Good day, and welcome to SPS Commerce 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Irmina Blaszczyk. Please go ahead.

Thank you, Manjeet. Good afternoon, everyone, and thank you for joining us on SPS Commerce Second Quarter 2025 Conference Call. We will make certain statements today, including with respect to our expected financial results, go-to-market strategy and efforts designed to increase our traction and penetration with retailers and other customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note, these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to our SEC filings, specifically our Form 10-K as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com, and not 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 a strong second quarter results. Second quarter revenue grew 22% to $187.4 million, recurring revenue grew 24%. Resilience and agility remain top of mind for trading partners across global supply chains, whether a result of tariffs or the need for cost and operational efficiencies. SPS is dedicated to supporting the supplier community through today's uncertain times, which we believe will ultimately incentivize them to increase investments in technologies that improve and optimize processes across their vendor networks. SPS Commerce is the only full-service EDI solution on the market, uniquely positioned to help suppliers effortlessly maintain EDI compliance with retailers' frequently changing requirements. Most importantly, our product portfolio enables stronger collaboration between trading partners, unlocking greater efficiency, cost savings and shared success. These are dynamics that we believe position SPS for durable growth. For example, Trader Joe's, a national chain of over 600 neighborhood grocery stores has been a long-standing SPS fulfillment customer. In an effort to reduce manual processes, improve order selection efficiencies, reduce shipping errors and prepare for future growth, Trader Joe's has recently rolled out EDI compliance requirements across the entire vendor base. By partnering with SPS, Trader Joe's is accelerating progress toward 100% vendor compliance. Managing supplier relationships remains one of the biggest challenges in retail. Compliance is an important part of managing supplier performance, but a scorecarding effort with insightful supplier metrics can help both the retailer and its suppliers perform better together. Research shows that organizations that systematically track and improve supplier performance can see sales increases of up to 10% and margin improvements of up to 12%. When products arrive on time and orders are filled completely, retailers can maximize sales opportunities while keeping operations efficient. Using SPS' supply chain performance management solution, one of the largest grocery retailers in the United States with nearly 500 locations gained actionable insights into their vendors' performance and shared the data with their trading partners to improve efficiencies across the board. The grocer boosted on-time and in-full performance and reduced overall out of stocks, resulting in higher performing and more profitable supply chain in less than 1 year. Gemplers, a trusted retail brand for farm and home supply products is another recent example of a retailer who uses SPS' supply chain performance suite. Gemplers switched to SPS Commerce from another EDI provider to increase EDI compliance from 3 to nearly 100 vendors in an effort to improve order automation and support omnichannel growth. The revenue recovery solutions we've acquired are beginning to deliver value to SPS fulfillment customers. As we advance the post-merger integration of SupplyPike and Carbon6, we're leveraging our expanded product portfolio to grow wallet share with our existing fulfillment customers. The advantages of a unified platform amplified by the data across our network are becoming increasingly evident. For example, Allstar Innovations offers turnkey solutions for taking products from concept to consumer. The company has been an SPS fulfillment customer since 2022 and recently started using the revenue recovery solution for retailers including Walmart, Target, Home Depot and Amazon. SPS' unified platform approach is a competitive differentiator in its coverage of retailers, expertise in retailer deduction complexities and data on our network. We leverage order data to estimate customers' recoverable deductions, giving them greater visibility into potential revenue recovery opportunities with their trading partners. In summary, SPS' product portfolio addresses the pain points of both retailers and suppliers. Our full-service approach is designed to successfully implement solutions and improve supply chain partnerships with ongoing support to manage compliance. As a result, SPS is uniquely and competitively positioned to empower participants of the world's largest retail network to work better together today, while helping them build resilience to meet the challenges of tomorrow. With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Chad. We had a great second quarter of 2025. Revenue was $187.4 million, a 22% increase over Q2 of last year and represented our 98th consecutive quarter of revenue growth. Recurring revenue grew 24% year-over-year. The total number of recurring revenue customers in Q2 was approximately 54,500 and ARPU was approximately 13,200. As a reminder, in February, we closed the acquisition of Carbon6, which added approximately 8,500 customers and had an adverse effect on ARPU due to the smaller average customer size. The full quarter Q2 impact to ARPU was approximately $1,400. For the quarter, adjusted EBITDA increased 27% to $56.1 million compared to $44.2 million in Q2 of last year. We ended the quarter with total cash and investments of $108 million and repurchased $20 million of SPS shares. Now turning to guidance. For the third quarter of 2025, we expect revenue to be in the range of $191.7 million to $193.2 million, which represents approximately 17% to 18% year-over-year growth. We expect adjusted EBITDA to be in the range of $57.9 million to $59.9 million. We expect fully diluted earnings per share to be in the range of $0.50 to $0.54 with fully diluted weighted average shares outstanding of approximately 38.5 million shares. We expect non-GAAP diluted income per share to be in the range of $0.96 to $1 with stock-based compensation expense of approximately $16 million depreciation expense of approximately $5.6 million and amortization expense of approximately $9.5 million. For the full year 2025, we expect revenue to be in the range of $759 million to $763 million, representing approximately 19% to 20% growth over 2024. We expect adjusted EBITDA to be in the range of $230.7 million to $233.7 million, representing growth of approximately 24% to 25% over 2024. We expect fully diluted earnings per share to be in the range of $2.17 to $2.22, with fully diluted weighted average shares outstanding of approximately 38.3 million shares. We expect non-GAAP diluted income per share to be in the range of $3.99 to $4.04 with stock-based compensation expense of approximately $60.9 million, depreciation expense of approximately $21.8 million and amortization expense for the year of approximately $37.1 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings. Additionally, based on our interactions with investors over the last several months and their interest in better understanding our growth profile, given our recent M&A activity, we are providing our growth expectations beyond 2025, excluding future acquisitions. The puts and takes impacting our outlook at this point in time are as follows. On the retail side, demand remains strong, as evidenced by enablement activity so far this year, driven by retailers who are realizing the value of digitized connections to their suppliers and optimizing supply chain performance management of their vendor relationships. Based on a recent TAM analysis and the ongoing push for automation and trading partner collaboration, we expect enablement activity to remain strong. On the supplier side, we are currently seeing dynamics impacting some customers within our network, such as heightened spend scrutiny and delayed purchasing decisions. We are seeing this directly with our customers and through our channel sales, where some companies are also delaying their mid-market ERP purchase decisions. We attribute the cumulative impact of these dynamics to ongoing uncertainties in the macro environment, including tariffs and their potential impact on consumer demand, which we have considered in our growth outlook. As a result, beyond 2025, we expect our revenue growth rate, excluding future acquisitions to be at least high single digits. We expect to remain acquisitive over time in keeping with our disciplined and effective M&A strategy, which has historically added to our growth rate, while strengthening our network and market leadership. As macro dynamics normalize and global trade headwinds stabilize, we remain confident in our ability to capitalize on the growth opportunity across our $11 billion total addressable market, add new customers to the network, both inside and outside the U.S. and drive higher ARPU through incremental network connections and cross-selling our broader product portfolio. In addition, given our history of strong operating leverage and the resilience of our SaaS business model, we expect to expand adjusted EBITDA margin by 2 percentage points annually, driven by continued improvement in gross margin and operating efficiencies. We are looking forward to sharing more information about our view of retail industry dynamics and how our unified product platform aligns with our addressable market during our September 23 Analyst Day. And with that, I'd like to open the call to questions.

First question comes from the line of Scott Berg with Needham.

Nice quarter here. I guess I wanted to focus on the, we'll call it, intermediate term or post 25% organic revenue growth rate Kim that you laid out in the high single digits. And thank you for the puts and takes there. But how do we think about growth by, I guess, product area, whether it's fulfillment or analytics or however you're going to think about breaking up the business here on a go-forward basis? Maybe help us construct how we get to 9%, that would be helpful or upper single digits.

Sure, Scott. When you think about what goes into at least that high single digits, it does take into consideration our current product portfolio. When you think about our current product portfolio, and that's call it the core fulfillment aspect of our portfolio. A lot of that is driven by what's happening with community enablement activity, which, to your point, we did give some of those puts and takes, so that would hit sort of on that, call it, that retailer side. On the analytics side, that is a product that, as we've discussed in the past, that does have more impact depending on the economy. So that one has been a bit more negative in growth rate relative to fulfillment. Over time, we see a lot of opportunity for analytics, but we would not anticipate analytics to grow at the same rate of fulfillment. And then our newer product, which is the revenue recovery, we have some cross-sell motions in place that we've done, but we would expect, over time, more opportunity to cross-sell that product across our customer base in the future.

Very helpful. Chad, as we zoom out a little bit on the broader macro here. Q2 was really the first quarter in this new kind of tariff macro that we're all seeing in today. And I know you have more data today 90 days ago than when we spoke at the end of April. But how do you think about some of the activity of your customers? I know Kim and the longer-term guidance talked about some heightened sense of scrutiny around spend and whatnot. But I guess if you unpack that a little bit, is it really more on just, I don't know, your core fulfillment products or how they think about, I don't know, geographic expansion, retailer expansion, obviously, that you benefit from, but maybe just kind of take us through what the last 90 days journey relative to that macro has been like for you.

Yes, good question, Scott. During our last call, we acknowledged the uncertainty surrounding the global trade situation. Over the past quarter, we've observed that what began as general uncertainty transitioned into a notable focus on aggressive cost-saving measures, particularly from suppliers. Although we've experienced positive activity with retailers, particularly in customer acquisition and a strong pipeline, the supplier side has been more focused on reducing spending. This impact varies by product. For instance, in analytics, customers may opt to discontinue certain data feed connections with less strategic or lower volume retailers to cut costs. In contrast, on the fulfillment side, customers are not canceling their services entirely, as these products are essential for managing their ongoing orders. However, they are reassessing their pricing structures and trading partner relationships to evaluate potential savings. This scrutiny has also extended deal cycles, with approvals requiring more time and additional signatures. Despite these challenges, we remain optimistic that this is a temporary response to current uncertainties, and we anticipate that clarity in the global trade environment will help suppliers return to normal operations.

Next question comes from the line of George Kurosawa of Citi.

I wanted to follow up on this discussion about the current macro. I think you specifically highlighted channel sales, which I think, tend to skew some of your larger customers. Is that fair to say that you saw some difference in behavior between maybe sort of your upmarket, mid-market customers versus more traditional SMB supplier base? Or just any color on those dynamics?

Yes, good question because there was nuance, George. So what we've been seeing is more pressure in kind of the mid-market ERP area. So vis-a-vis customers typically under $300 million in revenue, but kind of over $10 million in revenue and those ERPs that they would typically choose in the mid-market. That's where we're seeing the kind of prolonged decision-making about new ERPs. And those ERPs, which is a nice catalyst for people to come and join the SPS network because when they change their ERP it's typical that they would move to a cloud network approach like we have for all their digital connections. We've actually seen fairly healthy demand on the enterprise side, and some of those deals continue. But I'd just highlight the majority of our business is more in this mid-market segment versus the enterprise.

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

Yes, that's a great question. Let's take a moment to step back. Over the past few months, Kim and I have been engaging with investors, and many have asked for our perspective on long-term growth without considering acquisitions. This request makes sense, particularly in light of the significant mergers and acquisitions we've completed in 2024 and early 2025. It also aligns with how many other software-as-a-service companies report their long-term growth expectations. Each summer, around June or early July, we revisit our strategic plan and models. We conducted this review during a period of considerable uncertainty, as we observed spending scrutiny from customers, which influenced our long-term business expectations. It's somewhat challenging to determine precisely how the current situation is affecting our projections and to dissect the various factors involved. However, based on the dynamics we see in our business, we remain confident in our 2025 guidance, but we believe it’s important to set realistic expectations for the longer term. If we experience more favorable conditions in the macro environment and greater certainty in global trade, we are optimistic about the potential for increased spending from our supplier customers.

Next question comes from the line of Lachlan Brown with Rothschild & Co Redburn.

If we take the midpoint of the full year revenue guidance, it implies a deceleration in the second half. But I do appreciate that, that does consider cycling out their SupplyPike acquisition from August. So I just wanted to check within the guidance, whilst your expectation on organic revenue growth for the second half of the year.

Sure. So when you think about our expectations for the year, what you'll notice from what our current guide for the year is compared to where it was at the beginning of the year. So what we guided to on our Q4 earnings call in February. You'll see the high end of the guidance is the same, and the low end has been taken up. So the midpoint is higher than where we were at the beginning of the year. But outside of that, we pretty much just stayed with what our annual expectation is at least at the high end. So there's no real change in that sense relative to what our expectations are for the year, based on the guidance that we gave in February and based on the expectations of those acquisitions. If you do the reverse math on those numbers, that got you to call it a sort of a 10-ish for the year organic growth rate. And again, we've maintained the high end, and we've slightly taken up the bottom end.

That's very clear. And just the theme of supply chain system unification appears to be more of a focal point this year from both vendors and customers. So I just wanted to ask, have you seen any notable pickup in third-party ERP providers desiring to integrate with SPS this year or even in the way that your existing partners desire to be integrated?

I agree that the integration of data in supply chain applications and collaboration across the supply chain is a key focus we're hearing from the market. However, I wouldn't say we've seen any significant increase in requests for partnerships. With our market-leading network and position, it has been steady and well-known that SPS is the preferred partner for some of these supply chain application and consulting companies. We've seen those relationships continue to develop over time, but there hasn't been any material change. For many years, we have been recognized as the go-to partner for the exchange of supply chain data across our network.

Next question comes from the line of an undisclosed participant.

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

The post-merger integration for both SupplyPike and Carbon6 is going very well and going as expected. Historically, we have taken a little bit longer maybe to bring the go-to-market teams together. In the case of SupplyPike and Carbon6 because they're going after the same end markets, and we would have a much more compelling value proposition where we can offer the supplier revenue recovery solutions across more retailers it made a lot of sense to pull those solutions and go-to-market teams together. So we're in the process now of the SupplyPike and Carbon6 go-to-market teams coming together, selling a complete solution across all the retailers we support. We have not yet integrated the revenue recovery go-to-market team with our fulfillment team, but we do have a nice sort of lead sharing and prospect identification program running for our go-to-market team on fulfillment to identify opportunities where there's a need for revenue recovery. So the team is doing that. The other thing that's really nice about our business and our technology is we can use the network itself to identify those opportunities. So we can look into the network and actually see the trading volume, and that can help us identify opportunities for cross-selling revenue recovery.

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

Sure, Matt. So as with any year, we will look to say what resources do we need to make sure we're meeting the needs of our existing customers as well as the opportunities we see in the future. We also continue to work on ways to make sure what we're doing. We're doing even more efficiently or as efficiently going forward. All of that gets taken into account as it relates to what our needs are for headcount. So safe to assume that we'll continue to add headcount and resources as needed to support our customer base and the opportunity we see, but we're able to do that more efficiently than in historical years. You definitely also see that come through in already gross margin. So if you look at sort of the first half gross margin this year compare to annual last year compared to like annual the year before, you're starting to see some of that gross margin improvement come through. And simplistically, that's really growing into various investments we've made historically. So the rate of additions we need to add is at a different rate than where it has been historically.

Next question comes from the line of Dylan Becker with William Blair.

Chad, you mentioned a robust retailer pipeline for enablement campaigns, especially given that suppliers are being more cautious with their spending. I'm curious about how you perceive the opportunity to enhance efficiency in your delivery. This could help mitigate uncertainty and improve the speed to value by getting customers operational and compliant more quickly. Are you considering the possibility of tapping into that pipeline more quickly as a way to leverage efficiency?

Yes. I believe this relates directly to some of the investments Kim has mentioned that are contributing to the improvement in gross margins. We're not solely focused on gross margin enhancement; we're also enhancing the customer experience by enabling quicker onboarding to our network and allowing customers to realize the benefits of digitized trading partner connections sooner. We've concentrated on this over the past couple of years and have observed positive progress in the necessary efforts and personnel involved. More importantly, we’ve improved the customer experience and reduced the time it takes for customers to see value. We plan to keep enhancing that experience and making it even faster. With the introduction of generative AI into these processes, we are optimistic about continuing these improvements for our customers.

Okay. Very helpful. And then maybe for Kim. There's some questions, obviously, on kind of the medium-term framework here. But maybe slicing it as well, too, and apologies if you mentioned this, but in light of some of the supplier side being a bit more cautious, how do you think about the mix of kind of that, let's call it, high single-digit build between the opportunity that we've highlighted in the past around kind of wallet expansion paired alongside what seems to be a slight uptick or some improvement sequentially in the new logo side of the equation to maybe kind of the 2 pillars that get you to that high single-digit framework.

Sure. So we see opportunities for both to continue to grow over time, adding customers as well as growing that ARPU with customers. To your point, there tends to be a bit more of a correlation depending on what's happening on the community side with the customer ads. As it relates to community, we have a healthy pipeline this year. As far as what that mix is between what ultimately translates into a customer ad versus an upsell or an ARPU, really don't have that granularity until closer into like basically think of it as like a 90-day out window. So in the shorter term, if we think about Q3 as an example, our sort of initial view is probably similar customer adds to Q2. I realize you're asking the question from more of a medium-term lens. From a medium-term lens, we would expect that growth is coming from both areas, but it's challenging to give you an exact percentage between the 2 because that customer growth side is so correlated with what's happening with community enablement activity.

Next question comes from the line of Parker Lane of Stifel.

Staying with the same theme here, Chad, on the supplier side, when you look at the different geographies you work in and the sub-verticals of suppliers. Is there any particular areas that stand out as seeing incremental cautiousness? Or is this really across the board that you're picking up on these trends?

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

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

Sure. So the expectations that we provided is that we expect at least high single digits and also being able to deliver that 2 percentage points of EBITDA margin. Those statements then we said sort of excludes acquisitions. With acquisitions, however, we typically are able to within a 12-month time period, make those accretive. So we have a lot of, I'll call it, confidence and conviction in our ability to drive that healthy margin expansion in the medium term.

Next question comes from the line of Jeffrey Van Rhee with Craig-Hallum.

This is Daniel Hinchman on for Jeffrey Van Rhee. Chad, Kim, thanks for the transparency and just the color on '26, very helpful. Maybe just one more on the customer adds. Just wanted to confirm on that Carbon6 customer count that, that was fully reflected in the Q1 numbers, so those 350 ad this quarter. So that's the organic number to sort of look at as sort of the trend going into Q3, Q4.

That's correct. So the Carbon6 added approximately 8,500 customers that was fully reflected in Q1. So the sequential from Q1 to Q2 are approximately 350 million. Think about that as primarily driven by that community enablement activity. So the first-party customer add.

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

When considering our overall growth, a significant part comes from adding new subscribers to our network, which is mainly driven by our community enablement programs. This is the largest factor in acquiring new customers. On the other hand, the expansion of ARPU will come from two main areas: upselling and cross-selling solutions. The biggest opportunity among existing customers lies in upselling additional connections on the network, particularly increasing usage among fulfillment customers. This presents the most substantial opportunity for us. Cross-selling represents a secondary opportunity. Our customer treatment strategy focuses on both areas, but given the number of customers and the potential for additional connections, upselling connections is our largest prospect.

Next question comes from the line of Mark Schappel with Loop Capital Markets.

Chad, given what you're seeing with your supplier base with the delayed purchase decisions, could you just speak to just the general health of your SMB customers and also to the level of churn that you're seeing?

From a customer churn perspective, it has remained quite stable. We are not observing an increase in full cancellations. When servicing small and medium-sized businesses and retail, there is a natural churn that occurs, but we haven't noticed any significant change in that regard. The difference we are experiencing comes from customers taking a closer look at the invoices from SPS Commerce and asking if there's a way to reduce costs. Our owners and CFOs are looking for any cost-cutting opportunities due to the current uncertainties related to tariffs. This is where we are feeling more pressure from existing customers. Additionally, we are seeing slower deal cycles with new customers and in larger upsells and cross-sells. I would not link this to a large number of bankruptcies or insolvencies in the market at this time, but rather to the uncertainty and the strong responses to that uncertainty through cost-saving initiatives among suppliers.

Next question comes from Nehal Chokshi with Northland Capital Markets.

Yes. I think you guys have already answered my question, but I do have 2 questions. First one is when we talk about high single-digit growth beyond calendar '25 on an organic basis, is that fair to say that, that is basically 7% to 9%.

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

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

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

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