SPS Commerce At A Glance

A low-cap supply chain tech business with great economics and a solid TAM.

Disclaimer: This article is for informational & educational purposes only. Nothing I mention below is financial advice. Do your own research & speak to a financial advisor before making any investment decisions. Stock prices and market value have probably changed since this article was written. This is analysis is NOT a buy or sell recommendation.

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Introduction

SPS Commerce is in the supply chain technology business, having launched its first product in 1997.

Their mission: connect retailers to each other in a simple-to-use network so they can focus on their business and less on logistics. They mention networks a lot in their IR and you can tell that they place a lot of emphasis on the importance of building out a great network. I find this intriguing because network moats are incredibly strong, powerful, lucrative, and hard to disrupt.

How do they accomplish their mission?

They provide cloud-based supply chain management services to global retail networks, making it easier for:

• Grocers

• Retailers

• Suppliers

• Distributors

• Logistics firms

To communicate and collaborate by simplifying logistics across omnichannel retail channels.

They currently have “42,300 customers with ongoing contracts to pay us monthly fees, which we refer to as recurring revenue customers. In addition to our recurring revenue customers, to date we have provided our cloud-based supply chain management services to 72,700 other organizations, and we refer to the combination as our customers.” - 2022 Annual Report

SPSC does 3 main things for their clients:

1. Fulfillment: Utilizing their electronic data integrator (EDI) cloud software, businesses are able to use a single piece of software to take care of a host of their fulfilment needs. SPSC also digitizes everything which makes using one application possible.

2. Analytics: Since the business is digital, they are able to get unique insights into how a business is doing across multiple segments such as retail, wholesale, and e-commerce. This data can help influence decision-making for the user to improve their sales and marketing.

3. Adjacent Services: Their adjacent services are mainly focused on assortment and community. Assortment helps users sort their products across all sales channels. The community aspect helps improve relationships between buyers and suppliers.

You can see how the network effects of this business would work:

“Once connected to our retail network, trading partners can exchange electronic supply chain information with each other. The value of our network increases with the number of trading partners connected to it. After joining our retail network, customers often find that many of their existing or new trading partners are already on the network, allowing for easy connections. The addition of each new customer enables that new customer to communicate with our existing customers and permits our existing customers to do business with the new customer. This “network effect” of adding additional customers to our products’ infrastructure creates a significant opportunity for existing customers to realize incremental sales by working with our new trading partners and vice versa. As a result of this increased volume of activity among our network participants, we earn additional revenues from these participants.”

For all visual folks out there (like me) here are their network effects shown as a graphic.

The interesting part about their flywheel is as they scale, things become even better for the business, the suppliers, and the buyers. Seems a little like economies of scale combined which has been touted by Nick Sleep as an incredible business model. Here’s how it works for SPSC: their cloud service treats each customer as separate tenants sharing the same virtual infrastructure. As a result, delivery costs are spread across the customer base. Since the application is fully integrated, they do not need to draw data from multiple sources. These cost savings are then passed on to their customers further enhancing the strength of the flywheel.

Supply chain shocks have offered continued tailwinds since 2020.

Even if you remove 2020-2023 from the initial graph, the upswing is quite evident. So even though one could make the argument that the topline has been pulled forward, I think it’s a safe bet to see their top and bottom lines continue to increase as they bring on more and more partners.

Growth Drivers

SPSC has multiple growth drivers, which makes it an intriguing long-term bet.

In order to grow they intend to:

• Increase revenues from their customer base

• Further penetration of their current market

• Selectively pursuing strategic acquisitions

• Enhance and expand their services

• Expand their international presence

• Expand their distribution channels

Let’s look at some acquisitions from 2022.

InterTrade Systems Inc. was purchased in an all-cash deal for $49 million. It’s projected to add $8.5 million in revenue and $500k in Adjusted EBITDA. This is ~ 6x revenues. Not cheap .

They expect the acquisition will add $2.5 million in Adjusted EBITDA for 2024. So I assume they think they can vastly improve the profitability of the acquisition by integrating their business model.

GCommerce was purchased in an all-cash deal for $45 million. It’s projected to add $2.5 million in revenue and $300k in Adjusted EBITDA in 2023. This implies a 18x sales multiple. Also not cheap.

As with InterTrade, they expect increased revenues and Adjusted EBITDA in 2024. They expect $7 million in revenues and $2.5 million in Adjusted EBITDA.

Both these deals don’t seem very attractive to me, but I’m not a specialist in this space, so it’s hard for me to say. Judging by how expensive SPSC trades for, it seems like the GCommerce acquisition was overpriced and the InterTrade acquisition seems reasonable. But I never evaluate deals using revenue multiples, as I don’t care what revenues it will add unless it also contributes to the bottom line.

If we assume they can get 15% net margins they’d be looking at 2024 Net Income for each business of:

InterTrade Systems Inc.: $1.275 million

GCommerce: $1.05 million

These deals are optically expensive. However, the more partners SPSC brings into its flywheel the more exponential its growth can become.

Management has a vision for the financial target they want to hit as well. They currently have 42,300 recurring revenue subscribers to their service. Recurring revenue currently accounts for 93% of revenues. With revenues of $450 million, the average spend per customer is ~$10k.

Their current goal is to get to 200,000 subscribers. They want to increase this average spend to $25k per year. If they were to reach this financial target, revenues would be ~$5 billion.

We’ll go over this more later on in this analysis.