SPS Commerce, Inc.: Managing Supply Chain in the Cloud

SPS Commerce, Inc. (“SPSC”) provides cloud-based supply chain management software that is utilized by approximately 60,000 retailers, suppliers, and third-party logistics providers around the world. I believe SPSC is highly effective at aligning its business and operating models, as evidenced by its 59 consecutive quarters of revenue growth (as of September 30, 2015). As an additional indicator of success, it appears that the market is assigning a premium to SPSC in comparison to peers. SPSC currently trades at an LTM Enterprise Value/Revenue multiple of 7.0x while comparable companies currently trade at 4.1x. The chart below displays SPSC’s historical stock price compared to similar firms.

Company Overview and Industry Context

Founded in 2000, SPSC is one of the largest enterprise software companies in the world, with a market capitalization of approximately $1.2 billion (as of December 2015), ranking among the top 30 largest software as a service (“SaaS”) companies. SPSC originally started as a business-to-business exchange for retailers and manufacturers and has since evolved into comprehensive supply chain software provider that enables superior communication between trade partners (particularly information sharing), improved data collection and analytics, and serves as a networking platform for retailers, manufacturers, third party logistics partners to forge new business relationships through use of SPSC’s services.

The supply chain dynamic has become more complex now that e-commerce has become ubiquitous in the retail environment. Retailers must now simultaneously manage mobile, computer, brick-and-morter, television, and catalog channels. Further, supply chain management software, as an industry, is expected to grow at a CAGR of 19% through 2018.

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Business Model

The majority of supply chain software products are licensed-based, requiring a large up front capital investment, and maintain all supply chain data within the walls of the respective firm (retailer or supplier). SPSC offers end-to-end, cloud-based supply management software, in the following categories:

• Order fulfillment;
• Assortment;
• Supply chain analytics;
• Partner sourcing;
• Partner enablement; and
• Barcode labeling, scanning, and packing solutions

Because the products are cloud-based and all contained within one platform, sharing information with trading partners is much easier than previously, allowing retail partners and suppliers to achieve efficiencies through real time collaboration. Through the SPSC platform, trade partners can do things like share real time inventory, fulfillment, and data and in turn may be able to better predict future demands. In addition, customers pay for SPSC software via a subscription model. Therefore, customers do not have to pay a large upfront cost (which is required by licensed software), and they pay for the software commensurate with their usage, which is potentially more cost efficient. Customer retention is key for capturing value with this type of business model, and SPSC has done extremely well in this respect, with 90% of revenues coming from recurring customers in 2014.

Operating Model

Because SPSC captures the value it creates for its 60,000 customers by charging them on a subscription based model that is priced on a usage basis, the company uses its operations to grow the business primarily by increasing usage by current customers and by acquiring new customers. SPSC’s operations does both of these things exceptionally well largely because of the following aspects:

• Structured Sales Force: The sales force is structured into three categories—Retail Sales, Supplier Sales, and Business Development. Retailers and suppliers uses SPSC products differently and have very complex business-specific issues; therefore, it is crucial for sales people to understand potential new customers’ needs as intimately as possible.
• SPSC Blog: SPSC maintains a blog on their website with proprietary, employee-generated content including case studies of how prominent customers (e.g. Ford) use SPSC products to improve their supply chain operations. This blog helps establish SPSC’s credibility in the space and draws potential new customers to the website.
• Developer Platform: SPSC provides developer resources to help developers create applications that integrate with SPSC products. Facilitating the growth of applications that leverage the SPSC platform will help grow the user base and, to the extent that applications are developed internally by customers, increases the switching costs, as there is a development cost associated with creating proprietary applications.
• Online Community: SPSC maintains a vibrant online community. SPSC retail customers can search across the SPSC platform to find suppliers that offer products they sell (i.e. use SPSC for sourcing), while suppliers can search for retailers that sell the products they supply. The beauty of this network is that all participants are already integrated with the SPSC platform, so starting a relationship is made easier due to the fact that data can be shared, streamlined, and communicated via SPSC.

Sources:

1. S&P Capital IQ, December 2015
2. Bessemer Venture Partners SaaS Index
3. https://en.wikipedia.org/wiki/Supply_chain_management_software
4. https://en.wikipedia.org/wiki/SPS_Commerce
5. http://www.spscommerce.com/
6. SPS Commerce, Inc. 10-K filing (December 31, 2014)
7. SPS Commerce, Inc. 10-Q filing (September 30, 2015)