Lachlan Brown

Lachlan Brown asked about the current M&A environment, including private valuations and competitive bidding, and how SPS Commerce plans to manage the risk of AI ERP peers leveraging its strategic network data via Max Connect's MCP access, including potential monetization of this access.

Answer

CEO Chad Collins confirmed an active M&A pipeline, noting ongoing integration of the revenue recovery business and the attractiveness of share repurchases as a capital deployment strategy, with the board authorizing an additional $200 million. He expressed confidence in pricing MCP access, citing a successful demo with an ERP partner and an LLM, demonstrating the value of combining SPS network data with ERP data for customer workflows.

Lachlan Brown asked about the current M&A environment, noting that SPS Commerce's last transaction was over 12 months ago, and whether the derating of publicly traded software is reflected in private valuations, along with the competitiveness of bidding prices and private equity presence. He also questioned how SPS Commerce manages the risk of AI ERP peers taking strategic data via Max Connect's MCP access and whether this access could be priced.

Answer

CEO Chad Collins stated that SPS Commerce continues to manage an M&A pipeline but is balancing it with the integration of the revenue recovery business and the attractiveness of share repurchases, noting the board authorized an additional $200 million for repurchases. Regarding Max Connect, Chad confirmed that SPS Commerce expects to price MCP access, highlighting a live demo that showed how their data, combined with an ERP partner's data via an LLM, created valuable customer use cases, indicating the data's value for monetization.

Lachlan Brown of Rothschild & Co Redburn asked for clarification on the expected organic revenue growth for the second half of the year, given the implied deceleration in guidance, and questioned if there has been a notable increase in integration interest from third-party vendors.

Answer

CFO Kim Nelson stated that the high end of the annual guidance remains consistent with initial expectations, implying a full-year organic growth rate around 10%. CEO Chad Collins noted that while supply chain unification is a key theme, there has not been a substantial increase in partnership requests, as SPS is already the well-established market leader.

Lachlan Brown of Redburn Atlantic sought clarification on the organic versus inorganic new customer split for the quarter, noting the 8,500 customers from Carbon6 implied a net organic add of 300. He also asked about the potential impact of the expiring de minimis exemption on the customer base, particularly for Carbon6.

Answer

Executive Chad Collins confirmed the net 300 organic customer addition and attributed the result to a different mix in community campaigns that included more new subscribing customers. He also stated that SPS does not expect a major impact from the de minimis exemption change, as most Amazon sellers they work with import products in bulk rather than as individual shipments.

Lachlan Brown asked about the impact of tariff uncertainty on customer behavior and whether UPS cutting back on Amazon deliveries would affect SPS or its Carbon6 strategy.

Answer

Executive Chad Collins stated that supply chain uncertainty generally increases the need for collaboration, benefiting SPS. He noted that due to the mission-critical nature and relatively low cost of SPS's solutions, the company is somewhat isolated from macro headwinds that affect larger supply chain investments. He also clarified that they expect no impact from the UPS-Amazon changes, as most third-party sellers use Amazon's own fulfillment network, which has sufficient capacity.

Lachlan Brown asked about the channel sales funnel, the sales environment for new logos, and whether any slowdown was related to system integrator availability issues tied to SAP migrations.

Answer

Executive Chad Collins reported healthy lead activity from the channel program, especially in the SMB space driven by cloud ERP upgrades. He noted a slight slowdown in the higher-end mid-market, which he attributed to general macro uncertainty rather than specific system integrator capacity issues related to SAP. He stated they have not seen a direct impact from that trend.

Lachlan Brown inquired about the contribution of other growth drivers, such as cross-selling, pricing, and new logos, to Descartes' strong organic delivery in the quarter, and whether there was an acceleration in any of these drivers quarter-on-quarter.

Answer

CEO Ed Ryan noted that cross-selling continues to increase annually, now contributing 60%-70% compared to minimal levels 15 years ago, driven by a broader solution set and strong customer relationships built on trust. CFO Allan Brett clarified that pricing contributes a very small portion to growth, similar to previous quarters, and is primarily used responsibly to offset inflationary costs rather than being a main growth driver.

Lachlan Brown asked which areas of the business were affected by the recent reduction of 45 personnel.

Answer

CFO Allan Brett explained that the workforce reduction was spread across the entire business. He characterized the move as part of the company's ongoing process to streamline operations and eliminate redundancies, noting it is a fairly regular activity for Descartes.

Lachlan Brown of Redburn Atlantic asked which areas of the business were affected by the recent reduction of 45 personnel.

Answer

CFO Allan Brett explained that the personnel reduction was not concentrated in any single area. He stated that the changes were the result of role eliminations spread across the entire business as part of the company's ongoing and regular process of streamlining operations.

Lachlan Brown asked about the feedback from Manhattan Associates' Agentic AI early access program, its potential impact on gross margins (dilution vs. preservation), and pricing. He also inquired about the proportion of new logos in the pipeline versus existing customer expansion and typical pipeline conversion times.

Answer

President and CEO Eric Clark confirmed the intention to preserve and expand margins with Agentic AI, not dilute them, with pricing still being finalized. Key feedback from the early access program included surprise at the rapid deployment (minutes, not months) of standard agents and customer interest in building custom agents. Mr. Clark clarified that 35% refers to the *new cloud pipeline*, excluding renewals which are tracked separately. He noted that renewals, conversions, and cross-sell opportunities convert much quicker than new logo deals, which typically have multi-quarter sales cycles.

Lachlan Brown asked about the feedback received from Manhattan Associates' Agentic AI early access program and the expected gross margin impact, specifically addressing potential dilution due to high compute costs. He also inquired about the proportion of new logos in the pipeline versus existing customer expansion, and the typical pipeline conversion time.

Answer

President and CEO Eric Clark confirmed the intention to preserve and expand margins with Agentic AI, not dilute them. He noted positive feedback from the early access program, particularly regarding the rapid deployment of standard agents (in minutes) and customers' interest in building custom agents. Mr. Clark clarified that new logos represent 35% of the new cloud pipeline, separate from renewals. He explained that renewals, conversions, and cross-sells have much quicker sales cycles than new logos, which typically involve multiple-quarter sales cycles, though automation aims to accelerate deployment and ROI.

Lachlan Brown asked about the relative strength in EMEA and whether European customers were showing more willingness to invest. He also inquired if the current tariff environment could trigger on-premise customers to migrate to the cloud for its superior capabilities.

Answer

Executive Vice Chairman Eddie Capel stated that spending enthusiasm is 'about equal' across all geographies and that Q1's lower EMEA result was normal quarterly variance. He does not believe the current macro environment will trigger a near-term rush to the cloud, but he highlighted the agility and zero-downtime updates of cloud solutions as critical advantages for customers needing to react quickly to supply chain changes.