SPS Commerce at Morgan Stanley Conference: Strategic Growth Insights

On Thursday, 06 March 2025, SPS Commerce (NASDAQ: SPSC) presented at the Morgan Stanley Technology, Media & Telecom Conference. The company highlighted its strategic focus on expanding its role in the supply chain sector, aiming for significant growth in revenue and market share. Despite challenges in customer acquisition, SPS Commerce remains optimistic about leveraging its cloud-based network to connect retailers and suppliers effectively.

Key Takeaways

• SPS Commerce estimates an $11 billion global market, with $6.5 billion in the U.S.
• The company targets at least 15% revenue growth and 35% plus EBITDA margins.
• Recent acquisitions aim to enhance product offerings and address supply chain compliance.
• SPS Commerce plans to increase average revenue per customer to $40,000 globally.
• Organic growth is driven by customer acquisition and increased revenue per customer.

Financial Results

• SPS Commerce aims for at least 15% revenue growth, driven by expanding wallet share.
• Targeted EBITDA margins are set at 35% plus, with gross margin improvements as a key focus.
• In 2024, wallet share growth was strong at 15% year-over-year, though customer count grew by only 1%.
• The company plans to increase the average revenue per customer to approximately $40,000 globally, up from the previous target of $25,000.

Operational Updates

• The revised Total Addressable Market (TAM) analysis indicates an $11 billion global market, up from a previous estimate of $5 billion.
• SPS Commerce is focused on increasing average revenue per customer across all customer segments.
• The company utilizes community enablement programs, channel partnerships, and a direct sales force to acquire customers.
• Recent acquisitions, including Carbon6, Supply Pike, and Traverse Systems, expand product offerings and address supply chain compliance and chargeback penalties.

Future Outlook

• SPS Commerce expects a mix of new customer acquisition and wallet share expansion to drive revenue growth.
• The company anticipates more net customer adds in 2025 compared to early 2024, though not reaching pre-pandemic levels.
• Significant opportunities exist to cross-sell revenue recovery solutions to the existing customer base.
• SPS Commerce plans to continue being acquisitive if it aligns with business and financial goals.

Q&A Highlights

• The updated TAM analysis shows 275,000 addressable customers versus the current 45,000, indicating growth potential.
• Organic growth is driven by customer acquisition and upsell opportunities.
• Trade tensions and tariffs are not expected to impact SPS Commerce directly but may create opportunities due to shifts in supplier communities.
• ERP replacement cycles are more consistent among small to medium-sized businesses, which form the bulk of SPS Commerce’s customer base.

In conclusion, for a more detailed understanding of SPS Commerce’s strategic plans and financial outlook, please refer to the full conference call transcript below.

Full transcript - Morgan Stanley Technology, Media & Telecom Conference:

Chris Quintero, Software Analyst, Morgan Stanley: Thank you everyone for joining us here at the Morgan Stanley TMT Conference. My name is Chris Quintero. I’m a software analyst on the U. S. Research team covering all things back office and office of the CFO.

And I’m really excited to be joined here by the SPS Commerce team, Kim Nelson, CFO Chad Collins, CEO. Thank you both for being here.

Kim Nelson, CFO, SPS Commerce: Thank you.

Chris Quintero, Software Analyst, Morgan Stanley: Quick disclosure statements. 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 with that out of the way, Kim and Chad, would love to first dig into the SBS commerce story at a high level. For investors who maybe aren’t as familiar with the story, where does SBS fit in within the broader supply chain space?

Who are your customers? And what’s really the value they’re getting out of your software?

Chad Collins, CEO, SPS Commerce: Yes, absolutely. So at SBS Commerce, we have created and operate a cloud based network that connects retailers, distributors and grocers with all of their suppliers so that they can exchange supply chain information across our network. So we’re primarily focused in the retail space. And in retail, what’s typical is the retailers will have quite focused rulebooks. And these rulebooks really define the requirements for how their suppliers are going to interact with them from a commercial standpoint, but as well and importantly a supply chain standpoint.

And then that also includes all the digital transactions that need to go across and each retailer has a very unique and specific set of transactions that they need that their suppliers need to comply with. And so we maintain all that complex rule set in our network. So it makes it easier for suppliers once they connect to our network to do business not only with the one particular retailer that may attract them to our network, but to grow with the retail connections on our network. And we also have a pretty unique go to market approach in where we will work with retailers who don’t have all their supplier digital connections established. We’ll partner with them and get the mandate from them to do all the outreach to their suppliers and help onboard those suppliers.

And then those suppliers can choose to meet the mandate of that retailer by joining the SPS network, but we do have an open network approach. So we can also take them through a testing and certification process to meet that retailer requirement if they have some of their own technology.

Chris Quintero, Software Analyst, Morgan Stanley: Got it. No, that’s super helpful. Over you. So your customers are primarily suppliers to retailers. What kind of data are you actually exchanging between both of those parties here with your software?

Chad Collins, CEO, SPS Commerce: Yes. So one of the key components of the data is the whole ordering process. So oftentimes it will initiate with the order from the retailer to their supplier. And then there’s a mechanism for the retailer and supplier to collaborate on that order in terms of what would be the quantities, what would be the delivery timeframe. Really it helps the retailer then plan their inbound supply chain by knowing what’s coming.

And then another critical element in that process would be the shipment notification. So when the supplier actually ships the good, the retailers know really what’s coming to them and can automate their process and just allow them to scan a barcode and immediately flow it through their distribution centers and out to their stores. In addition to that, we handle quite a bit of drop ship e commerce across our network. So if you order on a retailer’s website, but maybe they’re not holding that in their own inventory, it can be drop shipped directly from the suppliers. And we also exchange quite a bit of item information.

Item information is sort of the backbone of the supply chain. So it’s very important for retailers to have correct item information from their suppliers.

Chris Quintero, Software Analyst, Morgan Stanley: Got it. And at a high level, how does the pricing model work? Is it based on number of connections, documents, data usage?

Kim Nelson, CFO, SPS Commerce: Sure. So when you think about that core fulfillment product, which is what, Chad has been talking about, there’s really it’s a subscription model, subscription fee, and there’s really two components that make up that subscription. There’s a fixed fee per number of retailers or we think of it as number of connections. So if you’re a supplier, you’re doing business with say five retailers, every month there’s five fixed fees that that supplier will be paying SPS Commerce. So that’s sort of the per retailer fee.

A transactional component of that. So you can think about that a little bit more volume based, but that really has to do with the quantity of documents, not what’s on the document. So for example, a document would be a purchase order. That purchase order could be for $1,000,000 worth of goods or to the extreme $1,000,000 worth of goods. It’s still considered one in our calculation.

So the combination of that is really how we price, and that is part of our recurring revenue or subscription fee.

Chris Quintero, Software Analyst, Morgan Stanley: Got it. Okay. I want to shift gears a little bit. So with your recent Q4 earnings, you also revealed a new TAM analysis that you all put out there. I think it’s a $11,000,000,000 TAM globally, $6,500,000,000 in The U.

S. And that was above the $5,000,000,000 TAM you had previously had out there. So what decided what ultimately led you to put out that new revised TAM analysis? And what are the key differences and changes that you all have made with that TAM analysis versus the old one?

Chad Collins, CEO, SPS Commerce: We’ll let you All right. Okay. Yes. So we had not updated our TAM analysis in several years. So just most importantly, we felt it was appropriate to share our current view on the market opportunity that was out there.

And so the work that we did really went from a bottoms up approach. We worked with a top tier strategy consulting firm that had experience building these type of TAM analysis. It was very helpful for us. And as a result of that, we went to all the industry SIC codes and really built up the total population of addressable suppliers in the market for us that led us to the 275,000 opportunity of the addressable suppliers. And then we also looked, especially as we’ve been able to successfully grow customers’ usage of our network over time and broaden our product portfolio, what we found is that we have a much higher potential average revenue per customer.

And so we were able to expand that potential average revenue per customer. I think one of the things that’s interesting that came out of this analysis around that average revenue per customer is that we found in each of our three segments of customers kind of small, medium and large customers, we have about 80% of the customers in each of those segments who are less than the average revenue per customer. And so we really feel confident that there’s a big ability within those customers to pull that 80% that are less than today’s average up and toward the average and really increase the wallet share in each customer segment, small, medium and large.

Chris Quintero, Software Analyst, Morgan Stanley: And what would you describe as your main or ideal kind of customer size? I know you have small, medium and large, but is there any kind of sweet spot that you mostly focus on or?

Chad Collins, CEO, SPS Commerce: Yes. So we really focus across all of them. We think each segment is very important. But the way that the customers join our network does tend to be a little bit different by customer size. And acquire these customers acquire these customers on the small side is through these community enablement programs I described earlier.

That’s really where we’re working with the retailer. We partner with them to get the full list of their suppliers and then help that retailer onboard those suppliers to our network. So by far that’s the greatest mechanism for us to onboard the small and some of the medium customers to our network. At the large and kind of the higher end of the medium, those customers typically are more established and have mechanisms historically to have these digital connections with their retail customers. And in that end of the market, we’ll typically move over all their trading partner connections at one time.

And here a great change event in those suppliers for us to do that is when they change the ERP system or they change their supply chain system. So we have what we call a channels go to market team that is working with the ERP companies, working with the value added resellers around those ERPs so that we can catch those change events at the suppliers. Typically, if you’re going to move from an on premise ERP to a cloud based ERP, you also want to move your mechanism to digitally connect with your customers to a cloud based modern network approach like what we offer.

Kim Nelson, CFO, SPS Commerce: And what I’d also add on that is, if you think about the depth and the breadth of the network that we’ve established over a two decade time period, it’s sort of that network effect that is very much alive and well. So we can meet the needs of any size customer or supplier. Chad talked through the ways we target to get those prospects to become customers. But you never get to a point with our business model and our technology that you would ever outgrow us, right? So we can meet the needs of really any size supplier.

Chris Quintero, Software Analyst, Morgan Stanley: Yes. So any customers can stay on with you for a long time, they can grow with you.

Kim Nelson, CFO, SPS Commerce: Correct.

Chris Quintero, Software Analyst, Morgan Stanley: I wanted to go back to something a little bit earlier you said, so change events, that’s a big part of the community enablement go to market strategy here. So you mentioned ERP change outs, that’s one change event. What are some of the other potential change events that catalyze these retailers going out to suppliers?

Chad Collins, CEO, SPS Commerce: Yes. So there are change events can happen on both sides of the equation, which are favorable for us. So on the retailer side, if you see the retailer making any shifts in their supply chain, so we’re in a time period right now where there’s lots of shifts and people company organizations reevaluating their supply chains. If that mix of vendors that they’re using is likely to change, that’s a great event change event within the retailer where they’ll go revisit all these digital connections they have with their suppliers and SPS can help partner with that retailer to shift those digital connections within a changing supplier base. And then as I mentioned before on the supplier side, anytime a supplier is implementing new ERP software, if they’re implementing new supply chain software, all of these are big catalyst events.

Similarly, if a supplier wins new business with a big retailer, that can also be a catalyst for them then to have these digital connections with that new customer.

Chris Quintero, Software Analyst, Morgan Stanley: Got it. We’ve done a lot of work on kind of ERP modernizations happening right now and there seems to be a pretty big upgrade cycle happening, especially at the large scale enterprise segment with some vendors forcing people onto the cloud versions. Are you seeing that at the high end with some of your larger supplier customers?

Chad Collins, CEO, SPS Commerce: Yes. So we do see a little bit of that in more the higher end of enterprise with some of the kind of forced shifts that are coming in the market. But I will point out that the majority of our customers are using more of the mid market ERP systems like a NetSuite or a Microsoft Dynamics. And in that end of the market, we see it driven more by the customer’s business and their need for technology adoption rather than some forced shift from the vendor. Yes.

That’s a good call out.

Chris Quintero, Software Analyst, Morgan Stanley: Outside of the community enablement programs, you mentioned working with the channel and some of the ERP vendors, but what else is part of the go to market strategy outside of those two? Is there a direct sales force too?

Chad Collins, CEO, SPS Commerce: Yes, there is. So really think about our sales force. We have a retail group and that retail group is out sort of winning these community enablement programs with retailers. And as part of that offering to the retailer, we have a sales team that will do all the follow-up and outreach as part of that community enablement program. So that’s all part of our retail group.

And then I mentioned the channels group, which is really trying to find these change events within suppliers. And then the biggest part of our sales group is what we call our supplier sales team. And they will manage the sales to suppliers when they’re into this type of change event. But they will also really execute our land and expand strategy with our supplier customers. So one of the great things I think about our business model is a customer can come to SPS and sign up and join the network with one trading partner connection.

But most likely they’re going to be doing business with other retailers or grocers on our network. And so there’s a great opportunity then for them to grow into more connections on our network. So a typical pattern would be they would come and join our network through with one trading partner for a community enablement program. And then our supplier sales team would come in, really work with that customer, understand their full landscape of digital connections they need. And then we can grow their use of our network over time.

And that’s really that supplier sales group. Got

Chris Quintero, Software Analyst, Morgan Stanley: it. Moving back into the growth algorithm piece, on the existing customer side, you mentioned adding connections to more retailers as a way to monetize those existing customer bases. But outside of that, what are other ways you monetize and grow the existing customer base?

Kim Nelson, CFO, SPS Commerce: So there’s multiple ways in which we see opportunities to grow that revenue per customer, which we refer to as like wallet share, some people refer to as ARPU, all of it basically how are you getting more and more revenue from your existing customers. So the first part of it, which you hit upon, is more connection. On that one, I actually there’s a large opportunity there. So that is one thing that I found really unique about our business as well as the change that happens in the retail space. It’s a very different business model that when you acquire that customer, there’s so much opportunity to get more and more revenue from that over time just based on how that customer, in our case, suppliers’ business is growing and evolving.

So, simplistically, as they add more retailers, that’s opportunity for more and more connections. As retailers are putting more requirements down to their supplier community, that’s more and more opportunity for us to get either additional connections or in some cases more of that volume, right, more of those documents. And so that has been extremely important and a large way in which consistently over the past two decades we have grown that wallet share. So I wanted to start there just because that is something that is a bit more unique, I think with our business than maybe with some other businesses. So that’s a very, very large opportunity and a big component in why that wallet share average, we’ve increased to be approximately 40,000 globally versus what used to be 25,000 as our target that we’re going after.

So that would be more of what I call a traditional maybe like an upsell type motion. There are cross sell opportunities as well. So we do have a product called Analytics, which is focused primarily on point of sale data. So providing information to suppliers, not only they obviously know what they’ve shipped to a retailer, they might have shipped a pallet of goods to the retailer, but they don’t necessarily know what’s ultimately been consumed. So is that product sitting in the distribution center?

Is it sitting on a store shelf? And with this information, then they have much more visibility, which helps in multiple ways, right? It helps their own supply chain know what products should we be producing more of because there’s an order coming in or maybe what should we be producing maybe a little bit less on. And so that will help them avoid overstocks, understocks, etcetera. So that analytics product is something that we do have that opportunity in which to cross sell into our customer base.

And then more recently, we’ve acquired two companies that bring us into another product offering, which will be a great opportunity over time for us to cross sell as well.

Chris Quintero, Software Analyst, Morgan Stanley: Yes. I definitely want to hit on the acquisitions and new products you’ll have under the umbrella now. But for 2024, it was a really strong year for wallet share growth. I think it grew 15% year over year. Customer count only grew about 1%.

So can you unpack around why the growth last year was so skewed towards that wallet share side and what are your expectations for this year?

Chad Collins, CEO, SPS Commerce: Yes. So these community enablement programs that I mentioned earlier, we had a strong year for community enablement in 2024. The difference between maybe previous years was the shift in those community enablement programs. Just the mix came in more toward working with retailers where we had had longer standing strategic relationships with those retailers. And those retailers did need both a combination of expanding out into new divisions or new banners as well as adding more supply chain documents.

And so we executed those programs very successfully. But when we work with a retailer multiple times and do multiple passes through their supplier community, even though we’re monetizing those suppliers through that program for more usage on the network, The mix inside those programs tends to be a bit heavier toward existing SPS Commerce customers because we’ve already run community enablement programs to that same group of suppliers. So that’s what we saw in 2024. It wasn’t necessarily a strategic shift for us in the business. It wasn’t really a macro factor.

It’s really just the mix of community enablement programs that came in were more geared toward these existing retailers. So while they were very successful and did help with growth and we were able to monetize those suppliers through the program, the metric that they impacted was more on that wallet share expansion versus the net customer count.

Chris Quintero, Software Analyst, Morgan Stanley: And any expectation of how that mix should be for 2025? Sure.

Kim Nelson, CFO, SPS Commerce: And I can take it. And when we think about longer term and part of this, I’m going to point us right back starting with that updated TAM, total addressable market. You’ll see with that updated numbers, we still have a lot of conviction there. There’s lots of opportunity to bring on new customers to become recurring revenue customers as well as lots of opportunity to expand that wallet share. So over time, we would expect a mix of both of those to be driving our overall growth or our overall recurring revenue.

Now some of the dynamics that Chad talked about in 2024, those still exist a bit in 2025. What I would say about our community enablement campaigns, we certainly have a view of, hey, how many are we planning on doing in a particular year? But you don’t get that real visibility into what is that next level down drill down between until you get the lift of how many are existing customers and how many are prospects. So at this point, our initial look, which is going to be more at the beginning of twenty twenty five versus the latter part of 2025, is indicating to us a bit more anticipated net customer adds than we saw at the beginning of twenty twenty four, but not to pre pandemic levels. So more similar to sort of what we saw come through in Q4 twenty twenty four.

Ultimately, sort of the quantity of enablement activity we see in 2025, we’re expecting to be similar to 2024. But when we look at that then the underlying how that translates into mix, we have some visibility earlier on, some will get more visibility as the year goes on.

Chris Quintero, Software Analyst, Morgan Stanley: Yes. And part of that is the retailer’s privacy. They don’t want to tell you all their who their suppliers are upfront before getting that program up and running.

Kim Nelson, CFO, SPS Commerce: And I would say part of it is when you so our retail sales team will engage in conversations with retailers. Sometimes it might be an initial conversation and it might be six months, nine months, a year, two years before that retailer is ready. And so part of it is just the timing of when the retailer is ready to engage and then at that point in time is when we receive that, the list of vendors.

Chris Quintero, Software Analyst, Morgan Stanley: Got it. Wanted to move on to the acquisitions, the M and A you all have been making over the past year or two, quite a lot Vision thirty three, Traverse Systems, Supply Pike, Carbon6, if I have all those right. From your perspective, which ones are most interesting to you and kind of what’s the biggest opportunity there?

Chad Collins, CEO, SPS Commerce: Yes. So as we think about M and A, it really starts with the customer and the customer’s needs. So we’ve done quite a bit of work looking at our three main customer segments, which are retailers, suppliers and the third party logistics providers that are right in the middle of that ecosystem. And what are their needs from a supply chain perspective? What are we helping them with today?

And are there things with the power of our network that we could help them with going forward? And through this product strategy work, we uncovered an area that was a big pain point for our supplier customers and an opportunity for our retail customers. And this has to do I mentioned earlier this whole vendor guide or retailer rule book that defines all the rules of the supply chain between retailers and suppliers. Well, the common method if you don’t meet those retailer rules and you’re a supplier is that they will apply a penalty and they’ll just short pay the invoice to you for certain errors that you had in your supply chain. This creates as you can imagine a big challenge for suppliers.

They need to understand why they’re being penalized. Was it correct that they were penalized or not correct that they were penalized? And how do they find that root cause error in their supply chain? And so with the acquisitions of Carbon6 and Supply Pike, we added capabilities to help suppliers really manage these chargeback penalties and dispute the ones that are erroneous. And we find that about 7% to 10% of these chargebacks actually should not have been applied.

And so you can recover your money from the retailer. And then a portion of them you really have to get to the root cause problem in your in the supply chain and our tools will help you do that. And the reason that we acquired the two different businesses is Supply Pike was very strong in more of the brick and mortar retailers like Walmart and Target and CVS. Carbon6 very strong in Amazon and in particular the very rapidly growing Amazon third party marketplace. And so that’s so far very good indications from the SPS customers that there’s strong need and interest in this type of product.

And I think as we do the post merger integration and look forward to 2026, As Kim mentioned, a great cross selling opportunity. And then the inverse of all that is the opportunity that exists for our retail customers. So some of the world’s largest retailers, like I mentioned, have the sophistication to implement these types of supply chain compliance or chargeback programs for their suppliers. But there’s a number of retailers out there that don’t have that level of sophistication. And so with the Traverse Systems, we acquired this platform that enables retailers to have the technology to implement these supply chain compliance programs for their suppliers.

So really one common business problem between retailers and suppliers and we’ve been able to address this at both ends. And we’re optimistic as well that if we have more retailers out there where we can help them with their supply chain compliance programs that should in turn create more demand for suppliers who need to deal with these types of supply chain compliance programs and kick in a flywheel effect over time.

Chris Quintero, Software Analyst, Morgan Stanley: Yes, I think the point around expanding over to retailers is really interesting because obviously historically the customer base has been more of the suppliers of retailers. So is that part of the broader strategy here to work with supplier work with retailers even closer and ultimately monetize them with some of these products?

Chad Collins, CEO, SPS Commerce: So we think we’re in a unique position given the strong strategic relationships we have with retailers, the role that our network as it’s grown over time plays in with the retailers and just the amount of retail trade that’s going through our network for these retailers. That we do think over time there will be areas that we will help retailers with their supply chains by new product offerings whether we’re building those or acquiring those. I think the core fulfillment business that we have which is really the sending of these digital transactions back and forth, I would not expect us to have a major effort there to monetize retailers on that particular offering because we have this great partnership with retailers already where we can help them digitize their connections with suppliers. It’s a win for them. It’s a win for us.

But in the case of platforms like what we got with Traverse, where there’s a very hard ROI and solid value proposition around that product, I think retailers are more than willing to pay for those types of solutions that help their supply chain.

Chris Quintero, Software Analyst, Morgan Stanley: You have the analytics product, but then also you’ve made all these acquisitions have new offerings that you can offer. So how do you think at a high level around the pricing and packaging? We talked about the pricing model a little earlier, but how do you think about the evolution of that as you make all these product integrations?

Chad Collins, CEO, SPS Commerce: Yes. So the great thing about the acquisitions we’ve made so far is that they just line up with the same ideal customer profile that we’ve had with our fulfillment and analytics business. So that does create this great opportunity for cross selling these products. And the other thing that lines up really nicely is the scaling factor much like what Kim described earlier on the network where you kind of scale up by connections to retailers. These revenue recovery solutions also scale up by retailer.

So it’s possible and actually common for a supplier to start with say maybe Walmart revenue recovery and then that works for them and then they add Target and Home Depot and Lowe’s after that. So very similar model of being able to land and expand that we have with our fulfillment product. And then I think also because the ideal customer profile is so similar, it creates bundling opportunities, right? So there is bundling opportunities within that. Now that said with the bundling, I do expect that customers will typically come to us with a specific revenue recovery problem or a specific need for digital connections, we’ll bring them on to the network with one solution and then expand with them over time.

But in those unique scenarios where they would prefer to buy multiple at one time, it does allow us to do some unique packaging of those multiple solutions.

Chris Quintero, Software Analyst, Morgan Stanley: Want to shift gears a little bit to competition. Who do you view as your main competitors? Does that change at all with these acquisitions? And from your perspective, what’s the competitive differentiate? Why does SBS Commerce win?

Chad Collins, CEO, SPS Commerce: Yes. So there are alternative approaches to how companies can solve what we solve. So the historic approach has been to purchase or license software and have your own team that is going to manage all these digital connections. And in that end of the market, we see some technologies from IBM Sterling and OpenText that have this more sort of historic approach. And I’d say back fifteen, twenty years ago, this was the predominant way to do it mainly because there weren’t cloud based networks that did this.

The benefit that we see where customers are moving off that historic approach and when they tell us when they come on to our network is that we have a full service proposition. So you connect once to our network, you get access to all the retailers and you get a team of SPS who’s going to keep all your retailer connections compliant and really stay on top of these ever changing rulebooks that the retailers have. So that’s sort of one area of competition. The other would be kind of on the smaller area. There are some companies that are don’t have the same size or scale or go to market capabilities that SPS has, but they can do point to point connections between companies and manage them on their behalf.

And they tend to be smaller businesses, typically competing more on price and nobody having the size and scale of the network that we’ve built up over twenty years.

Chris Quintero, Software Analyst, Morgan Stanley: On the financials, you’ve got this target model out there over at least 15% revenue growth. How did you arrive at that number and what gives you confidence to be able to continue to grow at that rate?

Kim Nelson, CFO, SPS Commerce: Sure. So a few years ago, we provided our view that we felt we could grow at that rate of 15%. At that point in time prior to that, we had a view of state of view was 10%. So maybe I just start give a little context of why were we comfortable changing from that 10% to 15% going back again multiple years ago. And a lot of it actually covers things that we’ve talked about right here is the opportunity of once you acquire a customer, there’s meaningful ways and opportunity to grow that amount of revenue per customer.

And we’ve demonstrated our ability to do that. We see that opportunity continuing going forward. We think our lead gen engines that we have, which is on that community go to market as well as on channel sales, that’s sort of the gift that keeps on giving. We’ve been doing that for many years. We have that cadence down.

We think we’re uniquely positioned in those areas. And that those are both great ways to get us in front of new customers. So there’s multiple ways for us to get new customers. There’s multiple ways in which we’re able to get more and more revenue from customers. And then we also have been acquisitive, and we’ve demonstrated our ability to do that.

And if it makes business and financial sense, we’d expect to continue to do that. All of those things were factored into our belief of being able to grow at a sustainable rate of 15%. And then with some of our newer acquisitions, they brought in an additional product offering. So when we also had our views of saying we believe we can grow sustain on a foreseeable future growing at that 15%, we also were mindful of opportunities for additional products and services for our customers over time.

Chris Quintero, Software Analyst, Morgan Stanley: Got it. No, that’s super helpful. And maybe one more for me before I open up to the audience here. On the flip side, margins, you’re targeting 35% plus EBITDA margins. Where do you get the most leverage as you go from today’s level to that 35% plus target?

Kim Nelson, CFO, SPS Commerce: Yes. So from where we’re currently at to the opportunity that we have stated, although there are opportunities in pretty much each line item, I’d caveat R and D, we think we’re at an appropriate spend as a percent of revenue. So we’re not really looking for a lot of leverage there. Although there’s opportunity in each of our other line items, I would point you to gross margin as really the really large opportunity for us on our next leg. We’ve done a lot of work in the past, call it, decade or so on our sales and marketing spend.

You’ve seen a lot of leverage and efficiency being driven there. So gross margin really is sort of that next leg. And a lot of that candidly is growing into investments that we have made over time. So if you think about really our core business, we’ve invested a lot in that overall customer experience. We now have an opportunity to grow into those investments.

We’ll still add resources as is appropriate, but we don’t necessarily need to do it at that same rate or pace that we have historically.

Chris Quintero, Software Analyst, Morgan Stanley: Got it. Okay. So gross margin line and that’s mostly realizing the leverage from the investments. Okay. Any questions from the audience here?

You got the mic? Just to

Chad Collins, CEO, SPS Commerce: reiterate, the customer count growth. You feel good about the customer count growth reaccelerating from what we’ve seen in the last two quarters over the course of sort of the midterm.

Kim Nelson, CFO, SPS Commerce: What I would say is when we look at I think it’s helpful if we go to that TAM analysis that we just update. If you look at that, that provides our view of we believe there’s 275,000 addressable customers or prospects to become SPS Commerce customers. We have approximately 45,000, so there’s still a lot of opportunity to be adding there. There’s also increased opportunity we see in that wallet share and how much on average those customers will be paid or will pay SPS Commerce. So from the way we look at it is that gives us a lot of conviction in this very large opportunity.

Now in 2024, you saw more of that mix, maybe a disproportionately higher coming in, in the wallet share and lower coming in, in customer count. But over time, we see opportunities for both of those to be important contributors to that overall stated goal of 15%.

Chris Quintero, Software Analyst, Morgan Stanley: Any other questions from the audience?

Unidentified speaker: Thank you so much. That was super helpful. I wanted to check when it comes to your growth, how does that break down between some of the core components, the organic growth? So in terms of the customers you have, how you keep them from revenue perspective, how you do cross sell upsell in that sense and to what degree that changes over time?

Chad Collins, CEO, SPS Commerce: Sure.

Kim Nelson, CFO, SPS Commerce: So when we look at that, the answer is different candidly depending on the year, but overall it gets us to that stated goal of the 15%. So we have two metrics that we share on a quarterly basis. It’s how many customers do we have and how much on average do those customers pay us. So you know what happens to the overall customer number. We’ve also provided some information in our investor presentation that’s on our website that shows some of those dynamics between small sized customers, medium sized customers and large sized customers.

So the good about SDS Commerce depth and breadth, we can meet the need of any customers, but any sized customer, but customers certainly have different purchase behavior etcetera. So we provided that to give a view as it relates to the customer size. As it relates to the wallet share, a lot of that has been driven more by, I call it, upsell. And you’re seeing opportunities for us now to continue to grow sort of that cross sell muscle and cross sell opportunity.

Chad Collins, CEO, SPS Commerce: In terms of trade tensions, tariffs, things like that, like how does SPS think about that from an opportunity perspective or a risk? Yes. So, I’d say first, the direct impact on our businesses is actually fairly minor. And the reason for that is we tend to deal primarily with the part of the supply chain once goods have been imported to The U. S.

By the suppliers and then they’re getting them into the retailers’ supply chains. But I do think the situation where and a lot of our customers are looking at different sources of supply as a result of the changing tariff landscape. What that can lead to is shifts in supplier communities. And anytime there’s a shift in supplier community, it’s a great time for SPS to help, right? Because that whole onboarding of new supplier communities is really where SPS can come in and help retailers with that whole onboarding of their supplier community.

So I wouldn’t say I see it as a big say tailwind, but I do think any time that there are change events that in this case could be driven by tariffs that generally is an opportunity for us to get in front of more

Chris Quintero, Software Analyst, Morgan Stanley: prospective customers. You have one? Yes. Last one.

Unidentified speaker: You’ve talked about seeing some healthy change outs in the SMB space and like the mid market and higher end of SMB kind of being a bit slower. How do you feel about that now? And also, we’ve been hearing the big refreshment replacement cycle coming from the enterprise. So like how has your visibility improved over there?

Chad Collins, CEO, SPS Commerce: Yes. So what I would say is the kind of change out cycle that’s expected at the higher end, the enterprise end is we do have customers in that area and should be a benefit. But if you look at the total distribution of our business much more are in the small and medium sized business area. And I’d say in that area, any type of technology investment tends to be driven much more by their own business dynamics versus change out strategies from vendors. So I think we’d see a more consistent pattern of ERP replacement cycles within those small to medium businesses, which is where the bulk of our customers are.

Chris Quintero, Software Analyst, Morgan Stanley: Awesome. I think we can end it there.

Chad Collins, CEO, SPS Commerce: Thank you, Sharon.

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