SPS COMMERCE INC 10-Q

Item 1. Financial Statements SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares) June 30, 2022 December 31, 2021 ASSETS (unaudited) Current assets Cash and cash equivalents $ 212,725 $ 207,552 Short-term investments 46,513 49,758 Accounts receivable 44,559 38,811 Allowance for credit losses ( 4,454 ) ( 4,249 ) Accounts receivable, net 40,105 34,562 Deferred costs 48,294 44,529 Other assets 17,912 16,042 Total current assets 365,549 352,443 Property and equipment, net 32,000 31,901 Operating lease right-of-use assets 9,578 10,851 Goodwill 142,960 143,663 Intangible assets, net 53,597 58,587 Other assets Deferred costs, non-current 16,371 15,191 Deferred income tax assets 191 182 Other assets, non-current 2,530 3,028 Total assets $ 622,776 $ 615,846 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 4,442 $ 8,330 Accrued compensation 25,855 31,661 Accrued expenses 7,508 8,345 Deferred revenue 59,093 50,428 Operating lease liabilities 4,341 4,108 Total current liabilities 101,239 102,872 Other liabilities Deferred revenue, non-current 5,281 5,144 Operating lease liabilities, non-current 14,239 16,426 Deferred income tax liabilities 4,997 7,145 Total liabilities 125,756 131,587 Commitments and contingencies Stockholders' equity Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding — — Common stock, $ 0.001 par value; 110,000,000 shares authorized; 38,074,026 and 37,798,610 shares issued; and 36,029,477 and 36,009,257 shares outstanding, respectively 38 38 Treasury Stock, at cost; 2,044,549 and 1,789,353 shares, respectively ( 115,900 ) ( 85,677 ) Additional paid-in capital 453,922 433,258 Retained earnings 161,443 138,087 Accumulated other comprehensive loss ( 2,483 ) ( 1,447 ) Total stockholders’ equity 497,020 484,259 Total liabilities and stockholders’ equity $ 622,776 $ 615,846 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 3 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) (unaudited) 2022 2021 2022 2021 Revenues $ 109,178 $ 94,539 $ 214,371 $ 184,633 Cost of revenues 37,530 31,730 72,919 61,700 Gross profit 71,648 62,809 141,452 122,933 Operating expenses Sales and marketing 24,582 21,952 49,237 43,307 Research and development 11,432 8,899 22,133 17,605 General and administrative 17,198 15,758 32,666 30,495 Amortization of intangible assets 2,468 2,671 4,938 5,335 Total operating expenses 55,680 49,280 108,974 96,742 Income from operations 15,968 13,529 32,478 26,191 Other expense, net ( 1,338 ) ( 383 ) ( 915 ) ( 708 ) Income before income taxes 14,630 13,146 31,563 25,483 Income tax expense 3,877 2,963 8,207 5,100 Net income $ 10,753 $ 10,183 $ 23,356 $ 20,383 Other comprehensive income (expense) Foreign currency translation adjustments ( 1,743 ) 172 ( 1,013 ) 364 Unrealized loss on investments, net of tax of ($ 3 ), ($ 12 ), ($ 4 ) and $( 27 ), respectively ( 8 ) ( 35 ) ( 11 ) ( 80 ) Reclassification of (gain) loss on investments into earnings, net of tax of $( 8 ), $ 11 , $( 4 ) and $ 30 , respectively ( 23 ) 33 ( 12 ) 90 Total other comprehensive income (expense) ( 1,774 ) 170 ( 1,036 ) 374 Comprehensive income $ 8,979 $ 10,353 $ 22,320 $ 20,757 Net income per share Basic $ 0.30 $ 0.28 $ 0.65 $ 0.57 Diluted $ 0.29 $ 0.28 $ 0.63 $ 0.55 Weighted average common shares used to compute net income per share Basic 36,085 35,903 36,110 35,828 Diluted 36,862 36,753 36,897 36,741 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 4 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity (in thousands, except shares) (unaudited) Shares Amount Shares Amount Balances, March 31, 2021 35,861,584 $ 37 1,613,250 $ ( 65,247 ) $ 402,860 $ 103,690 $ ( 817 ) $ 440,523 Stock-based compensation — — — — 7,014 — — 7,014 Shares issued pursuant to stock awards 36,756 1 — — 1,227 — — 1,228 Employee stock purchase plan activity 24,528 — — — 2,081 — — 2,081 Repurchases of common stock ( 63,515 ) — 63,515 ( 6,450 ) — — — ( 6,450 ) Net income — — — — — 10,183 — 10,183 Foreign currency translation adjustments — — — — — — 172 172 Unrealized loss on investments, net of tax — — — — — — ( 35 ) ( 35 ) Reclassification of loss on investments into earnings, net of tax — — — — — — 33 33 Balances, June 30, 2021 35,859,353 $ 38 1,676,765 $ ( 71,697 ) $ 413,182 $ 113,873 $ ( 647 ) $ 454,749 Balances, March 31, 2022 36,120,518 $ 38 1,910,897 $ ( 100,903 ) $ 442,405 $ 150,690 $ ( 709 ) $ 491,521 Stock-based compensation — — — — 8,128 — — 8,128 Shares issued pursuant to stock awards 9,274 — — — 186 — — 186 Employee stock purchase plan activity 33,337 — — — 3,203 — — 3,203 Repurchases of common stock ( 133,652 ) — 133,652 ( 14,997 ) — — — ( 14,997 ) Net income — — — — — 10,753 — 10,753 Foreign currency translation adjustments — — — — — — ( 1,743 ) ( 1,743 ) Unrealized loss on investments, net of tax — — — — — — ( 8 ) ( 8 ) Reclassification of gain on investments into earnings, net of tax — — — — — — ( 23 ) ( 23 ) Balances, June 30, 2022 36,029,477 $ 38 2,044,549 $ ( 115,900 ) $ 453,922 $ 161,443 $ ( 2,483 ) $ 497,020 Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Amount Shares Amount Balances, December 31, 2020 35,487,217 $ 37 1,613,250 $ ( 65,247 ) $ 393,462 $ 93,490 $ ( 1,021 ) $ 420,721 Stock-based compensation — — — — 13,505 — — 13,505 Shares issued pursuant to stock awards 409,502 1 — — 4,029 — — 4,030 Employee stock purchase plan activity 26,149 — — — 2,186 — — 2,186 Repurchases of common stock ( 63,515 ) — 63,515 ( 6,450 ) — — — ( 6,450 ) Net income — — — — — 20,383 — 20,383 Foreign currency translation adjustments — — — — — — 364 364 Unrealized loss on investments, net of tax — — — — — — ( 80 ) ( 80 ) Reclassification of loss on investments into earnings, net of tax — — — — — — 90 90 Balances, June 30, 2021 35,859,353 $ 38 1,676,765 $ ( 71,697 ) $ 413,182 $ 113,873 $ ( 647 ) $ 454,749 Balances, December 31, 2021 36,009,257 $ 38 1,789,353 $ ( 85,677 ) $ 433,258 $ 138,087 $ ( 1,447 ) $ 484,259 Stock-based compensation — — — — 16,624 — — 16,624 Shares issued pursuant to stock awards 240,381 — — — 690 — — 690 Employee stock purchase plan activity 35,035 — — — 3,350 — — 3,350 Repurchases of common stock ( 255,196 ) — 255,196 ( 30,223 ) — — — ( 30,223 ) Net income — — — — — 23,356 — 23,356 Foreign currency translation adjustments — — — — — — ( 1,013 ) ( 1,013 ) Unrealized loss on investments, net of tax — — — — — — ( 11 ) ( 11 ) Reclassification of gain on investments into earnings, net of tax — — — — — — ( 12 ) ( 12 ) Balances, June 30, 2022 36,029,477 $ 38 2,044,549 $ ( 115,900 ) $ 453,922 $ 161,443 $ ( 2,483 ) $ 497,020 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 5 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (in thousands) (unaudited) 2022 2021 Cash flows from operating activities Net income $ 23,356 $ 20,383 Reconciliation of net income to net cash provided by operating activities Deferred income taxes ( 2,160 ) 351 Depreciation and amortization of property and equipment 7,814 7,294 Amortization of intangible assets 4,938 5,335 Provision for credit losses 2,634 2,831 Stock-based compensation 17,676 14,424 Other, net 8 170 Changes in assets and liabilities Accounts receivable ( 7,862 ) ( 6,945 ) Deferred costs ( 5,095 ) ( 3,338 ) Other current and non-current assets ( 1,423 ) ( 1,201 ) Accounts payable ( 3,234 ) ( 147 ) Accrued compensation ( 7,186 ) 3,246 Accrued expenses ( 805 ) ( 2,087 ) Deferred revenue 8,802 12,893 Operating leases ( 678 ) 1,449 Net cash provided by operating activities 36,785 54,658 Cash flows from investing activities Purchases of property and equipment ( 8,191 ) ( 8,738 ) Purchases of investments ( 114,603 ) ( 44,034 ) Maturities of investments 117,500 35,000 Net cash used in investing activities ( 5,294 ) ( 17,772 ) Cash flows from financing activities Repurchases of common stock ( 30,223 ) ( 6,450 ) Net proceeds from exercise of options to purchase common stock 690 4,030 Net proceeds from employee stock purchase plan 3,350 2,186 Payments for contingent consideration — ( 2,042 ) Net cash used in financing activities ( 26,183 ) ( 2,276 ) Effect of foreign currency exchange rate changes ( 135 ) 65 Net increase in cash and cash equivalents 5,173 34,675 Cash and cash equivalents at beginning of period 207,552 149,692 Cash and cash equivalents at end of period $ 212,725 $ 184,367 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 6 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A – General Business Description SPS Commerce is a leading provider of cloud-based supply chain management services across our global retail network. Our products make it easier for retailers, suppliers, grocers, distributors, and logistics firms to orchestrate the management of item data, order fulfillment, inventory control, and sales analytics across omnichannel retail channels. SPS Commerce delivers our products using a full-service model whereby our internal experts monitor, update, and boost network performance on our customers’ behalf. The services offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. The services we provide enable our customers to increase their supply cycle agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into customer orders, to help ensure that suppliers, grocers, distributors, and logistics firms can satisfy exacting retailer requirements. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of SPS Commerce, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. This interim financial information has been prepared under the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”). We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations, stockholders’ equity, and cash flows for the interim periods presented. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year. Use of Estimates Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant Accounting Policies There were no material changes in our significant accounting policies during the six months ended June 30, 2022. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 , as filed with the SEC, for additional information regarding our significant accounting policies. Accounting Pronouncements Not Yet Adopted Standard Date of Issuance Description Date of Required Adoption Effect on the Financial Statements ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers October 2021 This amendment requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, effective for all business combinations in the year of adoption and thereafter. January 2023 The adoption of this standard may have a material impact on the purchase accounting for business combinations depending on the specific amount of contract assets and liabilities being acquired. SPS COMMERCE, INC. 7 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents NOTE B – Revenue We derive our revenues from the following revenue streams: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Recurring revenues: Fulfillment $ 87,887 $ 75,228 $ 172,618 $ 146,632 Analytics 11,648 10,381 22,944 20,525 Other 1,628 1,331 3,168 2,584 Recurring revenues 101,163 86,940 198,730 169,741 One-time revenues 8,015 7,599 15,641 14,892 Total revenue $ 109,178 $ 94,539 $ 214,371 $ 184,633 Revenues are the amount that reflects the consideration we are contractually and legally entitled to, as well as expect to collect, in exchange for those services. Recurring Revenues Recurring revenues consist of recurring subscriptions from customers that utilize our Fulfillment, Analytics, and Other supply chain management products. Revenue for these products is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our contracts with our recurring revenue customers are recurring in nature, generally ranging from monthly to annual, and generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice. Timing of billings varies by customer and by contract type and generally are either in advance or within 30 days of the service being performed. Given that the recurring revenue contracts are for one year or less, we have applied the optional exemption to not disclose information about the remaining performance obligations for recurring revenue contracts. One-time Revenues One-time revenues consist of set-up fees and miscellaneous fees from customers. Set-up revenues Set-up fees are specific for each connection a customer has with a trading partner. These nonrefundable fees are necessary for our customers to utilize our services and do not provide any standalone value. Many of our customers have connections with numerous trading partners. Set-up fees constitute a material renewal option right that provide customers a significant future incentive that would not be otherwise available to that customer unless they entered into the contract, as the set-up fees will not be incurred again upon contract renewal. As such, set-up fees and related costs are deferred and recognized ratably over two years, which is the estimated period for which a material right is present for our customers . The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Balance, beginning of period $ 14,938 $ 12,102 $ 14,459 $ 11,118 Invoiced set-up fees 4,058 4,343 8,061 8,210 Recognized set-up fees ( 3,687 ) ( 3,101 ) ( 7,211 ) ( 5,984 ) Balance, end of period $ 15,309 $ 13,344 $ 15,309 $ 13,344 SPS COMMERCE, INC. 8 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents The entire balance of deferred set-up fees will be recognized within two years . Those that will be recognized within the next year are classified as current, whereas the remainder are classified as non-current. Miscellaneous one-time revenues Miscellaneous one-time fees consist of professional services and testing and certification. The contract period for these one-time fees is for one year or less and recognized at the time service is provided. We have applied the optional exemption to not disclose information about the remaining performance obligations for miscellaneous one-time fee contracts since they have original durations of one year or less. NOTE C – Deferred Costs The deferred costs activity was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Balance, beginning of period $ 62,610 $ 51,540 $ 59,720 $ 50,595 Incurred deferred costs 17,637 16,036 35,418 29,463 Amortized deferred costs ( 15,582 ) ( 13,735 ) ( 30,473 ) ( 26,217 ) Balance, end of period $ 64,665 $ 53,841 $ 64,665 $ 53,841 NOTE D – Financial Instruments Cash Equivalents and Investments Cash equivalents and investments consisted of the following: June 30, 2022 December 31, 2021 (in thousands) Amortized Cost Unrealized Losses, net Fair Value Amortized Cost Unrealized Gains (Losses), net Fair Value Cash equivalents: Money market funds $ 138,729 $ — $ 138,729 $ 138,205 $ — $ 138,205 Certificates of deposit 6,904 — 6,904 7,268 — 7,268 Marketable securities: Commercial paper 39,634 ( 25 ) 39,609 34,984 7 34,991 U.S. treasury securities — — — 7,500 ( 1 ) 7,499 $ 185,267 $ ( 25 ) $ 185,242 $ 187,957 $ 6 $ 187,963 SPS COMMERCE, INC. 9 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents Recurring Fair Value Measurements The following table details the fair value hierarchy of our assets and liabilities measured at a fair value on a recurring basis: June 30, 2022 December 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 138,729 $ — $ — $ 138,729 $ 138,205 $ — $ — $ 138,205 Certificates of deposit 6,904 — — 6,904 7,268 — — 7,268 Marketable securities: Commercial paper — 39,609 — 39,609 — 34,991 — 34,991 U.S. treasury securities — — — — — 7,499 — 7,499 $ 145,633 $ 39,609 $ — $ 185,242 $ 145,473 $ 42,490 $ — $ 187,963 See Note E to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC, for additional information regarding the three levels of inputs that may be used to measure fair value. NOTE E – Allowance for Credit Losses The allowance for credit losses activity, included in accounts receivable, net, was as follows: Six Months Ended June 30, (in thousands) 2022 2021 Balance, beginning of period $ 4,249 $ 4,233 Provision for credit losses 2,634 2,831 Write-offs, net of recoveries ( 2,429 ) ( 2,809 ) Balance, end of period $ 4,454 $ 4,255 NOTE F – Property and Equipment, Net Property and equipment, net consisted of the following: (in thousands) June 30, 2022 December 31, 2021 Internally developed software $ 47,230 $ 44,981 Computer equipment 31,305 29,329 Leasehold improvements 16,650 16,685 Office equipment and furniture 10,929 10,972 Property and equipment, cost 106,114 101,967 Less: accumulated depreciation and amortization ( 74,114 ) ( 70,066 ) Total property and equipment, net $ 32,000 $ 31,901 SPS COMMERCE, INC. 10 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents NOTE G – Goodwill and Intangible Assets, Net Goodwill The activity in goodwill was as follows: Six Months Ended June 30, (in thousands) 2022 2021 Balance, beginning of period $ 143,663 $ 134,853 Foreign currency translation ( 703 ) 233 Remeasurement from provisional purchase accounting amount — 268 Balance, end of period $ 142,960 $ 135,354 Intangible Assets Intangible assets, net consisted of the following: June 30, 2022 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 61,142 $ ( 33,964 ) $ ( 51 ) $ 27,127 6.0 years Acquired technology 35,327 ( 8,857 ) — 26,470 6.3 years $ 96,469 $ ( 42,821 ) $ ( 51 ) $ 53,597 6.2 years December 31, 2021 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 61,270 $ ( 29,866 ) $ ( 1,395 ) $ 30,009 6.4 years Acquired technology 35,316 ( 6,738 ) — 28,578 6.8 years $ 96,586 $ ( 36,604 ) $ ( 1,395 ) $ 58,587 6.6 years The estimated future annual amortization expense related to intangible assets is as follows: (in thousands) Remainder of 2022 $ 4,924 2023 9,777 2024 8,534 2025 8,396 2026 7,392 Thereafter 14,573 Total future amortization $ 53,597 SPS COMMERCE, INC. 11 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents NOTE H – Commitments and Contingencies Leases The components of lease expense were as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Operating lease cost $ 740 $ 896 $ 1,499 $ 1,436 Variable lease cost 856 950 1,649 1,718 $ 1,596 $ 1,846 $ 3,148 $ 3,154 Supplemental cash flow information related to leases was as follows: Six Months Ended June 30, (in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,176 $ 1,204 Supplemental balance sheet information related to operating leases was as follows: June 30, 2022 December 31, 2021 Weighted-average remaining lease term 4.4 years 4.8 years Weighted-average discount rate 4.0 % 4.0 % At June 30, 2022, our future minimum payments under operating leases were as follows: (in thousands) Remainder of 2022 $ 2,478 2023 4,690 2024 4,278 2025 3,874 2026 3,770 Thereafter 1,268 Total future gross payments $ 20,358 Less: imputed interest ( 1,778 ) Total operating lease liabilities $ 18,580 Purchase Commitments We have entered into separate noncancelable agreements with computing infrastructure and customer relationship management vendors for services through 2023. At June 30, 2022, the total remaining purchase commitments were $ 6.0 million . SPS COMMERCE, INC. 12 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents NOTE I – Stockholders’ Equity Share Repurchase Programs Our board of directors has authorized multiple non-concurrent programs to repurchase our common stock. Details of the programs and activity thereunder were as follows: (in thousands) Effective Date Expiration Date Share Value Authorized for Repurchase Share Value Repurchased Unused & Expired Share Repurchase Value Share Value Available for Future Repurchase 2019 Program November 2019 November 2021 $ 50,000 $ 29,611 $ 20,389 N/A 2021 Program November 2021 November 2023 50,000 39,992 N/A $ 10,008 On July 26, 2022, our board of directors authorized a new share repurchase program ("2022 Program"), effective August 26, 2022, that allows up to $ 50.0 million of common stock to be repurchased, expiring in July 2024. The 2021 Program will terminate on the effective date of the 2022 Program. The share repurchase activity by period was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2022 2021 2022 2021 Shares repurchased cost $ 14,997 $ 6,450 $ 30,223 $ 6,450 Number of shares repurchased 133,652 63,515 255,196 63,515 Average price per repurchased share $ 112.21 $ 101.55 $ 118.43 $ 101.55 NOTE J – Stock-Based Compensation Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as other stock-based awards including performance share units (“PSUs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and deferred stock units (“DSUs”), to employees, non-employee directors and other consultants who provide services to us. We also provide an employee stock purchase plan (“ESPP”) and 401(k) match to eligible participants. We recognize stock-based compensation expense based on grant date award fair value. This cost is recognized over the period for which the employee is required to provide service in exchange for the award or the award performance period, except for expenses relating to retirement-eligible employees that have not given their required notice, which is recognized on a pro-rata basis over the notice period prior to retirement. At June 30, 2022 , there were approximately 13.2 million shares available for grant under approved equity compensation plans. Stock-based compensation expense was allocated in the condensed consolidated statements of comprehensive income as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Cost of revenues $ 2,152 $ 1,746 $ 4,331 $ 3,249 Operating expenses Sales and marketing 1,958 1,738 3,990 3,220 Research and development 1,380 1,106 2,854 2,017 General and administrative 3,171 2,909 6,501 5,938 $ 8,661 $ 7,499 $ 17,676 $ 14,424 SPS COMMERCE, INC. 13 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents Stock-based compensation expense by grant type or plan was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Stock options $ 463 $ 522 $ 940 $ 1,074 PSUs 2,004 1,931 4,703 4,016 RSUs 5,094 4,115 9,732 7,536 RSAs & DSUs 110 110 218 217 ESPP 458 336 1,032 662 401(k) stock match 532 485 1,051 919 $ 8,661 $ 7,499 $ 17,676 $ 14,424 As of June 30, 2022, there was $ 44.0 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a primarily straight-line basis over a weighted average period of 2.6 years. Stock Options Our stock option activity was as follows: Six Months Ended June 30, 2022 Options (#) Weighted Average Exercise Price ($/share) Outstanding, beginning of period 678,650 $ 44.76 Granted 47,171 122.36 Exercised ( 18,404 ) 37.52 Forfeited ( 3,759 ) 85.84 Outstanding, end of period 703,658 $ 49.93 Of the total outstanding options at June 30, 2022, 0.6 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $ 41.52 per share and a weighted average remaining contractual life of 3.0 years. The weighted average grant date fair value of options granted during the six months ended June 30, 2022 was $ 40.78 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Life (in years) 4.3 Volatility 37.4 % Dividend yield — Risk-free interest rate 2.2 % Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units In each of the quarters ended March 31, 2022, 2021, 2020, and 2019 we granted PSU awards with a target performance level. These awards are earned based upon our Company’s total shareholder return as compared to an indexed total shareholder return over the course of a fiscal based three-year performance period, starting in the year of grant. Earned awards vest in the quarter following the conclusion of the performance period. In the three months ended March 31, 2022 , SPS COMMERCE, INC. 14 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents PSU awards granted in 2019 vested at the maximum performance level and less than 0.1 million shares of common stock were issued. Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows: Six Months Ended June 30, 2022 # Weighted Average Grant Date Fair Value ($/share) Outstanding, beginning of period 702,160 $ 78.03 Granted 241,902 126.60 Vested and common stock issued ( 220,002 ) 62.49 Forfeited ( 16,123 ) 95.03 Outstanding, end of period 707,937 $ 99.07 The number of PSUs, RSUs, RSAs, and DSUs outstanding at June 30, 2022 included less than 0.1 million units that have vested, but the shares of common stock have not yet been issued, pursuant to the terms of the underlying agreements. Employee Stock Purchase Plan Our ESPP activity was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except shares) 2022 2021 2022 2021 Amounts for shares purchased $ 3,203 $ 2,081 $ 3,350 $ 2,186 Shares purchased 33,337 24,528 35,035 26,149 A total of 1.8 million shares of common stock are reserved for issuance under the ESPP as of June 30, 2022. The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the following assumptions: Life (in years) 0.5 Volatility 37.4 % Dividend yield — Risk-free interest rate 0.2 % NOTE K – Income Taxes We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pretax income and adjust the provision for discrete tax items recorded in the period. Differences between our effective tax rate and statutory tax rates are primarily due to the impact of permanently non-deductible expenses partially offset by the federal research and development credits and tax benefits associated with foreign-derived intangible income. Additionally, excess tax benefits generated upon settlement or exercise of stock awards are recognized as a reduction to income tax expense as a discrete tax item in the quarter that the event occurs, creating potentially significant fluctuation in tax expense by quarter and by year. Our provisions for income taxes includes current federal, state, and foreign income tax expense, as well as deferred tax expense. SPS COMMERCE, INC. 15 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents NOTE L – Other Income and Expense Other expense, net included the following: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Investment income $ 172 $ 79 $ 220 $ 176 Realized loss from foreign currency on cash and investments held ( 1,327 ) ( 349 ) ( 859 ) ( 638 ) Other expense, net ( 183 ) ( 113 ) ( 276 ) ( 246 ) Total other expense, net $ ( 1,338 ) $ ( 383 ) $ ( 915 ) $ ( 708 ) NOTE M – Net Income Per Share The components and computation of basic and diluted net income per share were as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2022 2021 2022 2021 Numerator Net income $ 10,753 $ 10,183 $ 23,356 $ 20,383 Denominator Weighted average common shares outstanding, basic 36,085 35,903 36,110 35,828 Options to purchase common stock 391 505 405 536 PSUs, RSUs, RSAs, and DSUs 386 345 382 377 Weighted average common shares outstanding, diluted 36,862 36,753 36,897 36,741 Net income per share Basic $ 0.30 $ 0.28 $ 0.65 $ 0.57 Diluted $ 0.29 $ 0.28 $ 0.63 $ 0.55 The number of outstanding potential common shares that were excluded from the calculation of diluted net income per share as they were anti-dilutive was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Anti-dilutive shares 242 129 211 93 SPS COMMERCE, INC. 16 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents NOTE N – Geographic Information Revenue The percentage of domestic revenue, which we define as the percentage of consolidated revenue that was attributable to customers based within the U.S., was as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Domestic revenue 84 % 84 % 84 % 84 % No single jurisdiction outside of the U.S. had revenues in excess of 10 %. Property and Equipment The percentage of property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows: June 30, 2022 December 31, 2022 International property and equipment 13 % 12 % NOTE O - Subsequent Events Business Acquisitions Effective July 19, 2022, we acquired all of the outstanding equity ownership interests of GCommerce, Inc., a leading EDI provider within the automotive aftermarket industry. Pursuant to the definitive agreement, the purchase price of approximately $ 45 million was paid in cash at closing, and is subject to post-closing adjustments. Stockholders' Equity See Note I for information regarding the authorization of a new share repurchase program on July 26, 2022. SPS COMMERCE, INC. 17 Form 10-Q for the Quarterly Period ended June 30, 2022 Table of Contents