Earnings Call Transcript - SPSC Q3 2025

Irmina Blaszczyk, Investor Relations

Thank you, Dave. Good afternoon, everyone, and thank you for joining us on SPS Commerce Third Quarter 2025 Conference Call. We will make certain statements today, including with respect to our expected financial results, go-to-market strategy and efforts designed to increase our traction and penetration with retailers and other customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to our SEC filings, specifically our Form 10-K as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com, and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on the Investor Relations section of our website, spscommerce.com. During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP income per share. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. And with that, I will turn the call over to Chad.

Chad Collins, CEO

Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. SPS Commerce delivered solid third quarter results across our core business despite ongoing macroeconomic uncertainty and continued spend scrutiny. Third quarter revenue grew 16% to $189.9 million and recurring revenue grew 18%. Our fulfillment business grew 20% year-over-year. The net increase of 450 customers exceeded our expectations in the quarter, primarily driven by strong retail relationship management programs. I'd like to take a moment to review the key dynamics that impacted our revenue recovery business, which came in approximately $3 million below our expectations in Q3. Firstly, we now recognize that there is more seasonality in this business than we had originally anticipated. In Q2, for example, we benefited from a higher-than-expected volume of shipped products related to Amazon Prime Day. Due to the seasonality effect in Q2 and the change in Amazon policy related to inventory capacity for third-party sellers, Q3 shipments came in below our expectations, which resulted in lower-than-forecast revenue recovery rates in the quarter. We've taken both of these factors into consideration in our updated outlook for that business. Revenue recovery is an important offering within our portfolio. It represents a $750 million addressable market across 1P U.S. sellers and a significant cross-selling opportunity within our network, where we're making progress and building momentum. In addition, we're pleased to report we completed our combined go-to-market strategy ahead of schedule, and we are now better positioned to unlock the full potential of this emerging product category. For example, Cyber Power Systems, a global manufacturer of power protection and management solutions, has partnered with SPS to modernize their business systems and processes since 2014. As a long-standing fulfillment customer, they recently engaged with SPS to drive further efficiencies across their supply chain, leveraging the revenue recovery solution for some of their key customers, including Amazon, Walmart and Home Depot. Having realized immediate benefits in ROI, Cyber Power Systems is evaluating other revenue recovery opportunities across their retail network. As we discussed at our Investor Day in September, SPS Commerce is well positioned to capitalize on the long-term growth opportunities driven by an ever-evolving retail ecosystem. Having made strategic acquisitions over the past two years to expand our product portfolio and market reach, we shared updates at Investor Day to address how our product strategy and our reimagined go-to-market motion have evolved to empower the kind of trading partner collaboration that enables supply chains to work like they should. We also hosted a broad cross-section of customers who provided their perspectives on why they chose to work with SPS and how we help them manage supply chain complexity to strengthen their trading partner ecosystems. Most importantly, you heard firsthand accounts of the return on investment that comes from partnering with SPS, such as driving greater operational efficiency and fueling business growth. An example of a recent partnership is Petco, a pet retailer who operates over 1,500 locations in the U.S., Mexico and Puerto Rico, providing both in-store and online omnichannel services. Leveraging SPS' retailer management solution, Petco transitioned over 700 suppliers to standardized digital supply chain requirements. As a result, the retailer reduced manual data reconciliation across merchandising and supply chain teams, delivered measurable efficiency gains and improved trading partner performance tracking. To summarize, despite the spend scrutiny we are experiencing this year across some of our customer groups, we believe the ever-evolving retail ecosystem will continue to drive the need for supply chain efficiencies. With our data-driven solutions, SPS Commerce is competitively positioned to improve collaboration between trading partners. We are the industry's most broadly adopted retail cloud services platform and the world's leading retail network. We provide unmatched value in the data that powers AI-driven use cases and a unique network-led growth motion. Before we dive into our financial results, I'd like to take a moment to share an important leadership update. After nearly 10 years with SPS Commerce, Dan Juckniess, our Chief Revenue Officer, has decided to retire. He will remain with the company through the end of the year to ensure a smooth transition. Dan helped shape SPS' modern go-to-market organization, growing the sales team in both size and strength. On behalf of SPS Commerce, I wish him all the best in retirement. In addition, I'm excited to share that Eduardo Rosini will be joining the SPS Commerce team as Chief Commercial Officer starting December 1. In this new role at SPS, Eduardo will strengthen our commitment to total customer relationship, maximizing the entire customer life cycle from acquisition to onboarding, retention and expansion, and ensuring we deliver consistent, intentional, and customer-first experiences around the world. As SPS continues to scale, this evolution helps us deepen relationships, maximize customer value and stay aligned with how global customers view their partnerships with one trusted full-service connection. Eduardo brings more than 30 years of growth, go-to-market and full customer life cycle experience across industries and markets, most recently serving as Chief Growth Officer at Sage, VP of Mid-market and Corporate Sales at Intuit and in large-scale commercial leadership roles at Microsoft, operating in North America, South America, EMEA, and APAC. His experience leading global organizations, paired with his passion for people and obsession with customers, make him an ideal fit for SPS' next phase of growth. And with that, I'll turn it over to Kim to discuss our financial results.

Kimberly Nelson, CFO

Thanks, Chad. We reported a solid third quarter of 2025. Revenue was $189.9 million, a 16% increase over Q3 of last year and represented our 99th consecutive quarter of revenue growth. Recurring revenue grew 18% year-over-year. The total number of recurring revenue customers in Q3 was approximately 54,950, an increase of 450 from the prior quarter. ARPU was approximately $13,300. For the quarter, adjusted EBITDA increased 25% to $60.5 million compared to $48.4 million in Q3 of last year. We ended the quarter with total cash and investments of $134 million and repurchased $30 million of SPS shares. In addition, the Board of Directors has authorized a new program to repurchase up to $100 million of common stock, which becomes effective on December 1 this year and is expected to expire on December 1, 2027. We expect to fully utilize the current program before its termination on July 26, 2026. Before we dive into guidance, I'd like to highlight the factors currently shaping our fourth quarter and 2025 outlook. First, a continued impact to our revenue recovery business resulting from the dynamics Chad laid out in his prepared remarks. Second, ongoing invoice scrutiny and delayed purchases affecting spend across our fulfillment customers. Lastly, across retail relationship management programs, several large enablement campaigns were pushed from Q4 into the first half of 2026. As a result, we expect a decline in onetime revenue from testing and certification fees associated with these programs. Now turning to guidance. For the fourth quarter of 2025, we expect revenue to be in the range of $192.7 million to $194.7 million, which represents approximately 13% to 14% year-over-year growth. We expect adjusted EBITDA to be in the range of $58.8 million to $60.8 million. We expect fully diluted earnings per share to be in the range of $0.53 to $0.57 with fully diluted weighted average shares outstanding of approximately 38.3 million shares. We expect non-GAAP diluted income per share to be in the range of $0.98 to $1.02 with stock-based compensation expense of approximately $15 million, depreciation expense of approximately $5.8 million, and amortization expense of approximately $9.5 million. For the full year 2025, we expect revenue to be in the range of $751.6 million to $753.6 million, representing approximately 18% growth over 2024. We expect adjusted EBITDA to be in the range of $229.7 million to $231.7 million, representing growth of approximately 23% to 24% over 2024. We expect fully diluted earnings per share to be in the range of $2.31 to $2.34 with fully diluted weighted average shares outstanding of approximately 38.1 million shares. We expect non-GAAP diluted income per share to be in the range of $4.10 to $4.15 with stock-based compensation expense of approximately $58.3 million, depreciation expense of approximately $21.1 million, and amortization expense for the year of approximately $37.1 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings. Additionally, as a result of the dynamics that are impacting our customers and retail partners this year, we are providing our initial outlook for 2026 and expect to deliver revenue growth without future acquisitions of approximately 7% to 8%. We continue to expect adjusted EBITDA margin expansion of 2 percentage points, driven by continued improvement in gross margin and operating efficiencies. Longer term, we remain confident in our competitive position and market opportunity and our ability to deliver at least high single-digit annual revenue growth without acquisitions and 2 percentage points in annual adjusted EBITDA margin expansion. And with that, I'd like to open the call to questions.

Operator, Operator

Our first question comes from Scott Berg with Needham.

Scott Berg, Analyst

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

Chad Collins, CEO

Yes, sure. Thanks, Scott. Let me speak maybe to the visibility and how that developed and let Kim speak to the outlook going forward. I'd say late in Q3, we did pick up that the volume of shipments that our customers were sending into Amazon warehouses were a little bit lighter than expected. In many cases, that can be a leading indicator to revenue that will develop, but I would say not necessarily in all cases. Unfortunately, as we closed out the quarter, we did see a correlation in that reduction of shipments into Amazon warehouses from our customers did result in less revenue than expected. So the shipment visibility kind of became apparent pretty late in Q3, and we really didn't understand the full impact to revenue until we close things out after the quarter ended.

Kimberly Nelson, CFO

And then when you think about the expectations that we have for the remainder of the year, when you think about the Q4 guidance that we just provided and the variance from that versus the implied Q4 guidance from a quarter ago, the impact on the revenue recovery in that, you should look at that similar as Q3. So there were three sort of dynamics that I highlighted that went into that, one of them being the revenue recovery, and that component was about similar impact in Q3 and Q4. Then the other two components were a continuation of where we're seeing some invoice scrutiny and delayed purchase decisions as well as some of those retailer enablement campaigns or relationship management campaigns we were initially thinking were going to happen in Q4. Now those are happening in 2026. And as such, the impact to the P&L in Q4 would be most notable on that onetime revenue of testing and certification just because of the timing of how the subscription revenue works, more of that would show up negatively on the testing and certification in the quarter.

Scott Berg, Analyst

All right. Understood. I guess from a follow-up question, I saw that Dan is leaving. Good luck, Dan. It's been fun working with you, is new Chief Commercial Officer coming in. I guess questions there revolve around what would you expect this new individual to do differently, if anything? I see his background has been not at one, but at two ERPs that you all certainly partner with today for customers with tightly at least. And just trying to help understand what we might see maybe differently going forward, if anything.

Chad Collins, CEO

Yes. I will begin by discussing aspects that will remain consistent while progressively improving. Firstly, our unique go-to-market strategy involving retailer relationship management is essential. We collaborate with retailers to establish their digital connections, which helps us identify suppliers and serves as our primary source of new customers. We've been enhancing this approach at SPS Commerce for 20 years and I anticipate we will continue this refinement for another 20 years. It’s great to have Eduardo on board to assist with these ongoing improvements. I also foresee our channel go-to-market strategy, where we partner with numerous mid-market ERPs, continuing strongly. I'm excited about what Eduardo can contribute, as his experience aligns perfectly with our business goals. He has worked with some ERP companies that we already collaborate with, and his extensive use of channel strategies to promote mid-market sales will add value to our efforts. In terms of potential developments that Eduardo may facilitate, I believe we will focus more on maximizing expansion and cross-selling with our existing customers, as well as managing the full lifecycle of customer relationships. We are confident that as our product portfolio grows, our ability to increase Average Revenue Per User will likely outpace the acquisition of new customers in our growth strategy. Eduardo’s background is expected to significantly support us in this area. Furthermore, as we evolve into a more global organization and expand in Europe, Eduardo's expertise across various cultures and regions should aid in fostering that growth.

Operator, Operator

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

Christopher Quintero, Analyst

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

Kimberly Nelson, CFO

Sure. So specific in Q3, Q3 hit our expectations on both of those. The color that I was providing was specific to Q4 and two dynamics in there. So as it relates to 90 days ago, what we were anticipating for the quantity of retail relationship programs and the timing of those programs, that has changed. So instead of many of those happening in Q4, they're now happening earlier in 2026. So the impact there is on the P&L in 2025. They're not lost programs. It's just the timing of when those are going to happen. Now in some cases, if you think about Q4, it's a really busy time, holiday season. And so it's possible that maybe some of those retailers were a little bit more optimistic of what they thought they would be able to accomplish in Q4. And in those cases, some of those now are just getting moved into '26, primarily due to the holiday season. And then the second part of that, as it relates to the invoice scrutiny delayed purchase decisions. Again, we hit on that expectation in Q3, but we're starting to see some signs that, that's still continuing on. And in light of that, we wanted to also add that continuation at a little bit higher factored into our updated guidance.

Christopher Quintero, Analyst

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

Chad Collins, CEO

Yes. I mean we are making investments in this area. I wouldn't describe them as incremental investments to achieve what we want here, more just where we're focusing our team's attention, and we're having great success. So I think a great example of how this is working is like in revenue recovery, where we're able to get based on the network data, the volume that our customers have trading with certain retail partners where we provide revenue recovery and immediately identify that they are a highly qualified candidate for that revenue recovery solution and automatically serve that up as a lead opportunity to the expansion salesperson that's responsible for that customer so they can engage with them about the benefits they receive from revenue recovery. That type of motion and triggering it off the network is sort of up and running, and we look forward to continuing to scale that and using that to drive more cross-selling activity. And that's just one example. There are multiple examples where we can identify opportunities right from the network data for further expansion in our customers.

Operator, Operator

And the next question comes from Matt VanVliet with Cantor.

Matthew VanVliet, Analyst

There is a prevailing concern in the software application sector that various AI tools and LLM providers are encouraging companies to consider developing their own functionalities instead of seeking external vendors. Are your prospects mentioning this as something they are exploring, which might be causing delays in deals? Do you have any insights on whether your stronghold in the market might be diminishing as customers perceive that the value of purchasing prebuilt solutions is not as strong as it once was?

Chad Collins, CEO

Well, we are seeing a few headwinds in our demand environment that we mentioned. This AI as a replacement is not one of those things that we're hearing from prospective customers. And I think that's really for a couple of reasons. One is the breadth of the network itself in terms of the rules that are in there and the way that we have built out the compliance capabilities to so many different retailers to where you can connect once and access those. That's years and years of that intelligence about retailer requirements being built into the network. And quite frankly, it would be very difficult to replicate with LLM or Agentic AI. The second reason is customers are seeing the power of the data that we have in our network and actually seeing that by participating in our network and having access to that data as they advance their AI strategies, the input mechanisms from that data on our network is going to be very powerful to them to execute on their AI strategy. So it's actually quite complementary there. So I think it's really for those reasons that we're not seeing that as a disruption with the end customers. And then I'd say more broadly about our business and business model, unlike some of the other application providers that provide seat-based licensing, if there's less users and more agents, they're vulnerable because our pricing model is really based on the connections in the network; we think that, that's going to be a more durable model that we have with our customers as more AI kind of takes over.

Matthew VanVliet, Analyst

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

Chad Collins, CEO

Yes. I wouldn't necessarily say it drives a change in philosophy. We have a lot of conviction in our M&A philosophy and continue to be active with our M&A pipeline really across what I'd say is kind of a couple or three different areas. One being continued consolidation in the core digital connection or EDI market. There still are opportunities for further consolidation there. And when we're able to execute on those types of opportunities, one, it's just really good for the customers because they're typically moving from a much smaller network or a point-to-point set of connections and then you move over to our network and really see the benefit of being on this broader connection, our network with lots of connections built in. The second category is more of the solution expanding or portfolio expanding type acquisitions, similar to what we've done in revenue recovery, and we continue to believe that there'll be more opportunities where we find a solution that's very applicable to our 50,000-plus customers already on the network and therefore, will drive cross-selling. And a lot of times, we find that these solutions actually get improved by connecting to the network and having access to the data on the network. And the third category would be geographic expansion. Admittedly, this one is probably a bit of a lower priority as we continue to drive the execution of our Europe strategy on the back of the TIE Kinetix acquisition. But I think as we continue to get traction in geographies outside of the U.S., we'll be able to use M&A over the long term to continue to build up business and capture more markets outside the U.S.

Operator, Operator

And the next question comes from George Kurosawa with Citi.

George Kurosawa, Analyst

I wanted to follow up on the spending scrutiny you mentioned. This is something you brought up last quarter as well. Should we consider this primarily driven by tariffs? Additionally, could you compare what you observed in the third quarter to the second quarter? At that time, it seemed like some of the issues were confined to your mid-market customers. Have you noticed any incremental weakness in that customer group, or has it possibly spread more widely across your customer base?

Chad Collins, CEO

Yes, it makes sense. Currently, customer sentiment shows an increase in scrutiny of spending, particularly concerning our supplier network. While this isn't solely related to tariffs, there is definitely an impact from them. Many suppliers are absorbing additional costs for the products they sell to retailers and are not passing much of that onto them. As a result, they are seeking alternative cost-saving measures within their organizations. This trend has remained steady, growing in Q2 and continuing into Q3. Regarding our Q3 results, we anticipated this in our initial assessment, but we noticed a specific variance related to revenue recovery and changes in shipment volumes for Amazon's third-party customers.

George Kurosawa, Analyst

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

Chad Collins, CEO

Yes. So first, I'll say we have high conviction over the long term in this revenue recovery opportunity. We're seeing very strong interest in it and demand from our fulfillment customers and have some great early adopter customers on the fulfillment side who have taken it. We also believe in the strategy where we were quick to build out a comprehensive set of solutions that one covered a wide set of retailers and two offered both models of a SaaS subscription model and Take Rate model. We're also pleased with the work that we've done integrating those teams across SupplyPike and Carbon6 now into a common go-to-market team that is offering all retailers and offering both sorts of pricing models to customers based on their specific needs. The headwinds that we saw as a result of shipments in Q3 was exclusive to the 3P side of that business. So if you think all of SupplyPike and the retailers they support are primarily 1P, meaning they're shipping wholesale or direct to store for certain retailers. A good portion of the Carbon6 fits with that because it's the 1P model in Amazon. And then there's another portion of Carbon6 that is the 3P. The variability we saw was in the 3P area. We have not seen much disruption in the 1P area. And as we think strategically, the 3P part of the business is certainly important to us, and it was a sizable portion of Carbon6, and we will continue with that piece of the business. But we really think of the 1P side as a lot more strategic for us because that 1P seller really lines up with our ideal customer profile on fulfillment. And therefore, we think over time, we're likely to have a broader product portfolio for that 1P seller. And therefore, the fact that the 1P was the piece that was a little less disrupted, probably a little bit more favorable for us.

Operator, Operator

And the next question comes from Parker Lane with Stifel.

Parker Lane, Analyst

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

Kimberly Nelson, CFO

Yes. Regarding our initial guidance, which is at the lower end of the high single digits, we have considered the current dynamics this year. The way recurring revenue operates means that some of this year's dynamics will naturally influence next year. I view this as a mid-case scenario, reflecting this year's performance while also maintaining optimism about the business and opportunities for next year. Therefore, our best estimate remains at the lower end of the high single digit range of 7% to 8%.

Parker Lane, Analyst

Got it. And Chad, you just alluded to the new go-to-market team that's combined here for revenue recovery. Can you just talk about how quickly you anticipate that you'll start seeing some of the benefits from that new structure? Is that something that can impact Q4? Or is it more of a couple of quarters for the team to get its feet underneath it and start to execute?

Kimberly Nelson, CFO

We are experiencing some early success in developing and managing our pipeline, which is aiding in moving deals forward. On the Amazon side, despite facing shipment challenges, we have been acquiring new customers at a rate greater than expected, reinforcing our belief in the overall market potential. Regarding Q4, I want to note that the customers we bring on board during this quarter are unlikely to significantly influence our revenue from either the subscription or the take rate model. Therefore, the benefits from our new go-to-market strategy are more likely to become evident in the latter half of 2027, or in 2026, rather than in Q4.

Operator, Operator

Our next question comes from Mark Schappel with Loop Capital.

Timothy Greaves, Analyst

This is Tim Greaves standing in for Mark. I would like to inquire about leveraging your customer change events such as ERP and WMS replacements. Could you share some insight on the activity levels you've observed regarding ERP and WMS replacements, including any upgrades over the past quarter or two?

Chad Collins, CEO

Yes. Most of the change events that lead to new customers for us are related to ERP. While WMS can be a factor, the majority are primarily on the ERP side. We have noticed some weakness in the ERP changeout or replacement market, especially within the mid-market ERPs. We don't do much business with high-end enterprise ERPs, but we are seeing those deals progress as expected. On the lower end, small systems like QuickBooks have moved forward, but in the mid-market ERPs, like Sage, Microsoft, and NetSuite, we have observed some softness, which slows our ability to attract new customers through these change events.

Operator, Operator

Our next question comes from Dylan Becker with William Blair.

Jackson Bogli, Analyst

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

Kimberly Nelson, CFO

Sure, Jackson. So through the first three quarters of this year, we've added a net 1,100 customers, which is a much higher pace than last year, where the number was 300 when excluding M&A. This accelerated rate is primarily driven by our retailer relationship management programs. In Q3, we exceeded our expectations, with a net addition closer to 450 instead of the 350 we had anticipated, indicating great momentum. While I know you're interested in next year, I want to provide some context for Q4. Due to the comments I made earlier about the relationship management programs being pushed from our original Q4 expectations into 2026, there’s a logical reason tied to the holiday season. However, this shift means our outlook for Q4 net customer adds is expected to be flat or slightly down, primarily due to timing. Looking ahead to 2026, we are optimistic about the pipeline for relationship management programs. Consistent with what we shared during Analyst Day, achieving our high single-digit growth rate will involve customer adds, but a larger portion of that growth will come from the ARPU side. Our focus remains on the ARPU aspect, while also recognizing the importance of customer growth.

Jackson Bogli, Analyst

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

Chad Collins, CEO

Yes. Jackson, thanks for picking up on the expanding margins. A lot of that coming from the gross margin. And the driver there in the gross margin is primarily the investments that we have made in our customer experience and in particular, our customer onboarding to the network. That's become much more efficient and that leads to a better customer experience, and that efficiency also has led to some margin improvement. There's continued improvement that we will drive there, first and foremost, to improve that customer experience and then secondarily, to have that efficiency drive better margin for us. Also, I would say, on the G&A lines and sales and marketing lines, as we continue to scale the business, we think we will get continued efficiency there over time and work towards the targets that we have in our long-term model. You did mention AI. I would say we do have internal initiatives now to apply AI technology to continue that efficiency journey and looking, first and foremost, at our go-to-market teams, so a combination of marketing and sales and our customer success teams. One, those are probably the most meaningful workflows in terms of they're all customer-facing workflows. That's also where a lot of our people are today. So we think we continue to drive efficiencies that way as well.

Operator, Operator

And the next question comes from Joe Vruwink with Baird.

Joseph Vruwink, Analyst

Carbon6 and SupplyPike, when they were originally announced, I think they added to $65 million in revenue in fiscal 2025, bringing a faster rate of growth with it. If I annualize this $3 million to $12 million for a year, it's taking off a double-digit proportion from those businesses. Is that the right way to think of it? And then if I do that into next year, and I'm subtracting off their elevated or what was an elevated growth rate, can you maybe talk about the embedded assumption for revenue recovery within that 7% to 8%? It maybe seems like that side of the business is in line to below the 7% to 8% and the SBS fulfillment business is still kind of above there, but I want to be sure on all that analysis.

Kimberly Nelson, CFO

When we consider that business for 2025, we are around 10 percent of our original expectations. For next year, we still anticipate that it will grow faster than our core business. Additionally, with the combined go-to-market strategy and teams now in place, we see significant opportunities for cross-selling in 2026. While we've had some early successes this year, it's still in the early stages. The expectation that we'll have this capability throughout next year reinforces our belief that this business will continue to grow at a higher rate than the core business next year.

Joseph Vruwink, Analyst

Okay. That's helpful. And then going back to the customer count, if my math is right, it looks like the 3P side of the count is down maybe 500 logos or 5% since the start of the year. One question, how much of that is churn that you're okay with going back to Chad's comments of you're inheriting a business, but now you're looking to refine it and optimize it for what's going to be more enduring for you going forward? And then the silver lining of this question is that if you add the 500 logos back to those 1,100 number you were talking about earlier at the corporate level, 1,600 added for legacy SPS Commerce is a pretty good number. And I wanted to just ask kind of where that's being driven within the environment of spend through the need.

Kimberly Nelson, CFO

Sure. When considering the customer count, we report the total number of customers, but we also provide a breakdown in the supplemental section of the 10-Q. For the third quarter, the customer count in our third-party business declined by about 150. It's important to note that when we acquired the Carbon6 business, we gained around 8,500 customers, of which roughly 8,200 were in the third-party category. In Q3, we specifically observed a decline of approximately 150 customers in that segment. This third-party business typically experiences more churn and has a lower average revenue per user. Additionally, we offer some nonstrategic ancillary products to third-party customers, and we have seen some churn in those areas as well. We expect the decline in the third-party customer count to continue, although it will have a minimal impact on overall revenue. The trend we noticed in Q3 is likely to persist through Q4 and beyond. Overall, we are divided into first-party and third-party segments, with the first-party segment generating significantly higher revenue per customer. The majority of new customers have come from the third-party side, which explains the higher churn and the impact from nonstrategic business areas. The decline we noticed began in Q3 with around 150 net customers and it would be reasonable to anticipate that trend will carry on. Lastly, the number of first-party customers grew, meaning the net addition of 450 customers reflects a greater increase when considering the first-party additions.

Operator, Operator

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