St. Anthony: SPS finds the supply chain's sweet spot

  • Article by: NEAL ST. ANTHONY , Star Tribune
  • Updated: November 20, 2011 - 6:41 PM

Selling "software as a service'' has made the Minneapolis company one of the best-performing initial public offerings in recent years.

SPS Commerce, a fast-growing provider of supply-chain management services, has nearly doubled its share price since its initial public offering last year in what has been one of the country's more successful IPOs since the Great Recession.

"We're trying to build for the long term a very strong company that only does a fairly small portion of our business with Minnesota companies," CEO Archie Black, a 13-year veteran of the Minneapolis-based company, said in an interview last week. "We serve a global market."

Low-profile SPS, which helps put product on the shelves at the right time and manages inventories, deliveries and payments, is an efficiency play that links suppliers like "Yurbuds" earphones for walkers and joggers with the likes of Target and Best Buy.

The suppliers, many of them small, use SPS' "software as a service" so they don't have to buy and maintain their own software. SPS rents them space on the network it has built to retailers, complete with specifications governing everything from invoices to payment terms, bar code labels and point-of-sale information. The average costs for the service: less than $300 per month. The range is $50 to $20,000.

SPS also sells customers business intelligence that helps them understand, for example, what ads drives sales in what stores.

"We're right in the middle of what I call the 'retail ecosystem,'" Black said. "Our business intelligence application helps our clients understand what is working and when Target is likely to reorder.

"Our marketing strategy is: 'Nail it and scale it.'"

SPS revenue has grown for four consecutive years, despite the sluggish economy. Analysts expect the company to increase profit by a whopping 80 percent, to 46 cents per share next year, on revenue that should increase by more than 20 percent, to $70 million.

In short, it costs little to add new revenue-driving customers.

"We have scale, and this is also a faster, cheaper way for customers to integrate and collaborate with their retailers," Black said last week.

A decade ago, when Black was promoted from CFO to replace a departing CEO, SPS was struggling, shrinking company. Employment had dropped from 250 to 75 people by 2002.

"I had a clean slate when I took over," said Black.

SPS had sold its larger, legacy software development business to focus on the fledgling "software as a service" integration business that links Costco, Amazon.com and 1,600 big retailers with 44,000 mostly small suppliers around the globe.

"They appeal very much to small vendors," said Scott Berg, analyst at Feltl and Co. "There's dynamic information in those systems. SPS can make one change or update and leverage it across 1,500 retailers. And the demand is significant because retailers are pushing manufacturers and suppliers with compliance through integration software. It's not just large suppliers anymore [who need this service]."

SPS and competitors also help big retailers hold down costs by automating work that used to be done by people using phones and faxes.

"It's an efficiency play for the vendors and retailers that eliminates the fax machine and the need for each supplier to deal with retailer protocols," said Rick Moulton, portfolio manager at Riverbridge Partners, which bought 1.13 million SPS shares to become a big shareholder earlier this year.

"This is a small company with a lot of room to grow. They are becoming the standard for this segment of the supply-chain management structure. They have competitors but nobody who does it as precisely or well as they do."

In May, globe-spanning SPS paid $10.9 million in cash for San Diego-based Direct EDI, a deal that added 1,500 customers to SPS.

EDI had only 300 retail clients and could not build out its network fast enough to compete with SPS.

SPS, which went public in April 2010 at $12 a share, hit an all-time high Thursday of $22.83 and closed Friday at $22.69. Three of the four original venture capital investors have sold their stakes through the 2010 stock offering and another stock sale in July at $16.50 per share.

The fourth, Split Rock Partners, a 13-year investor, continues to hold 1.1 million shares -- about a 10 percent stake. Bloomington-based Split Rock distributed about 250,000 SPS shares to its investors earlier this month.

Black, 49, leads a veteran management team recruited from the likes of Oracle, Amazon, Microsoft and Sterling Software, a competitor now part of IBM.

Black made $858,000 in salary, bonus and stock gains last year. He and other executives sold several hundred thousand SPS shares in recent months as the price rose and option shares were expiring at prices as low as 37 cents.

Black still has 400,000 shares under option.

Half of the employees are in their 20s, an eclectic mix of computer scientists, math and liberal arts majors.

"We're not a virtual company," Black said. "We have a lot of interaction here within and among departments. We promote mostly from within."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com

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