SPS Commerce, Inc. (SPSC) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A indicate strong financial guidance and strategic initiatives, such as the acquisition of CarbonSix and community enablement programs. However, concerns about macroeconomic pressures, cautious supplier spending, and unclear management responses temper the positive outlook. The guidance suggests organic growth deceleration, but optimistic guidance for 2025 remains. The lack of a market cap and mixed signals from the Q&A session lead to a neutral sentiment prediction.

Key Financial Performance

Revenue $187.4 million, a 22% increase year-over-year. The increase is attributed to resilience and agility in global supply chains and the adoption of technologies to optimize processes.

Recurring Revenue Grew 24% year-over-year. This growth reflects the company's focus on supporting the supplier community and increasing investments in technology.

Adjusted EBITDA $56.1 million, a 27% increase compared to $44.2 million in Q2 of last year. The growth is due to operational efficiencies and revenue growth.

Total Cash and Investments $108 million. The company also repurchased $20 million of SPS shares, reflecting strong cash flow management.

ARPU (Average Revenue Per User) Approximately $13,200. The acquisition of Carbon6 had an adverse effect on ARPU, reducing it by approximately $1,400 due to the smaller average customer size.

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Operating Highlights

Revenue recovery solutions: These solutions are beginning to deliver value to SPS fulfillment customers, leveraging an expanded product portfolio post-merger integration of SupplyPike and Carbon6.

Supply chain performance management solution: Used by a large grocery retailer to improve vendor performance, boost on-time and in-full performance, and reduce out-of-stocks, leading to a more profitable supply chain.

Unified platform approach: A competitive differentiator that provides coverage of retailers, expertise in retailer deduction complexities, and data insights for revenue recovery opportunities.

Trader Joe's partnership: Trader Joe's rolled out EDI compliance requirements across its vendor base, partnering with SPS to achieve 100% vendor compliance.

Gemplers partnership: Gemplers switched to SPS Commerce to increase EDI compliance from 3 to nearly 100 vendors, supporting omnichannel growth.

Recurring revenue growth: Recurring revenue grew 24% year-over-year, with approximately 54,500 recurring revenue customers.

ARPU impact from acquisition: The acquisition of Carbon6 added 8,500 customers but reduced ARPU by approximately $1,400 due to smaller average customer size.

M&A strategy: The company remains focused on acquisitions to strengthen its network and market leadership, contributing to growth.

Future growth expectations: Beyond 2025, revenue growth is expected to be at least high single digits, excluding future acquisitions, with a focus on expanding adjusted EBITDA margin by 2 percentage points annually.

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Risk or Challenges

Macroeconomic Uncertainty: Ongoing uncertainties in the macro environment, including tariffs and their potential impact on consumer demand, are causing heightened spend scrutiny and delayed purchasing decisions among customers.

Customer Dynamics: Some customers within the network are delaying mid-market ERP purchase decisions, which could impact revenue growth.

Post-Merger Integration: Challenges related to the integration of recent acquisitions (SupplyPike and Carbon6) could affect operational efficiency and the realization of expected synergies.

ARPU Impact: The acquisition of Carbon6 has adversely affected ARPU due to the smaller average customer size, which could impact financial performance.

Global Trade Headwinds: Global trade headwinds, including tariffs, could impact the company's ability to capitalize on growth opportunities in its total addressable market.

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Guidance & Outlook

Q3 2025 Revenue: Expected to be in the range of $191.7 million to $193.2 million, representing approximately 17% to 18% year-over-year growth.

Q3 2025 Adjusted EBITDA: Expected to be in the range of $57.9 million to $59.9 million.

Q3 2025 Fully Diluted Earnings Per Share: Expected to be in the range of $0.50 to $0.54.

Full Year 2025 Revenue: Expected to be in the range of $759 million to $763 million, representing approximately 19% to 20% growth over 2024.

Full Year 2025 Adjusted EBITDA: Expected to be in the range of $230.7 million to $233.7 million, representing growth of approximately 24% to 25% over 2024.

Full Year 2025 Fully Diluted Earnings Per Share: Expected to be in the range of $2.17 to $2.22.

Full Year 2025 Non-GAAP Diluted Income Per Share: Expected to be in the range of $3.99 to $4.04.

Revenue Growth Beyond 2025: Expected to be at least high single digits, excluding future acquisitions.

Adjusted EBITDA Margin Expansion Beyond 2025: Expected to expand by 2 percentage points annually, driven by improvement in gross margin and operating efficiencies.

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Shareholder Return Plan

Share Repurchase: Repurchased $20 million of SPS shares during the quarter.

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Key Q&A

Q:How do we think about growth by product area, such as fulfillment or analytics, to achieve a high single-digit growth rate?

A:Kimberly K. Nelson explained that the high single-digit growth rate considers the current product portfolio. Fulfillment growth is driven by community enablement activity, while analytics growth is more impacted by the economy and is slower compared to fulfillment. Revenue recovery products have cross-sell opportunities that are expected to grow over time.

Q:How has the macroeconomic environment, particularly tariffs, affected customer activity and spending?

A:Chadwick Collins noted that uncertainty in global trade has led to aggressive cost-saving measures, especially on the supplier side. Retailer enablement activity remains strong, but suppliers are scrutinizing costs, slowing deal cycles, and reducing discretionary spending on analytics. Fulfillment remains sticky, but suppliers are analyzing ways to reduce variable costs.

Q:Have there been differences in behavior between upmarket, mid-market, and SMB customers in the current macro environment?

A:Chadwick Collins highlighted more pressure in the mid-market ERP area, with prolonged decision-making on new ERPs. Enterprise demand remains healthy, but the majority of the business is in the mid-market segment.

Q:What is the medium-term growth outlook in a normalized environment?

A:Chadwick Collins stated that the medium-term growth outlook is influenced by current macro dynamics, with confidence in 2025 guidance. If macro tailwinds improve, supplier spending may increase, but parsing the exact impact of current dynamics is challenging.

Q:What is the expectation for organic revenue growth in the second half of the year?

A:Kimberly K. Nelson explained that the guidance implies a deceleration due to cycling out the SupplyPike acquisition. The high end of the annual guidance remains unchanged, with a slight increase in the low end, resulting in a 10% organic growth rate for the year.

Q:Has there been an increase in third-party ERP integrations with SPS this year?

A:Chadwick Collins stated that while supply chain system unification is a focus, there has been no substantial increase in requests for partnerships. SPS remains a known partner for supply chain data exchange.

Q:How is the integration of SupplyPike and Carbon6 progressing, and how is the revenue recovery pipeline?

A:Chadwick Collins reported that the integration is going well, with go-to-market teams coming together to offer a complete solution. Revenue recovery opportunities are identified through lead sharing and network analysis, but the fulfillment and revenue recovery teams are not yet fully integrated.

Q:What are the headcount addition plans for the rest of the year and beyond?

A:Kimberly K. Nelson stated that headcount additions will continue as needed to support customers and opportunities, but at a more efficient rate than historically. Gross margin improvements reflect these efficiencies.

Q:How is SPS addressing supplier-side caution on spending and improving efficiency?

A:Chadwick Collins explained that investments in onboarding efficiency have improved customer experience and gross margins. Generative AI is being introduced to further enhance these processes.

Q:What is the mix of growth between customer adds and ARPU in the medium term?

A:Kimberly K. Nelson stated that growth will come from both customer adds, driven by community enablement, and ARPU expansion through upselling and cross-selling. The exact mix is challenging to determine due to variability in community activity.

Q:Are there specific geographies or sub-verticals showing more cautiousness among suppliers?

A:Chadwick Collins noted that U.S.-based suppliers are showing more spend scrutiny compared to Europe and Australia.

Q:Will the 2% annual EBITDA margin expansion be maintained regardless of M&A activity?

A:Kimberly K. Nelson clarified that the 2% margin expansion excludes acquisitions, but acquired assets are typically made accretive within 12 months.

Q:Was the Carbon6 customer count fully reflected in Q1 numbers, and what is the trend for Q3 and Q4?

A:Kimberly K. Nelson confirmed that the Carbon6 customer count was fully reflected in Q1. The Q2 sequential customer add of 350 is primarily driven by community enablement, with similar trends expected in Q3 and Q4.

Q:What is the primary driver of growth in the medium term: connections or cross-sell?

A:Chadwick Collins stated that the largest growth driver will be upselling more connections on the network, with cross-selling as a secondary opportunity.

Q:What is the general health of SMB customers and the level of churn?

A:Chadwick Collins reported consistent churn levels, with no increase in full cancellations. Pressure comes from cost scrutiny rather than bankruptcies or insolvencies.

Q:What does 'high single-digit growth' mean in numerical terms?

A:Kimberly K. Nelson did not specify an exact number but indicated that 'high single digits' aligns with standard expectations, likely in the 7%-9% range.

Q:Is the deceleration from 2025 to 2026 primarily due to ARPU?

A:Kimberly K. Nelson stated that growth beyond 2025 will come from both customer adds and ARPU, with customer adds being the largest driver due to community enablement.

Q:Review of Unclear Management Responses

A:Management avoided providing specific numerical details for the medium-term growth outlook in a normalized environment, the exact mix of growth between customer adds and ARPU, and the numerical definition of 'high single-digit growth.' They also did not clarify the exact impact of current macro dynamics on future growth expectations.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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