What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-27 · 72 added, 63 removed, 200 unchanged (40% of the section changed)

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We expressly disclaim any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”) that advise interested parties of the risks and factors that may affect our business.

SPS Commerce is a leading provider of cloud-based supply chain management services across our global retail network.

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Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation.

We believe these non-GAAP financial measures are useful to an investor as they are widely used in evaluating operating performance.

Adjusted EBITDA and Adjusted EBITDA Margin are used to measure operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of capital structure and the method by which assets were acquired.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2022

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP.

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Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The following table presents our results of operations for the periods indicated:

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 Change

(dollars in thousands) $ % of revenue (1)

($ in thousands) $ % of revenue (1)

$ % of revenue (1)

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the increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions, and the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

• The number of recurring revenue customers increased 12% to 38,650 at June 30, 2022 from 34,550 at June 30, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.

• Wallet share increased 4% to $10,550 for the three months ended June 30, 2022 from $10,150 for the same period in 2021.

• The number of recurring revenue customers increased 12% to 39,550 at September 30, 2022 from 35,400 at September 30, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.

• Wallet share increased 5% to $10,900 for the three months ended September 30, 2022 from $10,350 for the same period in 2021.

This was primarily attributable to increased usage of our products by our recurring revenue customers.

Recurring revenues increased 16% to $101.2 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the three months ended June 30, 2022 and 2021, respectively.

Recurring revenues increased 18% to $106.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the three months ended September 30, 2022 and 2021, respectively.

We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we execute our growth strategy focused on further penetrations of our market.

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $2.8 million in personnel-related costs, and an increase of $0.6 million in software subscriptions.

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $2.0 million in personnel-related costs.

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $2.1 million in personnel-related costs.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

General and Administrative Expenses - The increase in general and administrative expense was primarily related to supporting continued business growth, including an increase in headcount which resulted in an increase in personnel-related costs of $0.8 million.

Additionally, there was an increase in professional fees of $0.8 million, which was offset by a decrease of $0.8 million in charitable contributions.

Amortization of Intangible Assets - The decrease in amortization of intangible assets was driven by the full amortization of previously acquired intangible assets as partially offset by acquired intangible assets related to recent business combinations.

Other Expense, Net - The increase in net other expenses was primarily due to unfavorable foreign currency exchange rate changes.

Income Tax Expense - The increase in income tax expense was primarily driven by a decrease in the excess tax deductions due to the current quarter equity award settlements.

Form 10-Q for the Quarterly Period ended September 30, 2022

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $2.6 million in personnel-related costs.

Research and Development Expenses - No significant changes.

General and Administrative Expenses - The increase in general and administrative expense was primarily due to an increase in professional fees of $0.7 million and an increase of $1.0 million in charitable contributions.

This was partially offset by a decrease of $1.0 million in bad debt expense given favorable accounts receivable collection rates.

Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by acquired intangible assets related to recent business combinations.

Other Expense, Net - The decrease in net other expenses consisted of increased investment income partially offset by unfavorable currency exchange rates.

Income Tax Expense - The increase in income tax expense was primarily driven by an increase in pre-tax income and a decrease in the excess tax deductions due to the current period equity award settlements.

This was partially offset by a decrease in nondeductible executive compensation.

Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.

Adjusted EBITDA - Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for income tax expense, depreciation and amortization expense, stock-based compensation expense, realized gain or loss from foreign currency on cash and investments held, investment income or loss, and other adjustments as necessary for a fair presentation.

For the three months ended June 30, 2021, other adjustments included disposals of cloud hosting arrangement implementation costs.

Adjusted EBITDA - Adjusted EBITDA consists of net income adjusted for income tax expense, depreciation and amortization expense, stock-based compensation expense, realized gain or loss from foreign currency on cash and investments held, investment income or loss, and other adjustments as necessary for a fair presentation.

The following table provides a reconciliation of net income to Adjusted EBITDA:

Three Months Ended

September 30,

(in thousands) 2022 2021

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SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

Adjusted EBITDA Margin - Adjusted EBITDA Margin, which is a non-GAAP measure of financial performance, consists of Adjusted EBITDA divided by revenue.

Form 10-Q for the Quarterly Period ended September 30, 2022

Adjusted EBITDA Margin - Adjusted EBITDA Margin consists of Adjusted EBITDA divided by revenue.

Margin, the comparable GAAP measure of financial performance, consists of net income divided by revenue.

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Three Months Ended

September 30,

(in thousands, except Margin and Adjusted EBITDA Margin) 2022 2021

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Adjusted EBITDA Margin 30 % 27 %

Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP measure of financial performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets, realized gain or loss from foreign currency on cash and investments held, other adjustments as necessary for a fair presentation, and the corresponding tax impacts of the adjustments to net income, divided by the weighted average number of shares of common and diluted stock outstanding during each period.

For the three months ended June 30, 2021, other adjustments included disposals of cloud hosting arrangement implementation costs.

Non-GAAP Income per Share - Non-GAAP income per share consists of net income adjusted for stock-based compensation expense, amortization expense related to intangible assets, realized gain or loss from foreign currency on cash and investments held, other adjustments as necessary for a fair presentation, and the corresponding tax impacts of the adjustments to net income, divided by the weighted average number of shares of common and diluted stock outstanding during each period.

To quantify the tax effects, we recalculated income tax expense excluding the direct book and tax effects of the specific items constituting the non-GAAP adjustments.

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Three Months Ended

September 30,

(in thousands, except per share amounts) 2022 2021

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SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Form 10-Q for the Quarterly Period ended September 30, 2022

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The following table presents our results of operations for the periods indicated:

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 Change

(dollars in thousands) $ % of revenue (1)

($ in thousands) $ % of revenue (1)

$ % of revenue (1)

16 unchanged sentences

• The number of recurring revenue customers increased 12% to 38,650 at June 30, 2022 from 34,550 at June 30, 2021 .

• Wallet share increased 4% to $10,450 for the six months ended June 30, 2022 from $10,100 for the same period in 2021.

• Wallet share increased 4% to $10,550 for the nine months ended September 30, 2022 from $10,100 for the same period in 2021.

The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

Recurring revenues increased 17% to $198.7 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the six months ended June 30, 2022 and 2021, respectively.

Recurring revenues increased 17% to $305.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the nine months ended September 30, 2022 and 2021, respectively.

We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we execute our growth strategy focused on further penetrations of our market.

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $8.4 million in personnel-related costs, an increase of $1.1 million in stock-based compensation, and an increase of $1.0 million of software subscriptions.

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $11.2 million in personnel-related costs, an increase of $1.6 million of software subscriptions, and an increase of $1.5 million in stock-based compensation.

Additionally, as we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $1.1 million.

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $3.7 million in personnel-related costs, an increase of $0.8 million in stock-based compensation, and an increase of $0.7 million in variable compensation earned by sales personnel.

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $3.2 million in personnel-related costs, an increase of $0.8 million in stock-based compensation, and an increase of $0.6 million in software subscriptions.

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $6.3 million in personnel-related costs, an increase of $1.0 million in stock-based compensation, and an increase of $0.9 million in variable compensation earned by sales personnel and referral partners.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

General and Administrative Expenses - The increase in general and administrative expense was primarily related to supporting continued business growth, including an increase in headcount, which resulted in an increase in personnel-related costs of $1.6 million and an increase in stock-based compensation of $0.6 million.

This was partially offset by a decrease of $1.3 million in charitable contributions.

Form 10-Q for the Quarterly Period ended September 30, 2022

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $3.0 million in personnel-related costs, an increase of $1.0 million in stock-based compensation, and an increase of $0.9 million in software subscriptions.

General and Administrative Expenses - The increase in general and administrative expense was primarily related to supporting continued business growth, including an increase in headcount.

The increase in headcount resulted in an increase in personnel-related costs of $2.0 million, an increase of $0.8 million of software subscriptions, and an increase of $0.8 million in stock-based compensation.

Additionally, there was an increase in professional fees of $1.3 million partially offset by a decrease of $1.1 million in bad debt expense.

Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by acquired intangible assets related to recent business combinations.

Other Expense, Net - The increase in net other expenses was primarily due to unfavorable foreign currency exchange rate changes.

Income Tax Expense - The increase in income tax expense was primarily driven by a decrease in the excess tax deductions due to the current period equity award settlements, partially offset by a decrease in nondeductible executive compensation.

This was partially offset by a decrease in nondeductible executive compensation.

For the six m onths ended June 30, 2021 , o ther adjustments included disposals of cloud hosting arrangement implementation costs and accelerated tenant improvement benefit, which was incurred as part of executing a lease agreement.

For the nine m onths ended September 30, 2021 , o ther adjustments included disposals of cloud hosting arrangement implementation costs and accelerated tenant improvement benefit, which was incurred as part of executing a lease agreement.

This tenant improvement adjustment was partially offset by accelerated depreciation, which is included within Depreciation and amortization of property and equipment and was also incurred as part of executing a lease agreement.

The following table provides a reconciliation of net income to Adjusted EBITDA:

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2022 2021

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Adjusted EBITDA $ 97,317 $ 79,321

Adjusted EBITDA Margin - Adjusted EBITDA Margin, which is a non-GAAP measure of financial performance, consists of Adjusted EBITDA divided by revenue.

Adjusted EBITDA Margin - Adjusted EBITDA Margin consists of Adjusted EBITDA divided by revenue.

Margin, the comparable GAAP measure of financial performance, consists of net income divided by revenue.

The following table provides a comparison of Margin to Adjusted EBITDA Margin:

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

Six Months Ended

Form 10-Q for the Quarterly Period ended September 30, 2022

The following table provides a comparison of Margin to Adjusted EBITDA Margin:

Nine Months Ended

September 30,

(in thousands, except Margin and Adjusted EBITDA Margin) 2022 2021

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Adjusted EBITDA Margin 30 % 28 %

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The following table provides a reconciliation of net income to non-GAAP income per share:

Six Months Ended

Nine Months Ended

September 30,

(in thousands, except per share amounts) 2022 2021

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Diluted $ 1.71 $ 1.35

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2022

Critical Accounting Policies and Estimates

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The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures.

On an ongoing basis,

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

we evaluate our estimates and assumptions.

On an ongoing basis, we evaluate our estimates, judgments and assumptions.

We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable.

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Accordingly, we believe that our policies for revenue recognition, internal-use software, and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations.

During the six months ended June 30, 2022, there were no changes in our critical accounting policies or estimates.

During the nine months ended September 30, 2022, there were no changes in our critical accounting policies or estimates.

For additional information regarding our critical accounting policies and estimates, see the discussion under "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.

Liquidity and Capital Resources

As of June 30, 2022 , our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $259.2 million and net accounts receivable of $40.1 million.

As of September 30, 2022 , our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $237.2 million and net accounts receivable of $36.8 million.

Our investments are selected in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation.

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The summary of activity within the condensed consolidated statements of cash flows was as follows:

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2022 2021

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Net Cash Flows from Investing Activities

The decrease in cash used in investing activities was primarily due to increased maturities of investments, partially offset by increased purchases of investments.

The increase in cash used in investing activities was primarily due to an acquisition of a business along with the net investment activity.

Net Cash Flows from Financing Activities

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SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2022

Form 10-Q for the Quarterly Period ended September 30, 2022

Contractual and Commercial Commitment Summary

Our contractual obligations and commercial commitments as o f June 30, 2022 are summarized below:

Our contractual obligations and commercial commitments as o f September 30, 2022 are summarized below:

Payments Due by Period

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• response of competitors to our products and applications;

• use of capital for acquisitions, if any.

• use of capital for acquisitions, including the $49 million InterTrade acquisition in October 2022.

Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.

We believe our cash, cash equivalents, investments and our cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

We believe our cash, cash equivalents, investments, and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Off-Balance Sheet Arrangements

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For information regarding the effect of foreign currency exchange rate changes, refer to the section entitled “Foreign Currency Exchange Risk,” included in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q.

Inflation and changing prices did not have a material effect on our business during the six months ended June 30, 2022 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2022 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis