based on activities that happen in our network. So this can happen for upselling new trading partner connections. One example is we can see sometimes from our analytics point-of-sale data that a supplier is doing business with a retailer, but they don't yet have that connection for fulfillment. So that based on that data in the network creates an opportunity for us to put in the system and create a lead for a salesperson to then go sell them fulfillment because they know -- we know they're doing business with that retailer.

So a similar example is if we see increased document volume happening across the network, there's a signal to our sales force that then they can go out and sell an increased document plan to that customer. So lots of upselling opportunities driven through the sales force and oftentimes signaled from the network itself. We can also see opportunities for cross-selling from the network data and have the sales force incented to drive the cross-selling as well.

So what we can see is if a customer has, as an example, fulfillment, and we know we have point-of-sale data in our network for the retailers that they're connected to for fulfillment, we can upsell them analytics and highlight the benefit that having that point-of-sale data for those retailers and what that would mean to those suppliers. Similarly, we can look at the trading volume that suppliers have with the retailers that we support for revenue recovery and oftentimes make a pretty solid prediction based on that volume of what the revenue recovery opportunity would be for that particular customer, and that will help drive the cross-selling of revenue recovery to that customer.

So let's take a great example here of how some of those existing customer expansion motions work with a specific customer example. So this is a really cool story. I don't know if you guys have heard of Audien Hearing. They are the first FDA-certified over-the-counter hearing aid company. And they're doing extremely well, as you see here, but they got their first agreement with CVS to sell their hearing aids at CVS. And so they contacted SPS because they knew they needed to do business with CVS and have a compliant digital connection with CVS.

As their business grew, they got a large agreement with Walmart, a nationwide agreement with Walmart. They also expanded their connection then to Walmart. Because their distribution volume was growing, they put on their first third-party logistics provider and did that together with SPS. And then as their business grew and they needed better financial systems, they implemented a QuickBooks ERP system for all their financials. and purchased our QuickBooks Adapter so that they could directly connect the network into their QuickBooks system, so their orders would automatically flow into their financial system.

They also added another third-party logistics provider. And then across all the retailers that they were supporting, we were able to identify that we had analytics or point-of-sale data from many of the retailers that they were working with. We were able to upsell them the analytics product. And now most recently, we saw that their volume with Walmart has achieved a certain threshold that there is a good return on investment for revenue recovery for them and have upsold them -- cross-sold them the revenue recovery product. So just an example of how we can land with one retailer with a customer as their business grows, they come to us for additional growth, but then we use that network data to identify additional sales opportunities for things like analytics and revenue recovery.

So just to recap, if you think simply about our business and our strategy, we're really trying to do a couple of things. We're trying to get more customers on the network, and we're trying to increase the revenue of each customer that's on the network. And so the strategies that we have to get new customers are the very differentiated retail relationship management programs, our channel go-to-market, which gives us access to the supplier change events. We're growing globally and very excited about the opportunity in front of us with Europe, especially if we can execute on retail relationship management programs in Europe. And then within the existing customer, we can ride some of the natural growth that comes from our customers, but we can also utilize our network to help our sales team prospect and identify opportunities for upselling and cross-selling our customers.

So we have, at this point, heard from both Chad and Mike about SPS' unique, proven, and optimized go-to-market strategy. The company has multiple inherent growth levers to land and expand its customer base and how we use network-led growth as a driver to upsell and cross-sell growth opportunities.

I think this is a good time for a break. We will reconvene at 10:00 a.m., and we will, after the break, start with our customer panel. Thank you.

[Break]

Welcome back, everybody. Thank you to the customer panel for joining us today. Mike Svatek will moderate the discussion with the customer panel. And I think Mike, we'll just go ahead and get started.

Yes. You bet. All right. Welcome, everybody back. I'm very honored and very happy to have our set of customers up here this morning. So thank you all for joining us. I know you took some time out of your schedule to be here. So important for us and hopefully helpful for everyone else online and here in the room. the panel today is really interesting. I think what you have today is a cross-section of different types of trading partners in the SPS network.

So you've got 3PL, you've got retailer, you've got supplier, you've got very large established brands. You've got upstart hyperscale growth brands brand, if you will. We've also got partners that are trading with one another, not just the types, but the fact that there's interdependent relationships here. So we're going to have a really fun time. There's a lot of questions we'll get through. And hopefully, we'll be able to explore some of the dynamics that you guys are seeing and kind of the strategies you're implementing.

So just quickly, we've got Adam from BRUNT. BRUNT is a super interesting newish brand, right, D2C, and I won't take only steal your thunder, but super exciting high-growth brand. We've got Ken Ratterree, who is from KEEN, CFO, probably a well-known brand that you guys know and just really enjoyed learning about the business last night, so we're doing some interesting stuff. Deb Conklin, who's the CEO of KeHE. You probably know KeHE, but a global -- or sorry, a national distributor of foods here, very sophisticated, very large operation. So we learn a lot from her as a client.

SCHEELS, we've got Tony Duerr, who runs operations for SCHEELS, fascinating business. If you've not had an opportunity to be in a SCHEELS store, it is -- if you don't mind, it's part of amusement park and it's part of amazing sports retailer and outdoor, and you name it, right? So -- it's a really, really interesting customer experience there, and I'm excited that there's 10 minutes from my home that's going up right now being constructed. And last but not least, certainly, we have Aaron Rubin, who is joining us from a 3PL partner as well as also a customer in ShipHero. So he's got kind of a dual hat that he wears.

So anyway -- but let me take -- we'll take just a moment and allow each of our panelists to kind of go through -- give a more thorough introduction, if you like. And then I would love to hear kind of in your own words, a little bit about your business, more so than I instructed. And then also just is there -- I'm not going to say something that keeps you up at night necessarily, but like what's the 1 or 2 things that you're thinking about that's always in the forefront of your mind -- so kick it off on, Adam?

Yes. So I -- can you guys hear me okay? I'm Adam Schuman, Director of Operations at BRUNT Workwear, where I oversee our supply chain. BRUNT, we're a 5-year-old company. This will be our fifth full year in business, but we're a modern workwear brand. We make boots and apparel for the hard-working men and women in the trades who wake up every day to, I guess, literally build this country that we live in. Something keeps me up at night. It's probably just making sure we have the latest and greatest tech or AI that's going to help us make sure the right products at the right place at the right time to meet customers in both channels as we get into wholesale. So...

All right. So I'm Ken Ratterree. I'm the CFO of KEEN. We're a global footwear brand based in Portland, Oregon. We've been around about 22 years. We've been working with SPS for, I think, about 14. I probably have 20-plus years of experience across 4 brands with SPS. So a bunch of footwear knowledge there. And we -- yes, I mean, I guess what keeps me up is going to be a shocker to you all. I'm sure it's not on any of your minds, but it's the current situation we're in right now. Footwear is one of the highest tariff industries. So really, my job as the CFO is really to try to figure out how to balance everything. So we're really looking for all of the efficiencies. I mean a lot of the stuff that Adam was talking about, how do we become more efficient? How do we do more with less? And how do we lean on some of our partners. So that's really, I'd say, main right now and just maintaining the momentum that we have. So -- and competing with BRUNT. We compete with BRUNT.

For sure.

Good morning. My name is Deb Conklin. I'm the CEO of KeHE Distributors. We are one of the nation's largest distributors of natural organic specialty and fresh products and very complex business, about 85% of natural and organic brands fell within the first 2 years of coming to market. And so that creates a crazy amount of churn in our business. And I would tell you that we are actually a curator of brands who happens to distribute, and that's really what differentiates us compared to a lot of our competition.

We're also an ESOP, and that puts us in a position where we really can drive major transformation in an industry that's growing, and we get our employees who show up with employee owner on their shirt to do deliveries. They just behave differently. I think the thing that keeps me awake now more than ever is how AI is going to be used for nefarious behaviors around cybersecurity. I think we've all felt like no matter how hard we work on cybersecurity that there's always something that we're missing. And now I worry about the iteration that happens even faster as AI gets involved in breaking down the doors when nobody is looking. So that keeps me awake at night.

Thank you, Deb. Tony Duerr with SCHEELS. I lead our supply chain operations for SCHEELS. We are a retail sporting goods retailer. Obviously, two great brands that we sell at our stores. So a little bit about our stores. We're 34 stores throughout the Greater Midwest. When I say that, also preference a little bit, our average store footprint side is about 240,000 square feet. So not a small retail footprint by any means when we say that. We are a collection of our brands, and we are an employee-owned company as well, which is great from an employee ownership side.

With that, as I say, our portfolio of our brands that we do sell, we have probably 3,000 active brands. And over a given calendar year, we will manage over 1 million unique SKUs through our supply chain. So a very diverse from a retail vendor relationship side to keep all that active within our system as well. As far as -- to echo what these guys said, it's the same things that keep us up at night is how can we connect to our suppliers, have the product at the right time, our customers demand that product and then just the ever-changing landscape of the supply chain. I mean it doesn't feel like there's been a normal year, and I think that's just what the normal is. It's -- you're always going to be adjusting to something that's happening within the supply chain.

Good morning, everyone. Glad to be here talking about supply chain. So my name is Aaron Rubin. I am the Founder and CEO of ShipHero. Our primary business is warehouse management software. So we provide the software to brands and third-party logistics companies that serve those brands. We have about 10,000 brands that use us, many of which are very small, all the way up to some public companies. And we also have a captive third-party logistics company that we use primarily for testing and R&D, but does operate about 1 million square feet of warehouses across the U.S. and Canada. What keeps me awake is certainly cybersecurity is insane these days.

The other thing, I think, is going faster. So our industry logistics tends to move slowly and that adoption of just cloud SaaS from on-prem and homegrown is still way behind basically the rest of the entire economy. So trying to get things to go a little bit quicker is probably what I think about the most.

Great. Yes, lots of things popping out. So I'm going to -- I'll give you the softball question first and just send this to a few folks. And I think maybe, Tony, we'll start with you. So everyone here has got a relationship with SPS, and we certainly appreciate that. Tony, you've had a relationship for a long time. And so as you guys have continued to scale and grow, what is it about your relationship with SPS that's worked really well and what's kept the relationship so strong?

Yes. And I'll kind of speak to a little bit. So we've started down the journey with SPS about 14 years ago in 2011. So it was really driven by some of our vendor partners, some of our larger vendor partners at that time had really kind of started and pushed us along that pathway. And we sought out SPS at that time just very similar to what Chad had said earlier with just the network, the expertise and that background because we just were looking for that because it was all new to us. I mean we were still a -- we felt a small entity at that point, and we're just needing some expertise in that area as we grew into that, that could work from anybody from a very small, as I call, mom-and-pop vendor because we're very regionalized with our locations to a larger entity like a Nike, a KEEN that are really driving ahead of where we were at that point in time with that EDI journey.

I think the benefit is we've been with SPS for 14 years. We've just been able to grow with them, and it's been a very give-and-take relationship, partnership, and we're very big from a partnership side in our business model. I mean we look at -- we want to drive things through a partnership than through anything else. We are not a -- I always say not a chargeback company. We will work directly with our vendor partners to provide and solve problems and drive solutions and SPS is willing to work with us in that unique model and help us along that journey.

And again, I think the strength in that is it's just been very consistent throughout those 14 years. I mean we've done several different smaller enablements as we've driven technology changes with them. But at the same time, it's a very consistent, I call it, user experience from a vendor partner side as we can continue to grow. On average, we still bring in about anywhere from -- I always say brands, but we add about 500 new brands to our portfolio every year. You give and take some every year, but to have somebody that has that expertise that you know as an extension of your business and the partnerships you want to create with the vendors is very important to us. So to have them be that extension and treat our partners like we want them to be treated is very important. And that's helped maintain that relationship through the 14 years to where we're at today.

That's super. Really a theme of that relationship management sort of pulling through not just an offering, but how we think about partnering together on that. And the collaboration aspects are just phenomenal. So yes. Over to you, Ken. Question about -- in particular, actually, what I really find interesting about Ken's background is Ken has worked in footwear for a while, has been at some really impressive brands, including the one he's at today. And you've picked SPS or work with SPS at each of these. And so I'm curious, as you've had an opportunity to go somewhere else and look at the options, what keeps bringing you back to SPS?

That's a great question. I mean I'd echo a lot of what Tony said. A lot of it's about the partnership and just the network. And the other thing, I mean, SPS owns the EDI space, if you just look at EDI or at least that's what they've convinced me of. So a good job. But let's believe it because really, there's an economy of scale, right? Because I think a lot of it's partnership, it's also the economy of scale that SPS brings because it's impossible for a brand like us to manage all the different connections and all the different work on our own, whether it's working with our own 3PLs or working with transportation suppliers. Globally, it's been a huge thing.

The other piece I really appreciate about SPS is their kind of the proactivity and the ability to problem solve. Tony mentioned that a little bit, too, but we've worked on global implementations and even expanding business into new regions together as partners. So I used to work with Adidas or Adidas, and that was one of the big things we did there was really expanding into Europe and getting Europe -- the European retailers more on kind of the analytics side of the house and just really kind of going in and trying to win together has been a huge thing.

I mean your team was visiting me last week, and the conversation is incredible because they come in and say, "Hey, what are you worried about?" And it wasn't just about the momentum comment I made earlier, but it's -- again, it's about efficiency and just different creative ways and solutions. I mean SPS is always willing to partner and I think outside the box. We have a saying within KEEN that are kind of a motto we live by. It's called truth, trust, and transparency, and that's really the way we work. I mean Tony is the same way, right? We love to work with our retail partners that way, all of our partners, and I really think SPS lives those values along with us.

Yes. Great. Super happy to have you guys in the fold, and we learned a lot from you guys as well. So it's good stuff. Yes. Well, Aaron, how about a different perspective? So we've got a great retail perspective, great brand perspective. How about from a software partner perspective and if maybe from a 3PL perspective as well since that's part of the business?

Yes, sure. So I got to meet Deb as part of this. So I'm going to use a mutual customer as an example. So anyone here eat at a restaurant called Momofuku or order their food? I got a couple of people nodding. Okay. So that's a mutual customer of ours. So Momofuku was a chain of restaurants that went into CPG, created 20 or 30 SKUs of noodles. And their Chili Crunches, one of the things they're famous for, started selling on Shopify Plus, used us. We're the largest WMS partner in the Shopify ecosystem. So we were working with them. And then they had big exciting news one day. They signed their first national distributor, which was Deb's company. And they're like, what do we do now?

And like we integrate with Shopify and Amazon and their other partners and they're like, "Hey, do we integrate with KeHE?" And I was like, "No, we use EDI." And I know it's like going to be obvious to everyone in the room, but like it's not obvious to a lot of these brands. Chad spoke about these Shopify brands that grow really quickly on Meta and TikTok these days. And they don't know the trading world, right? They know e-commerce. And then after a couple of years, it's time for them to work with national distributors or retailers.

So the conversation is, "Hey, we need to trade with this partner, what do we do?" And now EDI is like it's a standard, right? You don't have to use SPS, even though -- KeHE uses SPS. You can use another provider, but it's way easier to just work with the same provider. The compliance will be faster, certification will be faster. And these are very large POs for small companies, and it's a really scary process starting with EDI. So you want to go with the vendor you trust that's already working with the retailer. So we say, "Hey, this is -- SPS is the partner we recommend." And they always say, "Well, we're actually trying to also sell to three or four other ones later this year or next year." We're like, "Well, SPS probably works with them directly. And if not, they work with everyone, because EDI is a platform that allows them to work with everyone." And that's 95% probably of our customers end up using SPS just because of those reasons.

Yes, phenomenal. Yes, just the power of the network, keeping trading partners connected, keeping it fresh, making sure the connections are established and maintained and it goes a long way. Yes, certainly. Okay.

Let's change gears a little bit to -- let's just talk about the complexity in supply chain for a moment. And as I think about everyone up here, I know everyone's got different aspects of complexity. They're managing different scales of complexity, different nature of complexity. Deb, I've got to imagine you're probably at the top of that list in terms of complexity. I mean, big operations, you've got inbound, you've got outbound, you're sitting right in the middle as a distributor of all the supply chain goodness. And so what -- take me through a little bit of like how you're thinking about complexity, what you're doing to manage that complexity and to the extent that SPS is part of that.

I think about our product line models for start-ups, folks that are just figuring out a new formulation to crack a code and functional beverage, mushroom beverages and like all the crazy things that you can think of. And what that means is not only do they not understand the process of going into distribution, there's also a ton of churn. We have over 80,000 SKUs in each of our DCs -- 18 DCs across the United States and Canada. And so a lot of churn, a lot of complexity, and the consumer changes their mind tomorrow. So what you think might be hitting is now no longer the coolest thing on the block and you're -- you've got the next innovation cycle.

On top of it, natural and organic hasn't been in the forefront of technology. Things that I would tell you that I was doing in the '90s out of college were things that KeHE hadn't even started to think about doing. And so having SPS as our digital commerce trading partner, the ability for 6,500 suppliers and 80,000 SKUs with 20,000 new ones coming in and out every year allowed us to standardize the playbook instead of every different flavor of ice cream. It allowed us to have a playbook that was repeatable. And so that, as you can imagine, that drives efficiencies, that drives scale.

It also becomes that one way of working in a way that -- so when a new product comes out through a new supplier, it's easier to onboard. Massive improvements in our -- both throughput and efficiency. But one of our most important parts of our strategy is what we call partner success, easy to do business with and for. And that was never in this industry was important. And this has truly allowed us to have a playbook that allows us to get to market faster.

I would tell you the other thing that was resonated with me a lot with the SPS model is we had mapped all of the gaps in our process. And then we sat with the SPS team and they mapped all the different tools and systems they could bring to bear for us. And it was amazing the overlap that they already had a solution available or in flight that we could put to work quicker. KeHE wanted to build everything from scratch and the ability to partner with somebody who's the expert. We're the curator of brands. They're the digital commerce experts for our supply base, and that has us each in our own proper wheelhouse moving faster and adding a ton of value. I honestly do believe we couldn't do it the way we do it without our partnership with SPS.

Great. Thank you for that. And it's that type of insight that we get when we do customer visits, when we understand and try to become really a partner in a true sense of understanding the business and how to move the needle. It provides great feedback for us from a product road map and a strategy perspective. And so good stuff. You've got an interesting story. So from a complexity perspective, you started pure digital online, what you moved to wholesale and now even more is happening. So how are you dealing with all the complexity and...

Yes, yes. So not nearly as complex as Deb and her business, but we were, again, like I said, 5-year-old company, it is our fifth full year in business. First 3 years, we were exclusively direct-to-consumer. One set of requirements, it was nice. Overnight, about 18 months ago, when we decided to get into wholesale, we got a dozen-plus different requirements from our retailers. And now all of a sudden, we're trying to take their systems and process, our systems and process and work together. And SPS does that by standardizing everything. They're able to reduce or simplify that complexity so that we're really able to then get off the ground running and go into wholesale with a lean team.

I had one dedicated headcount when we launched that wholesale. But they're centralizing our EDI connections, they're integrating into our ERP system. So instead of having to hire a whole slew of people to manually enter orders, it's in our system. We have fields in our ERP that's account-specific that drive all those different nuances that are automated, ASN generation, invoice creation, really our end-to-end entire fulfillment process is streamlined. So we don't have to think about that, and we can do the fun stuff like being good partners to our partners and growing the business so that one day when we are as complex and big as these guys, we're good to go. But yes, echo the sentiment that without SPS, we wouldn't have been able to get off the ground running and move as quickly as we've been moving.

There was one other thing you shared with me last night at dinner. Do you want to talk about that at all? Or are we keeping that in the pocket about your -- you've got a location coming up? You've got a physical -- you're going into physical retailer?

Yes, we are. Yes, we are going into -- I got a lot of stuff going on. Yes, some possibility of going to our own and operated retail, exploring that.

Exploring that. Just to add a little more complexity to the plate because you're not full yet. That's good. Cool. And then maybe, Aaron, I know a great answer to the earlier question. Every time I talk to you, I learn more. Is there any -- are there any like gaps that you're seeing in your customer base where SPS is really coming in to fill that gap? Just from a complexity perspective, I mean, you're -- like Deb, you're seeing it on all sides of the complexity, right, being in a 3PL and also as the WMS itself, which is managing inventory, no doubt and fulfilling those processes. Where is that complexity -- where are you gapped out on that complexity? And what holes are we plugging for you?

Yes. So we're a technology company, right? We build a lot of software. We connect with platforms, shippers, ERPs, all that stuff, right? So like we're not afraid of building. But I was talking earlier about the speed and trying to make things go faster and the days of like, "Hey, yes, we're going to onboard someone and go live in 6 months." Like that just -- you can't do that. I still hear it. Like there are people still doing that, but like we want to be live in 2 weeks with a new connection.

And our team puts live dozens every week of new connections of retailer and suppliers. And the ability for us to build all that quickly is impossible. So by having a partner who -- it's not like there's just one connection, and it's just like you build it once and it's going to work for everything. Of course, there's work to do, and we have a team that manages as we keep adding people on both sides of the equation, but it's 10x, 100x faster working with a partner that knows what they're doing and has the technology. So it's all about speed and the quantity we can put live that we just -- we can never do anywhere close to that pace on our own.

Yes, maximizing speed, minimizing complexity, if you will, just move faster, basically. Just move faster. Cool. Well, let's -- we're going to pivot to another kind of conversation topic here, which is all of you -- as a trading partner of one or many other partners, you're working to collaborate and be a better trading partner to them. And so curious from a SCHEELS' perspective, you mentioned a little bit earlier in your earlier statement, but what is -- how is SPS enabling you to be a better trading partner to your suppliers?

Yes. I think there's a couple of different ways. I'd say one is -- and I will go back to it's just consistency. I mean, when you have so many systems that are tied in from the EDI and from the vendor side, there is a lot of complexity there, but it is very simple from that standpoint. And I say consistency because if you don't have consistency in that data and a platform that can handle the amount of data flow, it would be very challenging for us to be able to maintain our efficiencies on a day-in and day-out basis.

I think the second part, kind of going to a little bit of the collaboration piece would be some of the analytics. We are a private company, so we don't share a lot of analytics. Some of it is on purpose. And then -- but we do, do that strategically with partners through SPS. And that helps streamline, they are able to use that on their end to provide insights. Because when you're analyzing millions of dollars and thousands of brands, sometimes it's easy to miss, whether it be BRUNT coming into the workplace and disrupting what's going on or consistency with KEEN from a partnership that have always performed well, that sometimes you miss some of those nuances unless you have a second set of eyes that are equally invested in our performance from a vendor side because they want to see their brand perform well and we want to see that brand perform well.

And I think that's where the analytics side is kind of that two-way street in all of this by leveraging some of that point-of-sale data where they may see things that in all honesty, sometimes we gloss over because of the complexity of the business. So I think those are probably the two biggest things that we notice on a day-in and day-out basis would be that consistency and then that two-way partnership back and forth.

Yes, great. It's remarkable to hear from our retailers how often -- just how diverse the set of activities they're taking on are, they can't pay attention to every single SKU and every single product category that they have. And so getting that support from the supplier to really have who's got eyes on that has really helps drive sell-through. So well, actually, just on the other side of that coin, you're -- let's hear about your experience of working with SCHEELS, how is SPS helping with that? And to the extent you can talk about analytics or other forms of your relationship?

Yes. Well, Tony told us that KEEN and BRUNT are the two favorite vendors of SCHEELS. Out of the 3,000, we've made the Top 2. But no, as being the new guy in the space, SPS, like from the start, gave us that credibility that we could execute operationally. So people might go into the store and ask SHEELS to carry BRUNT because they saw the product, saw the marketing. But we have to then be able to execute operationally or it's going to be a short-lived thought into -- going into wholesale. So being on the SPS network removes all of those friction points in our end-to-end order fulfillment process so that we're able to fulfill SHEELS' orders with speed, with accuracy, doing it compliantly so that they then place those reorders and just a nice little cycle.

It really truly allows us to collaborate much more efficiently. And the advantage it gives like it's a good example where we start out in a few doors and we expanded to 100% of their doors in a very short period of time. And even if the demand was there, we probably wouldn't have been able to answer that request without being on SPS because they're able to standardize and have our two ways of working connect with each other.

And then on the analytics side of things, it's super helpful for us because we had 3 years' worth of data from the direct-to-consumer side of the business. But it's a different channel, and we've gotten a lot of learnings on size curve differences, color preferences, a mix in our toe type or work boots, whether it's soft toe or comp toe. So it allows us to get ahead of things and see how things are selling so we can have the right product for them to reorder and for expansion, so.

The visibility is key.

Yes, it's everything.

Yes. Great. Maybe, Deb, to you. So you're onboarding tons of new SKUs. Certainly, new items, new suppliers as well. I imagine the grocers themselves are pulling on you for new assortments and you've got to go out and source and sort of -- so you're in this constant process of onboarding. How do you do it? And what role are we able to help you play in that?

There is no doubt that, that is the life we live. We are truly a curator of brands. It's the ability to understand what need state each different customer has for the specific natural organic product that we're talking about. We see over 120,000 new SKUs a year, and we onboard somewhere in the neighborhood of 20,000 a year. One of the things that has been very differentiated for us is the fact that some of these come in ebbs and flows. And the ability to have a standard process that's automated that gives us flex capacity has been phenomenal for us because you talk about it, it used to be we're going to go live with this in 6 months. No, no, no, we want it tomorrow. And so you've got to figure out how to accelerate from a thumbs up to an on-shelf experience in weeks. And if not, you could miss the trend.

And having that flex capacity, that partner that we can look to that helps us automate it, even if you think about it, we do -- just wrap your head around hundreds of thousands of transactions a month because we serve 30,000 customer doors with 80,000 SKUs. So just you start to think about those numbers. And then you think about the innovation that -- on top of that, we used to do that all by keystroke. So just a mathematical error of no matter how good you are, you're not going to be perfect. And that being automated is a game changer from an accuracy standpoint from us.

There are other next-generation things that we're now doing as well, which I can't believe in 2025, I'm saying that KeHE never accepted advanced shipping notices, but we did not accept advanced shipping notices. And now that's a requirement. So with one scan, we can receive a load as opposed to having to manually check the difference between salted peanuts and unsalted peanuts on a case that looks exactly the like. And so there's a lot of progress that is really helping KeHE move a lot faster in an industry that has evolution of change that is at light speed.

Yes. Great. I love the peanut example. I mean it really kind of grounds it, like this is what -- this is operations, right? This is what we -- this is what folks have to deal with. That's great. You've got a huge retail channel. You've got a lot of retailers you're working with. So over 100 plus?

Yes, I'd say thousands globally.

Thousands globally, right? And so each of those retailers have a different flavor of what they want from you, different requirements. How are you able to keep up with all of that? And how are you able to be a good supplier and a good trading partner with literally thousands of retailers?

It sounds like a rhetorical question. No, I think it's -- I mean that's -- you've heard it, right? I mean that's where SPS comes in because there are a lot of brands, not on the EDI side, but even if you think about analytics, I think they can do it on their own, right? And anybody that tries to manage that amount of information on their own, it's literally impossible. And so similar to what we're hearing here, we kind of let the experts do their thing. But SPS really helps everything run, right?

I mean, Tony mentioned kind of just the reliability and all of that scalability. So for us, EDI is not a -- I think I'm allowed to say this, EDI is not sexy at all. It's kind of one of the things that you want -- sorry. It's one of the things that you want it to work, right? And it's an amazing technology, but it's one of the things that when you're not complaining about it and it just happens and you can get quick connections and have everything set up and it works smoothly. It allows us to focus on running the business, right? So that's a huge thing.

And on the analytics side, I mean, we -- I think taking SCHEELS, for example. I mean, we obviously want to sell product to Tony, right? We want to sell product to SCHEELS, but that's not the end goal. The end goal is to get more shoes on people's feet. We really care about sales to the end consumer through whichever channel that happens and being able to read trends, being able to make sure that happens helps make SCHEELS happy, makes us happy when we get it right. But also being able to kind of make sure we know where inventory is, and it comes back to what we heard about earlier about the whole product price place promotion. That really helps us manage inventory and manage a lot of our other strategies around it. So whether it's product launches, all of those things really help us -- the data that we receive from SPS really helps us out.

No doubt. Yes, I don't know how you do it without the automation. It just -- it's not possible.

No, it's not really.

Yes, it really isn't. Well, let's talk -- let's kind of pivot to kind of our last topic for the day, which is really like super exciting, ROI. Now we all are here because you've invested in technology and people and process, right, to drive business outcomes. So at the end of the day, it's about the return. And so maybe, Tony, if you want to give us a thought on how do you think about return on investment in terms of not only SPS investment, but kind of the processes that were associated with. Easy question.

Easy question. Well, one, I don't like to think about it because it just happens. But no, it's -- there's a lot of different -- again, if we didn't have the technology in place, I mean, there would be significant labor hours that have to be invested everywhere. I mean, from our end, it is integral to what we do from a business side of things. So one of the unique models is we're not 100% of a DC company. So we do a lot of ship to store. With that, that obviously adds complexity to our vendor partners, but it also adds additional documents and all the different things that happen.

So I mean, you can start from purchase order error rates that add return investment because you're going to have people keying all those in from a vendor side of things to same things from a receiving side. I mean we're able to receive large amounts in our store through the same 856 advanced ship notice process that we don't have to touch every single item that comes into the back of our door. So you just think of our speed to the floor within our stores is most things that come in our back door now can be sales floor ready within 24 hours, which is huge for our stores. So you can meet the customer needs, and we can be very lean in our assortment and our inventory levels.

To then the last part of that automation that from a return on investment, it's the invoicing side, whether you want to -- the vast majority of our invoicing does not even get touched from a reconciliation side of things through the EDI, the cross-referencing. I mean, we're able to do all of that with the complexity of the amount of purchase orders, the amount of vendors that it just flows through our system right into the back into the ERP.

So I mean, there is so much efficiency within the operational side that, that's all the given ROI. And then you continue to look and say, where can you build upon that, whether it be additional automation, different processes that SPS is bringing to us. So I mean it's exciting to see we're going to go through a lot of some -- more automation processes with receiving even yet further on our side, which is exciting that, again, without the technology and the consistency in the data flow, you just won't even consider because you're managing other problems instead of being forward thinking.

Yes. Great point. Well, it's a financial question. I've got to go to our resident Financial Officer over here. So Ken, how do you think about ROI for KEEN? And again, put your big CFO hat on, like you're looking across the entire organization. How do you think about it?

Yes. I mean, Tony mentioned part of it. We're on the other side of that PO invoice thing, just the lack of issues there and the fluidity with which SPS helps us manage that is a big one. I love the analytics side. And another exam -- I mentioned that in my last comment, but another example is it helps us manage our marketing investments, right? So we can actually see what's selling through, where, when, which colors, which SKUs across multiple retail partners. Or if we do a product launch, we've used SPS' data in the past to say, "Hey, we're coming out with this new product. How do we judge if it's successful or not, right? How do we know if we're winning or we're losing or where we're winning and losing." So we'll take products that we have data on from the past and kind of model against those using SPS' sell-through data.

So I mean, I think that's a phenomenal kind of maybe a little bit more outside the box use of the data, but it's really just taking advantage of -- I don't know, I think of SPS is almost the connective tissue amongst all of us. I mean it really links everything. And if you look at it the right way, there are so many use cases in there that are really interesting. And the investment -- kind of measuring investments from a different way is super important. If you ever ask anybody to measure a marketing ROI, yes, it's tough, it's really hard, right? But this data helps us do that. So one example.

Yes, super. I guess on the BRUNT side, how do you think about it? And I'm really curious, do you using this data for production scheduling and sort of demand forecasting and things like that. I know you have a ton of e-com data to go off of, but how do you think about ROI?

And that's actually -- we just internally, we were discussing this, and we broke it out into four different groups. I'll fly it through. I know we're running out of time. But first one is cost savings. So we're able to not have to automate -- I mean, sorry, we're able to automate, and we're not -- we don't have to do all these manual orders. We don't have to -- we can aggressively grow wholesale without having to scale our headcount at the same rate. We have efficiencies. So we're reducing that complexity. We're getting cleaner data, which allows us to create orders faster. On the scalability side, we're able to onboard partners. We've had numerous onboard partners we've onboarded in 7 to 10 days when people tell us months.

And then visibility -- on the visibility side, like it's huge. I mean, we also do the same thing with marketing launches. And I think one of the bigger pieces that's a little tougher to put a dollar against to like exactly know your ROI, but we've talked a lot about -- or everyone has on the network and the systems and the tech, but the people side of SPS, like truly mean it when I say their people are just as good, if not better, than their tech side of things. So the support we get on our daily questions, the chat feature is awesome. That's huge. We want to align ourselves with someone who's going to help us grow as much as we want to grow. Yes.

Super. We've got about a minute left. Who's got an exciting ROI story?

I just want to point out that Tony is the only one to mention a document number so far all day. So congratulations on that.

Deb, any kind of last thoughts there?

For me, this was just a cost of doing business, we had to do it. But the good news is there are plenty of ROIs. We've reduced our time from thumbs up to shelf by 25% just by what we've talked about. And I could list you 30 more. But I'm an engineer by trade, so it's absolutely in my DNA to worry about the measurables, but we just couldn't have run our business and grown it if we didn't have our partnership.

And I think a lot of it, too, just in closing, it's about opportunity cost and what we would have -- what we wouldn't have if we didn't have a partner and great people that help us bring it all together. So yes, that's it, I guess.

Yes. Limited time, we got to pick our projects, right, for sure.

Real quick as I say. So 25% of our customers are on EDI. Those 25% over the last 18 months has scaled to represent 65% of our total doors because it's significantly easier to grow when we're utilizing SPS' network. Otherwise, it's just we have to kind of pick and choose where we grow, and it's SPS accounts.

Yes. Good. We're kind of picking up a vibe of infrastructure. It's commerce infrastructure to help you guys scale, grow, automate, reduce error, be predictive, give you the data you need to draw your own predictions from. So all those things. But anyway, I want to thank you guys each for being a great partner, great customers for us. I hope that everyone here has got some great takeaways. I certainly have got some great takeaways. I know you can spend your time in lots of ways. We just appreciate you making the trip and sharing your insights. So give our panelists a round of applause, please.

All right. Wonderful panel, a lot of insightful commentary about SPS products, how SPS contributes to the infrastructure these customers are building. So I think this is a great time to have Jamie Thingelstad come up and talk about network strategy and how that further puts SPS in a great position to help its customers.

Thank you, Irmina. Such a great session. It's always amazing to hear how our customers benefit from being part of the retail network. As you've heard throughout the morning today, really at the core of SPS is the world's retail network. For the last 25 years, we've been building that network retailer by retailer, supplier by supplier, partner by partner and creating this ecosystem that allows people to dynamically connect with each other with agility and flexibility. That network gains power every single time that we add another member to it. And that scalable, global and secure network is the foundation of everything that we build on here at SPS.

So let's talk about some numbers. First, in that network, we have over 300,000 trading partner relationships. Across those 300,000 trading partner relationships, we have over $650 billion of transaction volume. And in the last 12 months alone, we've seen over 33 million product SKUs and processed over 780 million documents or messages between those members of the retail network. Now there are many features of the network that make the network so powerful, but I want to highlight three of them for you today.

First is this idea of protocol agnostic. You heard many people talk about EDI, and EDI is a great place to start, but it's not enough. We also have data that arrives via XML or JSON or CSV or many proprietary formats that have been built in-house. That data moves between trading partners in the network in a variety of different ways. Some customers may use things like managed file transfer. Others may use APIs. And by the way, inside of those protocols, those protocols do different things. So for example, some of those protocols are very opinionated about the transactions that they include. Other protocols are unopinionated and leave it up to the author to decide how they want to represent that information.

It's the job of the network to connect all that together. So we may have partners on one end using a JSON API and partners on another end using EDI and managed file transport, but we make that all smooth and seamless and bridge those gaps inside of the retail network. It's one of the key capabilities that we have. Additionally, the network is AI-enabled. So we already are able to use AI to add members into the network easier and be able to test and validate that information is flowing between those networks faster than we could otherwise.

We can also look at an entire industry and analyze what that industry is doing to understand better, for example, in a category, what's typical. Or for example, we could even look at a single retailer and work with that retailer who might want to change a business process and help them understand how complicated that will be for their suppliers to meet.

Lastly is the scale and security. Retail is dynamic. We heard that just today -- just right now in the panel, and so is the network. As we enter the holiday period, many retailers are preparing for orders of magnitude change in their volume. It's critical that the network be able to adapt and scale along with them, and it does. That security is also more critical than it's ever been in retail and making sure that we meet those security requirements of retail is absolutely key.

So how do we prove that security and that reliability? First is our trust center, where we share with prospects and customers all of the details of our security program, including our security certifications, most recent audits, et cetera, so that they know that the way that we handle their data will meet their requirements as well. We also were the first in our industry to make our real-time status available for all of our products and network capabilities and still are the only provider that provides real-time insight into our network performance. So using that, our customers and members of the network can at any time know that the network is performing and meeting what their needs are. And all of that is possible with just one secure connection to the world's retail network.

Now there are many things that the network gives us, but I want to highlight three of them for you today. First is data as a differentiator. Secondly, how we achieve faster time to value for our customers. And third, how we can use the network for network-led growth opportunities. Let's start first with data. Now retailers publish rule books that are the foundation for how their suppliers can connect with them. But those retail rule books don't have everything that you need to know. They often lack some of the business processes or the other requirements that retailer may have. So for example, what is the retailer's expected turnaround time for an order? Or when they do request an order, how should that order be shipped to them? What carriers should be used? If a pallet is required, do they have specific requirements about how the contents are placed on the pallet? And by the way, make sure that you get that advanced ship notice to them before the package arrives.

So retail rule books are a great place to start. Sometimes there's also a vendor guide, but not often. But you always have to wonder as a supplier, is this accurate? Is it up to date? As you heard, retail changes frequently. And all of this is very difficult for retailers and suppliers to keep up to date with. This is where we can use the network to do this differently. By using data in the network, we're able to see what retailers do in addition to what they say. So for example, we may be able to look at a retailer and see that, that retailer typically receives an acknowledgment of their orders within an hour. We can then understand that pattern and using AI, build that pattern into our network. The ultimate result of that is that members of the retail network gain a deeper understanding of the retailers' goals and what their expectations are and as a result, have more successful trading partner connections.

Now to build that capability, we provide -- we use three different things. First, the information contained in those retailer rule books, which helps us understand the structure of the data. Then we look at the network data itself, which allows us to understand what's actually happening between those different trading partners. And then as you heard reference, we bring our retail expertise to that, bringing all those together in combination with AI allow us to bring a number of different use cases to retail members and into our products.

Let me talk next about how we achieve faster time to value. So as we bring new customers onto the network, we use a prescriptive process to bring them on using that -- those rulebooks that we have built into the retail network. First, we start with a discovery process that allows us to understand what are the trading partners that this supplier is going to work with, what are the fulfillment models that they have, what business systems are involved and what are the problems that they're seeking to solve. We then build a prescription that we can then show, we'll solve all of the specific things that they're looking for by looking at our overall product capabilities.

And when we get to the point of configuring that solution, we don't do that point-to-point in the network. We do that by each solution. So we bring them online and then ultimately validate those solutions to make sure that they meet the requirements of all the trading partners. By doing that, we provide a very fast and easy way to bring new members into the network. Now excitedly, all of that is well designed for us to then bring agentic extensions to that onboarding process.

So for example, in Discovery, we can use AI to create a unique discovery process for each individual customer, looking at their specific requirements and only asking the things that are critical to their business process. We can also then validate that, that prescription covers all of the necessary things that they're looking to do. In configure, we can use an agent that can work alongside a number of other agents to help team SPS get that customer set up faster, and then ultimately using our testing agent that can work along with the information that we have in the retailer rule books and network data to even, for example, generate its own test data so that we're never blocking on any part of a trading partner connection to provide us information to move forward with them. This is incredible power that only comes when you have a retail network.

And last, let me talk about network-led growth opportunities that we have. We've talked about some of the signals that are in the network. And we listen to those signals to identify a number of opportunities for us. So for example, we may say a supplier who's had a recent uptick in their trading activity with Walmart. We know then that there's probably an opportunity to work with them with revenue recovery to help them gain improvements in that connection. We may have a fulfillment customer that's working with a retailer, but isn't then getting the analytics information from that retailer or the vice versa, getting analytics information, but not actually using the network to trade their -- to use fulfillment. Or we may have somebody who tested with a retailer, but isn't actually using the world's retail network to actually do their fulfillment with them.

Using those signals, we can drive opportunities into our sales organization, into the -- to then reach out to those customers and add more value for them. But those same signals can also be used by network agents that are working with customers to answer questions about the network itself. For example, you can prompt in plain English to understand what's happening in the retail network for you, what information do you need on which orders and what exceptions may you need to deal with. You could actually have that same agent identify reports and analysis that can help you drive business decisions. And then ultimately, exposing that agent via protocols like MCP will allow us to extend that agent capability right into our advanced customers who are already using agent technology in their trading partner ecosystem.

So a vast number of benefits that we get from the retail network and all that we're doing with it. But we also have identified a number of internal efficiencies that we believe are possible with AI along with the data that we have. Earlier, I talked about the customer onboarding use cases. But in addition to that, we also see an ability to use Agentic engineering capabilities to explore, prototype and build faster to just get more capability to our customers. We also see an opportunity to use agents along with network data and CRM activity to help us engage prospects and work with new customers in a more efficient manner. And in fact, we've already started doing much of that.

We have our own internal agent platform that's already connected up to many of these different systems. So for example, we have access to our CRM data or access to conversational data that we're having with our customers. And these internal agents can connect that all together to deliver more value for our team. That combination of internal data along with commercial information and then also what the network knows about those trading partner relationships is incredibly powerful.

So in closing for all of you, I've actually been at SPS for over a decade, and I've always been incredibly excited about the opportunity to build the world's retail network. But I am incredibly excited about what we can do with Agentic technology on top of that to create even more value for our customers. It's a really incredible time. So with that, I'm going to hand it back to Irmina.

Thank you, Jamie. All right. So we have established sort of network is important. Data is important. And ultimately, it is protocol-agnostic, AI-enabled, scalable and secure. All right. With that, I will invite Kim to provide the financial review and the final presentation for the day.

Okay. Thank you, Irmina. Great to see so many people here in the audience. Some folks have been investors for over a decade. Some are newer investors or just taking the opportunity to get a refreshed look at SPS. So I really appreciate everybody here today and really appreciate everybody online as well.

So I'm Kim Nelson, I think most of you have had an opportunity to connect with me. But again, really appreciate the opportunity that you're taking to get just a better understanding of our story. So I've really 3 key messages for you to walk away with. First, that strong foundation of durable growth; second, that huge opportunity to go after a very large total addressable market based on our go-to-market strategies that we have; and then third, our conviction as it relates to sustained and profitable growth. So we'll spend a few minutes going through each of these.

First, our durable growth. So what you'll see here is we have a very long track record, many years of being able to deliver nice top line growth as well as nice bottom line growth or adjusted EBITDA dollar growth. What you'll also see here during that time period with that balanced growth, we've also been able to drive a lot of efficiencies in margin expansion that you also see on the bottom here with that EBITDA margin over this time period.

Over this basically decade time frame, you'll see we've delivered about 17% top line growth and 27% EBITDA dollar growth, which also helps to drive that EBITDA margin expansion as well. Now as Chad talked about in his section, we have had different dynamics that have happened in the retail space during this time period. So the next slide is just going to overlay some of the expectations that we've had during that time period.

So what you'll notice on the box on the left here is that was during a time period where there was some change happening in the retail space. And at that point in time, we had a stated expectation of approximately 10% top line growth and delivering approximately 20% adjusted EBITDA dollar growth. You'll also notice that during that pandemic time period, as Chad talked about, there was really a pull forward. There was a lot of momentum, a lot of activity happening in the retail space and that drove a great tailwind for us as a business.

So during that time period, we took the opportunity to update our expectations over a multiyear time period to 15% or greater top line, including M&A. And we slightly expanded the expectation on the EBITDA side. So from just approximately 20% EBITDA growth to approximately 15% to 25% EBITDA growth. And what you'll see throughout all of these time periods, if we've successfully executed and delivered in helping our retailers, our suppliers, our third-party logistics providers and delivering on this balanced growth.

Now the two components that ultimately drive that revenue, it's how many customers do we have and what do those customers pay us or what we refer to as the ARPU. And what you'll see is during that same time period, both have been very important contributors to that overall revenue growth. There's certainly some time periods where one may grow a bit faster than the other, but the combination of the two are really what's driving that top line growth.

Now next, I want to take a moment, and I just want to double-click down on the customer side. So in this case, what this is showing is what has happened to our customer adds over various time periods. And this chart excludes M&A so that you can get a sense of what are the drivers of customer adds, excluding M&A.

And what you'll notice here is there's really 3 time periods that we have highlighted. We have pre-pandemic, pandemic and post-pandemic. So your takeaway here is, we had a very consistent engine in how we get the majority of our new customers, and that is through that relationship management program. And what you'll see is pre-pandemic, that averaged on an annual basis, approximately 1,300 new customers joining the SPS Commerce network.

Then you'll notice pretty obviously here is during the pandemic, you saw that, that number increased significantly. And during the pandemic time period, the customer adds, excluding M&A, was approximately 2,100. Now for those of you that have followed the SPS story for quite some time, you do know that acceleration. We've talked about that pretty consistently that occurred during that pandemic. Great for us as a business, but quite a bit of an outlier during that time period of that acceleration.

Next, you'll see in the latter third of the chart, post-pandemic. And what you'll notice during that time period, there has been a little bit different in some of the years, how many customers we've added. But if you look at roughly 1,000 is the average post-pandemic of a net customer adds. Now there is a caveat on this slide as it relates to you'll see that little orange bar on the far right. Since we only have information through the first half of the year that's been provided, the orange line is simply extrapolating forward if the second half of '25 ends up being the same as the first half of '25, that is where that line would end up.

And so what you'll see is that, that is trending closer to where we were from a net customer adds of approximately 1,300 pre-pandemic. You'll also notice on here that '24, and Chad did speak to that, but that was a pretty low customer add year for us. And again, overall, we're trending a little bit closer to where we were pre-pandemic.

Next, huge total addressable market. We have over $11 billion opportunity in front of us. We're going to spend a little bit of time now to double-click in this area as well. So first, this slide you saw from Chad earlier today. This shows where we're currently at through the first half of the year versus this very large opportunity we have in front of us. What I'm now going to do is go a little bit deeper on the U.S. side of that opportunity. So that's that $6.5 billion total addressable market. What this slide does is not only does it show the total U.S. opportunity, but it actually breaks it into different size customers.

So as you probably know by now, we are able to service all size customers, but there are different dynamics depending on what size you are. So what this chart shows is for the small customers, the medium customers as well as the large customers. What do we see as the opportunity for both how many customers and how much that average revenue per customer will be. Those are those circles. And then you'll see the little darker shade colors in each of those areas. That represents through the end of '24, how much of this opportunity do we already have.

And so you can sort of look at it and say pretty much between, call it, like 1/4 or 1/3 in general that already exists today for us. So sometimes we have investors that ask questions about, but how does it look overall between our customer size. So this is just a simple depiction of the total addressable market and how we believe that will look like by the quantity of customers and then the revenue from those customer size as well. So again, this is specific on the $6.5 billion total addressable market we see in the U.S. and this represents approximately 146,000 of the customers and approximately $45,000 of the ARPU or average revenue per customer.

So what you'll notice, not surprising, the biggest quantity of our customers we see will be small. And you can see that depicted on the left side of this chart with 87% of the quantity of customers being small. And then you'll see our expectation of what that looks like for medium and large.

If you look on the right-hand side of the chart here, you'll see the revenue. And really, your takeaway here is there's meaningful revenue opportunity we see from each size of customers, not surprising, a smaller quantity we anticipate of large suppliers, but much more meaningful revenue for those large suppliers. So on the right, you'll see, again, approximately 64% of the revenue coming from small, but then pretty equal about 18% each of what those medium and large customers will equal over time.

Next, we're going to do a double-click down as it relates to each of these customer size. And I wanted to provide a perspective of why we have the conviction we do of why there's still such this meaningful large opportunity. So hopefully, from the prior slide, you see based on the circle charts or the pie charts, there's still a lot of opportunity in each of these areas. But what gives us a lot of conviction is not only the TAM analysis we did, but also what we have already actually done in getting those customers and getting those -- getting that ARPU.

So in this case, we're going to show you from the last 5 years, we'll start with small. So in the time period from 2019 to 2024, how many additional customers have we added that are small during that time period. And what you'll notice here is we've added approximately 40% more. So we have 40% more customers in '24 than 2019 that are small. Interestingly on the bottom, that's the ARPU or that average revenue per those customers. And what you'll see here, there's been an 87% increase over that time period.

If you move forward to the medium, you're going to see we've added a healthy amount of customers, 26% and interestingly, a pretty similar amount of an increase in that ARPU of approximately 85%. So if you think back to what you've heard today on sort of the land and expand, this is showing what we've been able to do in landing customers, but meaningfully expanding, why we have that strong conviction in the very large ARPU.

And it's accentuated a little bit more in this next group, which is large. So on the large side, we've added approximately 9% more customers over that 5-year time period, but you can see that meaningful increase or acceleration in that average revenue per customer.

Overall, this translated to very healthy growth in both customers as well as ARPU over this time period, adding approximately 37% more customers and about 90% more of that ARPU. So I wanted to take the opportunity to provide this view so that hopefully, you walk away with that same level of conviction that we have internally of what we've actually demonstrated and already done and the meaningful opportunity that's still in front of us to continue to land more customers and expand our relationship with those customers.

Next, sometimes investors will ask us about customer cohorts. What's happening with your customer mix and what does that look like over time? So what this slide is showing is the first year where you see a different color. That's the first year that, that group or those customers joined us. And then what you'll see is in future years, how much revenue have we gotten from those cohorts. So in 2018, that's the blue line on the bottom, and you'll see from 2018 to 2024, what has happened to that revenue over that time period. And you'll see that for each of these time periods here.

So in general, what we've seen is when customers join us, we get at least 2x to 3x more revenue from that same cohort over time. Now do keep in mind, we do have churn. It's been a pretty consistent amount of customer churn, but there's certainly that does happen, the part of sort of cost of doing business in the retail space. So your takeaway here is, I'll just go to the example of the 2018 book of customers that joined us in 2018. When you look to the far right in 2024, there's fewer customers remaining that joined us in 2018. But of those remaining customers, this represents their revenue that we are getting and helping to support them.

So for those remaining customers over that time period, that their ARPU is obviously much higher. So your takeaway is over time period, when we land a customer, there's meaningful opportunity to expand those customers even despite the fact that there is some just natural churn that happens as part of in the retail space.

Finally, why do we have the conviction we do in the sustained and profitable growth or what I like to refer to as balanced growth. So the left-hand side talks to our latest expectations that we have provided on our last earnings call. And that expectation is that we believe we can grow at that high single digits or greater. Now what makes that up? Sometimes investors want to understand you have customers and you have ARPU. And we've really demonstrated that both are meaningful in the overall contribution, but sometimes investors want to understand how should they think about what that mix should be.

So what you'll see here our expectations of what's going to make up that, at least high single-digit growth, is we expect low single-digit growth coming in the form of customer adds and mid- to large single-digit growth coming in the form of ARPU.

Now there's really a couple of reasons for that. One is simply the large numbers. So the more customers you have over time, when you're adding additional customers, by default, the percentage of that or the growth of that will be smaller. Think back to that chart that I showed of what we have trended in net customer adds on an annual basis, excluding M&A. So think back to that chart of that 1,300, it was up higher over 2,000, and then we've been trending at about that 1,000. So when you think about just that math, that naturally would get you to a low single-digit growth.

And then if you think back to the presentations that you've heard today, we have ways to land customers, meaningful ways to expand that relationship with customers over time. And that ARPU side then our expectation is, again, that mid- to high single digits. It also fits in very nicely when you think back to the total addressable market and the update that we provided there, meaningful opportunity, continue to grow what that average revenue per customer will be.

Now all of that stated expectation excludes acquisitions. And we have been acquisitive in the past. And should we continue to be acquisitive in the future, this is the lens of how we think about acquisitions, and that would be additive to the top line growth. Now Mike, in his presentation, spent a little time on how we think of the build, the buy and the partner.

To the extent buying makes sense, we'll continue down the path that we have done historically, where M&A has been a great way to expand or enhance our product offerings, geographic expansion as well as consolidation. Think of that as just more of that pure customer acquisition. All of those that we've demonstrated our ability to do those effectively and well.

Okay. Now on the EBITDA margin. So we have demonstrated and proven our ability to drive significant improvement in that adjusted EBITDA margin. What this chart is showing is from, call it, the mid-teens, 20-teens to more recent time. We got ourselves from mid-teens to high 20s from an EBITDA margin perspective. And we have a stated goal of getting to at least mid-30s or 35%.

Now a big driver of how we've gotten to where we are, has been through our sales and marketing efficiencies. We've spent a lot of time there in being able to do things in a more cost-effective way that has extracted or driven again those sales and marketing efficiencies. That does not mean we haven't gotten efficient in other areas of the business as well. But what really stands out has been that sales and marketing side.

When we think about the next leg of our growth to our margin expansion. Again, there's going to be opportunities across the company, but we're really pointing investors to the gross margin area to be a significant driver in that next leg of growth. Now part of that is based on various investments we've made historically that we're able to grow into. And my next slide, I'll go a little bit deeper in each of those components.

So what you'll see here is our stated goal on the bottom of getting to at least 35% adjusted EBITDA margin. And you'll see we have ranges of where we think each line item could land on that journey to at least 35% adjusted EBITDA. The revenue growth I've already talked through our view of how we believe we will get to that high single digits and the makeup of that between how much comes from customer growth and how much comes from ARPU. You'll see on the right-hand side some additional commentary that we provided for each line item, how to think about what's going to drive us there.

So as I started to mention on the prior slide for gross margin, we have made a lot of investments over a multiyear time period to reinvest back in that customer experience. And we're now at a point where we're starting to deliver and show some of those efficiencies. Think of it simplistically, we're able to grow into some various investments we've previously made.

And as an investor, if you look at our financial statements, you saw that starting in the back half of '24. And you've also seen that in the front half of '25. We've also appointed investors for full year '25, the margin expansion to be primarily from the gross margin side.

Now on top of that, we'll continue to get more efficient in what we're doing. You heard a lot from Jamie today on things we're doing on the AI side. AI, very naturally will be a way for us to continue to drive efficiencies and ultimately delight our customers and getting them onboarded faster and helping them to ultimately do their business better and effectively.

When you look at the other line items here, R&D, we've been at a range of, call it, 9% to 12% historically. We do want to make sure that we are investing back in our existing products as well as an opportunity to invest in future products. However, we think we can do that while getting more efficient in areas like AI to drive underlying inherent efficiencies that will allow us to still keep at that pretty, I'd call it, low but tight range of that 9% to 12% from an R&D perspective.

Sales and marketing. Again, we've driven a lot of efficiencies here. We'll continue. Again, AI -- you're going to hear this AI theme. AI will help us drive efficiencies here, but we want to make sure that we are appropriately reinvesting back in the business based on the opportunity that we see.

And then G&A, a variety of areas of how we can improve margins here. One, just as the top line grows, there's fixed costs that naturally are going to scale. And then AI, there's certainly a lot of use cases here where AI can help HR, finance, legal, be more efficient and effective at what we're doing.

Overall, while we're growing at that high single digits, we expect we can drive and extract approximately 2% or 200 basis points of EBITDA margin on an annual basis.

Capital allocation. This is a question that comes up frequently with investors. I think we have been very effective and prudent stewards with our capital. We are cash flow positive. As CFO, a fabulous place to be in, to be cash flow positive. We, of course, will reinvest back in the business to help drive this meaningful opportunity ahead of us. But even after doing that, we still do drive cash. And so what have we done with our cash. From an investor perspective, you've seen us deploy capital in a couple of ways: one, in share buybacks; two on M&A. We don't look at this as an either/or. We look at this as an opportunity we have to do both.

On the capital allocation for the stock buyback side, what you'll see here is in the last 6 quarters, so '24 through first half of '25 about 50% of our free cash flow that generated has been deployed in stock buyback. And if you look at the first half of 2025, almost 100% of our free cash flow generated has been deployed in stock repurchases. From an M&A perspective, we have capital to deploy if it makes both business and financial sense. And again, the bottom under by shows those opportunities that we have seen in the past and opportunities we may see in the future to be able to deploy capital for M&A.

Okay. So in summary, hopefully, there's three key takeaways you walked away from with my section: First as it relates to that strong foundation of durable growth; two, the very, very large total addressable market that we have in front of us and also what we've done and demonstrated and delivered on that path to -- for that large total addressable market; And then finally, really, our conviction and again, what I refer to as balanced growth but sustained top line growth as well as profitability. So with that, we are going to move into a panel so that you will have the opportunity to ask questions to the executive team, and I will turn it over to Irmina.

Thank you, Kim. So just a quick reminder for those of you in the room, [Operator Instructions].

All right. Scott Berg from Needham. Thanks for hosting the day. I appreciate the update as always. I guess I've got two questions. I'll start with the one to ask the follow-up. Second is, Jamie, you talked about Agentic use in the product. I looked at most of the functionality that you talked about was really around onboarding of customers, making the whole product easier for customers to use. But how do you think about leveraging some of those technologies in a commercial aspect of actually developing product. And it's probably a question for both of you and the ability to maybe monetize some of those efforts?

Yes. So I mentioned how those network data signals are, we're able to feed that into the system. So as you said, we'll use many of those things to power our own onboarding and make it more efficient for us to add new customers. But we do see also adding that in so that the customer is directly engaging, probably first focusing on really exposing data that they send through the network with their trading partners and building capability on top of that and then branching out from that over time.

Yes. And just to add a bit more color as well from the product perspective. AI is going to permeate every bit of our road maps. And so I think that probably most people would agree that early AI is in the early innings of its development from a commercialization perspective across the industry, across all software. And so what we know is that AI will be powerful, and it will be a part of our offering. What we're not yet, I would say, convinced by yet is the specific SKU, the specific new product, the specific offering what we would take that would be a stand-alone AI capability.

But instead, we see it infused in all of our products because we're seeing significant potential advantages at each part of the supply chain through our existing products. And so certainly, one way that, as Jamie mentioned, you'd see it exposed there. But certainly, you think about our data that we have, which was a theme that came out today as being sort of the oil, if you will, that's going to power AI, especially to the extent that, that data is not accessible to public search engines and other access points.

And also the network, the fact that we're connected into those systems of record within our customers' operating rhythm. We have an opportunity then to think about the next generation of sort of Agentic use cases that is implied by system connectivity and frankly, data that's very interesting. So that's sort of a stay tuned answer on that front.

Great. And then for my follow-up, Kim, on your graphic around the 3 different customer sizes. The large customer segment stood up for 2 reasons. One, the ARPU growth was obviously substantially larger. But the customer count growth was slower than I would have expected because I know you've had a lot better success upmarket. But as I start to think about that from the history of the company is when I go back to the acquisition of Edifice, a lot of those customers around analytics tended to be larger customers in general. And we know analytics is not really growing today, right?

The last couple of years, it's been, we'll call it, in the flattish to 10% range annually. So it's been a little bit slower to the overall business. But if we exclude customers that are maybe only analytics customers upmarket, how do we think about the growth of those customers with respect to the rest of the portfolio? Because I think that's probably more interesting because that's really driving that 100, and I think it was 67% ARPU growth. If analytics is growing, isn't growing, it has to be those other products. But how do we think about the growth of those large non-analytics customers.

Yes. So if you think back to our go-to-market strategy, particularly on our fulfillment or core fulfillment product. So if you think about the relationship management, that drives the largest quantity of net new customers into our network, and those tend to be skewed to the smaller size. So when you're looking at that growth rate, you saw the highest growth rate coming in, in the small. That is really contributing or attributable to that relationship management.

When you're a supplier that's larger, medium or large and in particular, the large size, you've already had to figure out how to do fulfillment. It's not like you are doing everything in a manual way with retailers. So in that case, the way we win that business is usually when there's a change event. So that goes back in Chad's section where we was talking about the channel, sales channel partners. So a lot of that really depends on we have to make sure we're getting in front of those larger suppliers.

At that time, they have a meaningful change event. And typically, that meaningful change event is going to be an ERP change. So there's a smaller quantity in total that we think are there. And it's also because it's more dependent or historically has been more dependent on that type of change event. That's why you haven't seen as many, I guess, percentage-wise, in ads there. But what you are seeing is that meaningful increase that we -- once we land that supplier, how we're able to meaningfully increase their revenue from both the fulfillment side but also other product offerings.

Matt VanVliet from Cantor. I guess you mentioned the product-led growth as sort of a new engine that you're going to explore a little more of. But what are you doing today already on that front. Maybe what's holding you back from doing or executing the plan that you want to have ahead? And how do you fill that gap in between?

Yes. So there's very little product-led growth in the company. So even these -- when we add a new customer through a relationship management program that does require a salesperson and the sales transaction. It's a fairly junior salesperson that can handle that, and they can handle a lot of volume. So it is efficient. But unlike some other SaaS companies that can actually convert product or customers automatically using the product, we're not at that stage.

And as we've looked at this and formed the product strategy, we feel the biggest opportunity is actually to leverage these signals that are coming from the network first, and then we can automate that and serve that to salespeople. That would be sort of stage 1 and a lot of what we talked about here. But over time, there should be ways that, that can automatically happen in the product. So we're getting those same signals and the conversion opportunity for a customer is right in the product.

So imagine logging into our fulfillment portal and it says we see that you're trading with Home Depot. We know that 90% of our Home Depot suppliers also trade with Lowe's. Would you like to sign it for the Lowe's service. And so -- but we think the fastest path to opportunity is actually getting those signals to our existing salespeople and then moving forward to the product-led growth.

And then maybe just one more on the M&A strategy. How have the priorities changed between the three drivers you mentioned maybe for the next several years versus what's gotten the company here to this point? Are you more focused on expanding the product and that ARPU opportunity, the geographic side or are you at a scale now that maybe just buying the market consolidation players is the most efficient?

Yes. So of those 3 categories of M&A that we think about: one is sort of this market consolidation, other EDI providers, the second product line expansion on products like what we did with revenue recovery where we know it was a strong fit for our ideal customer profile and the third being the geographic expansion. To the extent there is further consolidation opportunities, we like those types of acquisitions. And what we find is that customers get a huge benefit for that because they're able to then join the world's largest retail network and get all the benefits of the network. What I'd say is the industry is less fragmented because of some of the consolidation that's happened in the industry.

So there still are opportunities out there. They just might not be as plentiful as they once were. And we also like the opportunities around the product line extensions. And I think the work that we've done in revenue recovery is a good example of that. And I'm confident that the work that Mike and his team is doing, really focusing on the details of each of those 3 market segments we serve will uncover new opportunities.

I'd say on the geographic expansion at this point in time, we have a lot on our plate right now with Europe, right? So we've integrated [ Tai ] into our business, but we have relaunched a whole new product portfolio in Europe and our early days in these relationship management programs in Europe. So I think if we get traction there, I could see further geographic build-out in Europe as a means to get there quickly. But what I'd say right now is we really kind of have a lot on our plate right now with the things that we are doing with Europe, early positive signs, but a lot to do with what we have there.

Dylan Becker with William Blair. Maybe for Mike or Jamie, we spent a lot of time kind of talking about the value of the network and we don't know what AI monetization is directly going to look like. But how are you guys thinking about kind of the compounding value of that ecosystem in embedding intelligence in the existing processes, how that can maybe fuel greater supplier connectivity, incremental adoption, you can solve kind of more pain points? I'm sure there's a stickiness and a retention dynamic there, too. But the network today is valuable. It reads as if it's only going to become increasingly more valuable with your position and I would love your thoughts there.

Yes. I mean I'd start with saying one of the unique things about the retail network. I mentioned that we have 300,000 trading partner connections. Every single one of those trading partner connections has going to be unique signature. They all are very specific to between those different entities. And that's an area, for example, we're using AI, we can put an incredible more kind of insight into each one of those to gain network led growth signals to come back to the customers with like new opportunities or even just understand their business context better. And so there's significant potential that we see and be able to pull more out of those signals that are in the network.

Yes. And maybe just to add a little bit more. If you think about all of the -- the way I think about it is what are -- what is the sum total of all manual decisions that need to be made in the supply chain. And then we ask ourselves the question, could you apply either deterministic or predictive models to those series of events. If you go back to maybe the [ Chevron ] slide, it's going to be one of the earlier slides in my presentation. Each of those -- each step in the value chain, there are one or many human decisions that are made throughout that supply chain.

And we're asking ourselves, okay, given the network that we have, given the data that we have, and then in a determination, do we want a rule-driven predictive -- or sorry, rule-driven deterministic approach to solve that? Or is prediction good enough? So imagine like if you're in [ martech ] or something like that, where you don't have to be 100% accurate, better is better. Sometimes in supply chain, different is worse. So you've got to be careful with predictive models, but I think that there's a tremendous amount of opportunity.

So I would say, directionally, we're thinking about how to create automation at every human step in the supply chain across all participants for which we have visibility, and we're sort of going to score that, and we're going to start kind of working down the list of where we deliver the greatest value. So you can kind of imagine where that leads to.

Great. And then maybe one for Kim too. The customer cohort analysis, very helpful in kind of the segmentation. As you think about kind of the delineation between yes, a small customer, large customer and the debate between customer count and ARPU expansion. It's very clear that Enterprise has a couple of benefits to it. Is it maybe make the conversation around pure net logo adds less relevance going forward when an enterprise customer could be indicative of 10 SMBs in the future, and they have a higher propensity to buy more across the platform. I would just love your perspective there.

Yes. No, that's a great question. As we want to make sure we're servicing suppliers of any size. And historically, that focus has really been more on the small. And then as we've grown and evolved, we've got from small to medium to large. So to your point, Dylan, they're not equal in what they can contribute. If you think back to that pie chart, about 18% of our revenue, we think, will come from large as well as medium even though the percentage of that customer count is much smaller.

So what we wanted to do by providing that level between small, medium and largest is to really help investors understand there are some differences there. We do have traction in each of them. But the way that's going to end up resulting in our overall mix of revenue or contributor of revenue there, it is different there. So that is one thing that we have -- we'll continue to evaluate if sharing a total customer number is the most appropriate and relevant for the next decade plus or not.

This is [ Pala ] for George Kurosawa from Citi. First is on go-to-market. So should we think of relationship management programs as an evolution to community enablement or is this a whole new sales motion? What is fundamentally different? Where do you see the revenue opportunity from this motion?

Yes. So you should think of the relationship management as the same motion that we've had as community but augmented by the things we can do for retailers as a result of having the performance management product that we acquired from Traverse. So what we've done with the sales team is, historically, they've just gone in with a value proposition around the community and the value in getting the digital connection to the suppliers established.

Now when we go in and engage with a retailer, we're able to talk to them about the overall performance of the supply chain of their inbound supply chain and how their suppliers are performing, including the scorecarding capabilities that exist with performance management. And then, of course, one of the best ways to drive better performance of your suppliers is to have them digitally connected so you can effectively communicate and collaborate with them.

So really, the core offering on relationship management is the same as you've known from community. And -- but now what we're able to do is when we bundle it together with that performance management, have a much more meaningful discussion with the retailer about their overall supply chain performance. And what we found is we're able to open a lot more doors frankly, with this whole broader message about supply chain performance and not just about the digital enablement that's historically come through community, which is now relationship management.

Perfect. So then my second was that one of the barriers to collaboration vision was the willingness of to share data with other players. So have you seen any improvement on that front as you're better able to convey the value proposition for collaboration?

Yes. So in some areas, especially the more transactional areas like this order and shipment and item exchange, we see a high degree of willingness to collaborate. I would say where people tend to be a little bit more guarded with their data is around point-of-sale data and driving more of that point-of-sale data from retailers into our network for our analytics solution. We've been very successful doing that in certain industries like footwear, apparel, sporting goods. In some other areas, we've been less successful getting the retailer to share the data across our network.

Chris Quintero from Morgan Stanley. I want to hit on the customer cohort breakout. Chad, I think you mentioned like during the pandemic, obviously, a lot of drop shipping and you saw that in the small customer count growth. But as we look forward, how should we think about where the growth comes between all the different cohorts should be more balanced? Is there one that you think is going to drive more of the growth? How should we think about that?

Sure. So I think as you think about -- I'll take it back a step and just look at the total market opportunity because I would say if you look at that market opportunity, relatively equally penetrated in small and medium and maybe a little underpenetrated in the large compared to the other two, but not substantially. I mean, for the most part, it's fairly equal. I think the nice thing about our business is we're uniquely positioned to get to the small with the retail relationship programs. And there's still remaining opportunity in the large on the enterprise replacement cycle that Kim mentioned, but has not historically been the focus of the company, right?

So if you look at the evolution of the company, it very much started in the small and having the unique sort of Internet portal way approach to get to the long tail. We were then able to move more into the medium as we build out our product portfolio around the ERP adapters and the ERP connectors that really unlocked the more of the medium for us. And I'd say, although we've had some success in the large, we haven't had a dedicated go-to-market strategy per se to really tackle that replacement market. And so we do see still some more legacy approaches, more do-it-yourself approaches in that enterprise area. And it remains a nice part of the market remaining for us to focus on in the future.

Got it. That's super helpful. And kind of as a follow-up, I don't know if Maria is in the room too, but just -- we heard a lot about the sales side. How do we think about the marketing side? Historically, you haven't been in that large side, but you also have all the new brands on the smaller side. So how do you think about the marketing for those two segments?

Yes, great question. And if Maria had a microphone, I think she'd be all over it. But let me give a little context of, one, first, having Maria in the business and then what I think is possible on the marketing side. So SPS unlike a lot of SaaS software companies hasn't had to heavily utilize traditional digital marketing strategies, and that's really come from the strength of these retail relationship programs and the strength of the channel go-to-market. And quite frankly, one of the observations that I had when I came in is that if we can move more to best-in-class digital marketing strategies, that would present another great lead source for the company.

And we went out and found a best-in-class SaaS marketing expert. I'd say we're early on this journey. But I think especially as you think about the things that we can do with these network signals and how do we convert those then into digital marketing campaigns and digital engagement approaches with customers and prospective customers. I think that there's a big lever to be pulled in digital marketing and doing all that without sacrificing any things that we're doing on the relationship management side or the channel go-to-market side.

Nehal Chokshi from Northland Capital Markets. A couple of quick questions. Within the small customer cohort, has the land size been increasing over that time frame that you showed that the ARPU was also increasing?

Has the what size?

The land size. So as you onboarded new customers in that small cohort, has the land size been increasing as well? Or has it been landing at the original size and you're just simply expanding even faster?

Yes. So meaning, is our view of how many potential customers there are, has that changed in the small size. If I think about -- so if we look at our TAM that we refreshed earlier this year, prior to that, we had a TAM view albeit it was a bit dated. And when we look at the older TAM, that basically had we thought about, call it, 100,000 potential customers in the U.S. The refresh TAM shows that, that number is 146,000. And because the biggest quantity of the opportunity and the biggest quantity of our customers are small, it is safe to assume that, that land size of what that opportunity looks like, is greater than what we initially thought.

Part of that, I think, also is if you think about the retail space, there's so much change that's happening there. You heard from the customer panel. There's different brands coming in, they're looking at different selection of products to bring onboard. So that opportunity of how many potential prospects for customers for SPS is larger than what we initially thought.

Okay. What I really want to get at is the ARPU of a new small customer. Has that gone up over that 5-year period that you've shown that the ARPU of the overall small customer has gone up as well?

Yes. And that would be -- it would be the case there as well. I'd bring you back to the TAM if you think about what the opportunity is on our prior version, we thought the overall average ARPU was around 25,000 in the refreshed version. The overall is 40,500 specific within the U.S. It's approximately 45,000. Now of course, that does have medium and large in it. But even if you look at that small component, the ARPU opportunity is greater than what we initially thought.

And that was driven by the additional SKUs?

If -- we have a couple of things. One, the broadest, I would say, is just as things have changed in the retail space and the quantity of SKUs that retailers are now looking to source product from. The second is our -- the way we came up with it, the second time around, we actually leveraged some external data as well as just looking at our internal data. But overall, that opportunity is larger than we originally thought.

And the other question I have here for Jamie, it was great to see how you talked about the various examples on how you're going to bring Agentic AI into the SPS platform. It seems like you are implementing this not from a ground-up basis but plugging it in, in areas where you can find leverage. Why not actually look at Agentic AI from a ground-up basis instead of plugging it in where it could -- where you could get leverage from?

Well, I mean, I would say that we're doing both actually. I mean, I'd say we showed examples of where we're able to bring AI capability alongside our existing products to make that customer experience better. But we also then are internally looking at different business processes or different ways that the network operates in order to figure out how we can pull in and do that kind of a ground-up basis. So I'd say that we're doing both. How that shows up to our customer and the market, we'll see over the course of the next product delivery.

Parker Lane at Stifel. Chad, you talked about different expansion drivers to the business, cross-sell, upsell as well as the supplier-driven expansion activities. Just wondering if you square on that part, the supplier-driven activities. The predictability of that and the trends you're seeing there? Like how sensitive is that relative to the cross-sell and upsell piece in light of the macro trends you talked about in the last earnings call?

Yes. I mean I think this is one of the unique dynamics that we have in the retail ecosystem is that there's constant share exchange going on within our customers. And so there certainly are opportunities to expand with brands as they open up more channels. And it's certainly a tailwind that we have the overall increase in brands in the retail ecosystem based on the lower barriers.

But I think the one thing to keep in mind with our business is sometimes that share increase of a customer is coming at a share decrease of another customer, right? So overall, we're optimistic about the more brands and the more opportunities and the large TAM. But if you look at it at a micro level, there can be situations where some customers increase means another customer's loss of share, yes.

Right. So I think we're out of time for Q&A. Thank you very much for your questions. Thank you, everyone, on the webcast for participating. And thank you to our speakers.