Good day, and welcome to the SPS Commerce Second Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than 1 on your telephone keypad. To withdraw your question, please press star than 2. Please note that this event is being recorded. I would now like to turn the conference over to Amina Blaschik, Investor Relations for SPS Commerce. Please go ahead.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's 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 risks factors that may affect our results. These documents are available at our website, sbscommerce.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, sbscommerce.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, Hermina, 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's 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. Compare business requirements and business performance between major retailers like Target and Costco. With proactive monitoring, Max serves up 24 by 7 extending anomalies and flagging critical business. retailers like Williams-Sonoma and partners, Max helped achieve 90% of the customers have recognized tangible results since Max's beta phase launch. $1,000 invoice failure due to an incorrect UPC. 100 stalled dropship orders for Max. It flagged $70,000 in unacknowledged purchase orders by Max's quote starting point for customers inside the SPS user interface. Priority supply chain expertise allowing you to take automated actions on their behalf. operational efficiencies with our trading partner. By pairing SPS's network intelligence with our Agentec capabilities, AI-powered customer onboarding, including pre-sale contacts and account provisioning, we're working toward a future where Agentec technology can engage a new customer immediately after a deal closes. The onboarding process is shifting to AI as we continue to reduce the time it takes for customers to transact with our trading partners. Agent-assisted customer functions and onboarding, as well as the agentification of our internal operations, are the two 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 Macs 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 Macs through the chat interface are more likely to explore advanced Macs 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% said it 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 SPS as a strategic partner in navigating increasing supply chain complexity while they expand their business and premier food and beverage company, best known as America's number one 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 one trading partner to dozens of customer supplier network. To prepare for their next phase of growth, Chosen Foods migrated to a new ERP, Acumatica deployment, SES Commerce delivered a unified approach across their order-to-cash, procure-to-pay, and revenue recovery workflows for operational downtime. Crucially, with growing deduction complexities across major retailers like Walmart, Amazon, and Target, SES's automated dispute management successfully recovered approximately 30% of outstanding deductions, while helping Chosen Foods identify why these deductions occurred and how to prevent them. Real ROI from SPS Revenue Recovery include Owlette, a leader in infant health technology, $4 million solution, including 100% recovery on our recent settlement, totaling $423,000. Serta Simmons Bedding, one of North America's largest bedding manufacturers, saved $200,000 by successfully challenging a post-audit with a large retailer. Turning to our analytics business, SJS's new analytics solution is now running on the 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 move seamlessly from data to predictive capabilities. Our analytic solution helps customers protect revenue, margin, and shelf space by catching risks early while uncovering new growth opportunities across products, customers, markets, and retailer relationships with a single view of performance. RuffleButs, 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 retailer's e-commerce channel. To sustain this momentum, automated data feeds and schedule reporting will drive ongoing feedback from ruffle butts on the platform's granular product and location insights, prompting this supplier to consider adding another major retailer to their reporting. In summary, SPS is 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 a tangible value in collaboration. With that, I'll turn it over to Joe to discuss our project.

Thank you, Chad, and welcome, everyone. We report a strong second quarter of 2026. SPS Commerce's core business, which includes the divested 3P revenue recovery business, grew into high single digits. driven by the acceleration of 1P customer ARPU growth, resulting from continued upsell and cross-sell momentum. On June 30th, we announced the sale of the 3P revenue recovery business. We believe this debesiture 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, and we occurred 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 end investiture significantly reduced our final customer count, Q2R pool 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 path 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 five percent 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 in the range of $264.6 million to $269.1 million, reflecting an adjusted EBITDA margin of 34 percent at the midpoint, and 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 expense 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 pre-tax net earnings. In summary, SPS's strong second quarter performance reflects the strength of our core business, driven by upset on 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. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Our first question today will come from Scott Berg with Needham. Please go ahead.

Hi, Chad. Nice quarter here. I've 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's been a little bit of a thorn in your side, but why divest it? Why divest it now? Or can you just help us understand the thought process, too?

Yeah, Scott, so, you know, 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 kind of a new emerging category of SaaS solutions. Where more of that positivity was, though, is on the one-piece side seller. So those that are selling, you know, primarily wholesale, you know, to multiple retailers, Amazon being one of those, but the 1P sellers really can use our whole portfolio 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. 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.

That's helpful. And then, Joe, I think we kind of probably understand the platform, you know, what is one. One, are you calculating it any differently than how the company has before in the quarter? And then I guess secondly, in conjunction with that, how do we think about the impact going into Q3?

Yeah, so we didn't calculate it any differently. And I think, you know, 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 count, but they weren't in the ending customer count. And then that's compared against the revenue in the quarter. And, you know, the full 3P revenue was in the quarter, but not the ending customer count. And so because of that, the ARP overall is skewed higher than it normally would have. And so that's just, you know, it's more of the impact in the quarter. Going forward, if you think about it, we'll just have, you know, 1P customers in the beginning and end of the period. And so it'll be a little bit, you know, more consistent going forward than it has been, than it was in QQIS.

And if I may, a quick third question. Can you quantify what the third-party revenue recovery?

Yeah, Scott. So the only other color we'll provide on free business outside of the fact that, to your point, that outside of the divested business, then, you know, we'd be growing high single digits. I think the other thing to pull out on the full year is, you know, we pull 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.

Next question will come from Dylan Becker with William Blair. Please go ahead.

Hey, guys, this is Jackson Bogley on for Dylan Becker. Maybe sitting on the revenue recovery side, now that the focus is solely on the one-piece side of that business, how are you thinking about the level of resources and investment dedicated to that business going forward? Like, 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?

Yeah, so the – Jackson, the 1P business, I would say, is nearing consistent with our overall margin profiles in the business overall. It wasn't that way right out of the gate 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, you know, oversized investment at this point in time. And I think the divestiture of the 3P 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, you know, think that revenue recovery business, you know, is definitely in line with the margin profile of our overall business.

That's super helpful. And then maybe as a follow-up, with ERP migration still creating a little bit of timing noise, I mean, I would just be curious to 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 live? Thanks.

Yeah, so we're super excited about the progress around agentic 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. You know, 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. You know, we've been making progress there over the last couple years, speeding that up. That's led to a better customer experience. It's also helped us on the gross margin. And that was really done all before this agentic 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. 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 Quintero with Morgan Stanley. Please go ahead.

Hey, Chad. Hey, Joe. Thank you for saving the questions and the rest of the nice execution here. I want to hear your thoughts on maybe the macro environment and kind of what you're hearing from your customers. You know, we're hearing about, you know, higher fuel costs, higher freight costs, you know, the K-shaped economy. So just curious kind of what you're hearing and seeing high level from your customers from a macro perspective.

Yeah, Chris, I mean, I would say, you know, no substantial headwinds we're hearing from our customers relative to the macro. You know, 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, you know, did cause some contract right-sizing last year. We anticipated that that would dissipate this year as we kind of did get those contracts right sides, and they were one time, and that's playing out as we had expected. And so I'd say, you know, no overwhelming headwind in the macro. Of course, things like the fuel prices and still a little bit of looming tariff uncertainty are things that we continue to monitor, but those things are not coming up in our engagement with customers right now.

And then maybe go 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, I'm curious what you're seeing on the community enablement side of things and new customer ads.

Yeah, no, that's the 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, you know, 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, you know, 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, you know, would expect for the year we're 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.

Next question will come from George Kurosawa with Citi. Please go ahead.

Okay, great. Thanks for taking the questions here. Maybe if I could just ask about the max data. You have some interesting anecdotes of customers saving, in some cases, it sounds like hundreds of thousands of dollars. I don't 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.

Yeah, absolutely. So, yeah, as you noted and was in the script, we're seeing customers really identify different supply chain anomalies and disruptions using MACs, which today is, you know, 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 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, you know, 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 MAX technology 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 and 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 would 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 gives us high confidence in this approach is we're already seeing customers using MaxChat 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, Culler. And then one 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 just 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 just maybe comment if there's anything, incremental spend, expense timing, conservatism, anything we should keep in mind on the EBITDA line.

Yeah, for sure. I think on the EBITDA side, I think there's a couple things that we kind of planned. One, you know, there was some movement of some of the expenses that moved out of Q2 and 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 cost. 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, you know, 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, Okay, makes sense.

Thanks for taking the questions.

And our next question will come from Parker Lane with Stiefel. Please go ahead.

Yeah, guys, good afternoon. Thanks for taking the questions here. Chad, you talked about some of the advancements you're making on the analytics side from there, so it's good to see that. I think the revenue side, it was up maybe a percent in the first half of the year. Can you just talk about what you're seeing from the demand perspective around that? And 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 that?

Yeah, 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 stale, a little dated. Our feedback from customers who are up and running on this new capability is one. You know, just the look and feel and ability to use the system and the pre-built 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 a maybe a little bit stronger competitive position, but we should also be in a position then to add more AI features, which I believe we'll be able to monetize over time.

Got it. And we're kind of the first-party revenue recovery space with the supply pipe deal. I think at the time there was about 300 customers that overlapped with SPS. How have you – what are some of the learnings you guys have had on the go-to-market product?

Yeah, 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 pike and really now the Amazon 1P that came out of Carbon 6 to the fulfillment customers. And, you know, we've kind of hardened 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 team's incentives. And what I think is really pulling 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 candidates 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.

Great. Thanks, Jeff.

And our next question will come from Matt Van Vliet with Cantor.

Please go ahead. Yeah, good afternoon. Thanks for taking the questions. I guess following up on some of your comments, chat 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 in, you know, 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?

Yeah, great question. So in terms of the adoption, I mean, if we're to judge it based on the MaxChat adoption, I believe we'll have real strong agent adoption because we're already seeing customers sort of, if they're onboarded with MaxChat, 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 MaxChat. And, you know, through that, then I can – I believe that as some of the things that they're doing in MaxChat were 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 will 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 degree to which we're able to kind of do uplift on our booth, 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 some, like, internal AI usage, maybe just help us with the timeline 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, you know, later this year, in the 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 efficiency you've seen in this business have really been driven by kinds 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 I feel really good about how we've somewhat structurally 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 added 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. And as we exit this year, Matt, we'll have a little bit more color on how we think that, you know, it probably impacts more of the longer-term focus of the business.

All right.

And our next question will come from Mark Chappelle with Loop Capital Markets. Please go ahead.

Thank you for taking my question. Chad, you've had a new chief commercial officer on board now for a couple of quarters. I just want you to just talk a little about maybe some of the changes that have been made or adjustments that have been made to the sales structure, maybe customer segmentation or just even the coverage model for that matter.

Yeah, I would say we did evolve certain things in the go-to market. They were kind of – it happened to be in conjunction with Eduardo's arrival, but I think he's all in line with that. You know, 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. I'm sure we've 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, you know, the other thing I would say is, you know, 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 and 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, you know, mature our capabilities around go-to-market. And I will add, too, 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's been kind of in a luxury position to, you know, pretty much solely rely on these retail enablement programs as the source for new customers. We believe that there, over time, will be opportunity to drive more new customers through to more traditional digital marketing capabilities, and that's something that Maria has brought into our organization. So the combination is working quite well.

Thank you.

And our next question will come from Jeff Van Rie with Craig Hollum. Please go ahead.

Hey, this is Daniel on for Jeff Van Rie. On the beat this quarter, you know, the last few quarters have been a little bit more in line. Congrats on this quarter. Real nice beat on the top and the bottom. Just what played out in the quarter that drove, you know, the more than expected strength here in Q2?

Yeah, I think a couple of things. One, we talked about coming out of Q1. Q1. We're not, you know, we're not seeing the same amount of pressure, especially on the down sell and gross retention that we saw throughout 2025. So, GRR continues to be a real strength of ours. That continues to, you know, grow year over year and feel really good about the progress we're making on that front. And then, you know, we start to see, you know, 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, you know, the positive momentum on the GRR side with the two big drivers on the revenue, you know, over performance.

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 to change there? Thanks.

Yeah, that was just really due to some timing of the retail enablement programs and how they contributed to customer count in the quarter. I'd say overall the retail programs that are up and running and those are in the pipeline that we have high confidence in for the second half, you know, that all looks pretty positive. So I would expect the second half to contribute sort of a positive customer count, but kind of coming in on the year probably, you know, kind of flat to slightly positive on the customer Thanks, Chad.

Our next question will come from Lachlan Brown with Ross Chow & Company. Please go ahead.

Hi, Chad. Thanks for the questions. With your Max Beta customers, could you just run us through your confidence and being able to convert them when you made 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.

Yeah, 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, you know, 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 MaxChat capability. In terms of kind of then upselling them from MaxChat, which we're using kind of as a gateway into our overall Max architecture, you know, we're going to target those probably larger, are more complex customers that have high usage of MaxChat and work with them to convert some of the things they're doing with MaxChat into autonomous agents that will 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, an autonomous agent, that there'll be a 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, it suggests a nice step up from Q3. Could you just help us unpack the main building blocks behind that acceleration? For example, are there any specific enablement campaigns scheduled for later than in the year that gives you that visibility?

Yeah, let's walk through a couple of things, and then I'll chat, talk about it a little bit more on the enablement campaign. But 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, you know, is on the enablement side. We're seeing more of these campaigns come through. We're seeing momentum in the back 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 are landing Q4 that's really kind of driving that revenue in the quarter.

Yeah, I mean, I would just add, you know, although we see some positivity there, you know, 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 and the ARPU expansion. We do expect to be positive on the customer count. But, you know, 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, those tend to be very low ARPU customers when they come in the door. So they're meaningful over the long term but not as meaningful in the short term to drive revenue.

That's clear. And congrats on the quarter guys. Thank you. Thanks, Carson.

Next question will come from Nehal Chokshi with Northland Capital Markets. Please go ahead. Nehal Chokshi, your line is open.

Sorry about that. Congrats on a good quarter. And congrats on the, as well, that the implicit acceleration in the business in the back half, especially in the 4-2 here.

And it sounds like it's going to be driven by the improving GRR that you're seeing. Is that, is the driver an improving GRR max or is it something else?

Yeah, 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 right-size some contracts. We're not seeing that this year. The other factor is I believe, you know, 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 Salesforce, 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. Great. Thank you very much.

And once again, if you would like to ask a question, please press star, then one. Our next question will come from Clark Wright with DA Davidson. Please go ahead.

Hi, thank you. 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?

Yeah, Clark, what we've said is, you know, kind of in our growth algorithm over the long term, You know, we expect kind of, you know, roughly one-third of the growth to come from the customer count side and two-thirds to come from ARPU. This year, it will obviously probably be slightly more on the ARPU side. And then if you were to take that to our current expectations of the business, at least high single digits, we're sort of at 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 SDS 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?

Yeah, yeah. 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, you know, three main components. There are one, of course, the customer's 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, you know, of course we can't, you know, let one 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, you know, differences in the way that Walmart or Target are handling some of their suppliers and see that at the macro level and translate that into some changes that the suppliers to those retailers need to make. And then maybe most importantly is, you know, over this 25 years of doing this, we have built out very deep proprietary databases of supply chain expectations that 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 downloadable vendor guide that they're going to provide. And then a lot of them on the network don't even provide these types of vendors. 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.

Got it. That's helpful. Thank you.

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.