SPS COMMERCE INC 10-Q

Item 1. Financial Statements SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares) September 30, 2022 December 31, 2021 ASSETS (unaudited) Current assets Cash and cash equivalents $ 186,230 $ 207,552 Short-term investments 50,928 49,758 Accounts receivable 40,445 38,811 Allowance for credit losses ( 3,658 ) ( 4,249 ) Accounts receivable, net 36,787 34,562 Deferred costs 50,082 44,529 Other assets 15,246 16,042 Total current assets 339,273 352,443 Property and equipment, net 32,923 31,901 Operating lease right-of-use assets 9,760 10,851 Goodwill 165,908 143,663 Intangible assets, net 70,742 58,587 Other assets Deferred costs, non-current 16,474 15,191 Deferred income tax assets 223 182 Other assets, non-current 1,787 3,028 Total assets $ 637,090 $ 615,846 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 8,200 $ 8,330 Accrued compensation 28,779 31,661 Accrued expenses 5,202 8,345 Deferred revenue 58,949 50,428 Operating lease liabilities 4,336 4,108 Total current liabilities 105,466 102,872 Other liabilities Deferred revenue, non-current 5,146 5,144 Operating lease liabilities, non-current 13,974 16,426 Deferred income tax liabilities 4,841 7,145 Total liabilities 129,427 131,587 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; 38,184,747 and 37,798,610 shares issued; and 36,037,964 and 36,009,257 shares outstanding, respectively 38 38 Treasury Stock, at cost; 2,146,783 and 1,789,353 shares, respectively ( 128,377 ) ( 85,677 ) Additional paid-in capital 463,356 433,258 Retained earnings 177,306 138,087 Accumulated other comprehensive loss ( 4,660 ) ( 1,447 ) Total stockholders’ equity 507,663 484,259 Total liabilities and stockholders’ equity $ 637,090 $ 615,846 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 3 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) (unaudited) 2022 2021 2022 2021 Revenues $ 114,486 $ 97,887 $ 328,857 $ 282,520 Cost of revenues 38,605 34,343 111,524 96,043 Gross profit 75,881 63,544 217,333 186,477 Operating expenses Sales and marketing 25,334 22,079 74,571 65,386 Research and development 11,135 10,854 33,268 28,459 General and administrative 16,724 14,691 49,390 45,186 Amortization of intangible assets 2,998 2,399 7,936 7,734 Total operating expenses 56,191 50,023 165,165 146,765 Income from operations 19,690 13,521 52,168 39,712 Other expense, net ( 695 ) ( 716 ) ( 1,610 ) ( 1,424 ) Income before income taxes 18,995 12,805 50,558 38,288 Income tax expense 3,132 1,356 11,339 6,456 Net income $ 15,863 $ 11,449 $ 39,219 $ 31,832 Other comprehensive income (expense) Foreign currency translation adjustments ( 2,296 ) ( 968 ) ( 3,309 ) ( 604 ) Unrealized gain (loss) on investments, net of tax of $ 53 , ($ 9 ), $ 49 and ($ 36 ), respectively 158 ( 27 ) 147 ( 107 ) Reclassification of (gain) loss on investments into earnings, net of tax of ($ 13 ), $ 16 , ($ 17 ) and $ 46 , respectively ( 39 ) 48 ( 51 ) 138 Total other comprehensive expense ( 2,177 ) ( 947 ) ( 3,213 ) ( 573 ) Comprehensive income $ 13,686 $ 10,502 $ 36,006 $ 31,259 Net income per share Basic $ 0.44 $ 0.32 $ 1.09 $ 0.89 Diluted $ 0.43 $ 0.31 $ 1.06 $ 0.86 Weighted average common shares used to compute net income per share Basic 36,093 35,961 36,104 35,873 Diluted 36,915 37,015 36,942 36,898 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 4 Form 10-Q for the Quarterly Period ended September 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, June 30, 2021 35,859,353 $ 38 1,676,765 $ ( 71,697 ) $ 413,182 $ 113,873 $ ( 647 ) $ 454,749 Stock-based compensation — — — — 6,361 — — 6,361 Shares issued pursuant to stock awards 145,658 — — — 2,997 — — 2,997 Employee stock purchase plan activity 1,526 — — — 130 — — 130 Repurchases of common stock ( 42,299 ) — 42,299 ( 4,211 ) — — — ( 4,211 ) Net income — — — — — 11,449 — 11,449 Foreign currency translation adjustments — — — — — — ( 968 ) ( 968 ) Unrealized loss on investments, net of tax — — — — — — ( 27 ) ( 27 ) Reclassification of loss on investments into earnings, net of tax — — — — — — 48 48 Balances, September 30, 2021 35,964,238 $ 38 1,719,064 $ ( 75,908 ) $ 422,670 $ 125,322 $ ( 1,594 ) $ 470,528 Balances, June 30, 2022 36,029,477 $ 38 2,044,549 $ ( 115,900 ) $ 453,922 $ 161,443 $ ( 2,483 ) $ 497,020 Stock-based compensation — — — — 7,429 — — 7,429 Shares issued pursuant to stock awards 108,240 — — — 1,767 — — 1,767 Employee stock purchase plan activity 2,481 — — — 238 — — 238 Repurchases of common stock ( 102,234 ) — 102,234 ( 12,477 ) — — — ( 12,477 ) Net income — — — — — 15,863 — 15,863 Foreign currency translation adjustments — — — — — — ( 2,296 ) ( 2,296 ) Unrealized gain on investments, net of tax — — — — — — 158 158 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 39 ) ( 39 ) Balances, September 30, 2022 36,037,964 $ 38 2,146,783 $ ( 128,377 ) $ 463,356 $ 177,306 $ ( 4,660 ) $ 507,663 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 — — — — 19,866 — — 19,866 Shares issued pursuant to stock awards 555,160 1 — — 7,026 — — 7,027 Employee stock purchase plan activity 27,675 — — — 2,316 — — 2,316 Repurchases of common stock ( 105,814 ) — 105,814 ( 10,661 ) — — — ( 10,661 ) Net income — — — — — 31,832 — 31,832 Foreign currency translation adjustments — — — — — — ( 604 ) ( 604 ) Unrealized loss on investments, net of tax — — — — — — ( 107 ) ( 107 ) Reclassification of loss on investments into earnings, net of tax — — — — — — 138 138 Balances, September 30, 2021 35,964,238 $ 38 1,719,064 $ ( 75,908 ) $ 422,670 $ 125,322 $ ( 1,594 ) $ 470,528 Balances, December 31, 2021 36,009,257 $ 38 1,789,353 $ ( 85,677 ) $ 433,258 $ 138,087 $ ( 1,447 ) $ 484,259 Stock-based compensation — — — — 24,053 — — 24,053 Shares issued pursuant to stock awards 348,621 — — — 2,457 — — 2,457 Employee stock purchase plan activity 37,516 — — — 3,588 — — 3,588 Repurchases of common stock ( 357,430 ) — 357,430 ( 42,700 ) — — — ( 42,700 ) Net income — — — — — 39,219 — 39,219 Foreign currency translation adjustments — — — — — — ( 3,309 ) ( 3,309 ) Unrealized gain on investments, net of tax — — — — — — 147 147 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 51 ) ( 51 ) Balances, September 30, 2022 36,037,964 $ 38 2,146,783 $ ( 128,377 ) $ 463,356 $ 177,306 $ ( 4,660 ) $ 507,663 See accompanying notes to these condensed consolidated financial statements. . SPS COMMERCE, INC. 5 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) (unaudited) 2022 2021 Cash flows from operating activities Net income $ 39,219 $ 31,832 Reconciliation of net income to net cash provided by operating activities Deferred income taxes ( 2,092 ) 1,013 Depreciation and amortization of property and equipment 11,983 10,989 Amortization of intangible assets 7,936 7,734 Provision for credit losses 2,889 4,037 Stock-based compensation 25,636 21,273 Other, net 43 234 Changes in assets and liabilities, net of effects of acquisition Accounts receivable ( 3,999 ) ( 5,327 ) Deferred costs ( 7,174 ) ( 5,686 ) Other current and non-current assets 2,202 ( 3,893 ) Accounts payable 129 ( 1,518 ) Accrued compensation ( 4,388 ) 6,617 Accrued expenses ( 3,035 ) ( 174 ) Deferred revenue 8,261 13,401 Operating leases ( 1,127 ) 1,036 Net cash provided by operating activities 76,483 81,568 Cash flows from investing activities Purchases of property and equipment ( 13,894 ) ( 15,567 ) Purchases of investments ( 134,276 ) ( 84,020 ) Maturities of investments 132,500 67,500 Acquisition of business, net ( 44,923 ) — Net cash used in investing activities ( 60,593 ) ( 32,087 ) Cash flows from financing activities Repurchases of common stock ( 42,700 ) ( 10,661 ) Net proceeds from exercise of options to purchase common stock 2,457 7,027 Net proceeds from employee stock purchase plan activity 3,588 2,316 Payments for contingent consideration — ( 2,042 ) Net cash used in financing activities ( 36,655 ) ( 3,360 ) Effect of foreign currency exchange rate changes ( 557 ) ( 10 ) Net increase (decrease) in cash and cash equivalents ( 21,322 ) 46,111 Cash and cash equivalents at beginning of period 207,552 149,692 Cash and cash equivalents at end of period $ 186,230 $ 195,803 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 6 Form 10-Q for the Quarterly Period ended September 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, judgments 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 nine months ended September 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 September 30, 2022 Table of Contents NOTE B – Business Acquisitions GCommerce Effective July 19, 2022, we acquired all of the outstanding equity ownership interests of GCommerce, Inc. ("GCommerce"), a leading EDI provider within the automotive aftermarket industry. Pursuant to the definitive agreement, the purchase price of $ 45 million was paid in cash at closing, and is subject to customary post-closing adjustments. The purchase accounting for the acquisition has not been finalized as of September 30, 2022. Provisional amounts are primarily related to intangible assets, net working capital, and tax positions. We expect to finalize the allocation of the purchase price within the one-year measurement period following the acquisition. Purchase Price Allocation We accounted for the acquisition as a business combination. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. Goodwill is attributed to a trained workforce and other buyer-specific value resulting from expected synergies, including long-term cost savings, which are not included in the fair values of identifiable assets. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date: (in thousands) Estimated Fair Value Cash $ 230 Accounts receivable 467 Other current assets 288 Operating lease right-of-use asset 934 Goodwill 24,556 Intangible assets 20,250 Deferred income tax assets 5,291 Accounts payable ( 266 ) Accrued compensation ( 321 ) Deferred revenue ( 262 ) Operating lease liability ( 934 ) Deferred income tax liabilities ( 5,144 ) $ 45,089 Purchased Intangible Assets The following table summarizes the estimated fair value of the purchased intangible assets and their estimated useful lives, each of which are subject to finalization: ($ in thousands) Estimated Fair Value Weighted Average Estimated Useful Life Subscriber relationships $ 18,225 8.0 years Acquired technology 2,025 5.0 years Total $ 20,250 InterTrade Effective October 4, 2022, we acquired all of the outstanding equity ownership interests of Canadian based InterTrade Systems Inc. ("InterTrade"), a leading EDI provider within the apparel and general merchandising markets. Pursuant to the definitive agreement, the purchase price of $ 49 million was paid in cash at closing, and is subject to customary post-closing adjustments. SPS COMMERCE, INC. 8 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents NOTE C – Revenue We derive our revenues from the following revenue streams: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Recurring revenues: Fulfillment $ 92,952 $ 78,106 $ 265,570 $ 224,738 Analytics 11,902 10,858 34,846 31,383 Other 1,699 1,435 4,867 4,019 Recurring revenues 106,553 90,399 305,283 260,140 One-time revenues 7,933 7,488 23,574 22,380 Total revenue $ 114,486 $ 97,887 $ 328,857 $ 282,520 Revenues are the amount that reflects the consideration we are contractually and legally entitled to, as well as the amount we 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Balance, beginning of period $ 15,309 $ 13,344 $ 14,459 $ 11,118 Invoiced set-up fees 3,715 3,622 11,776 11,832 Recognized set-up fees ( 3,805 ) ( 3,245 ) ( 11,016 ) ( 9,229 ) Balance, end of period $ 15,219 $ 13,721 $ 15,219 $ 13,721 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. SPS COMMERCE, INC. 9 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents 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 D – Deferred Costs The deferred costs activity was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Balance, beginning of period $ 64,665 $ 53,841 $ 59,720 $ 50,595 Incurred deferred costs 17,442 16,459 52,860 45,922 Amortized deferred costs ( 15,551 ) ( 14,207 ) ( 46,024 ) ( 40,424 ) Balance, end of period $ 66,556 $ 56,093 $ 66,556 $ 56,093 NOTE E – Financial Instruments Cash Equivalents and Investments Cash equivalents and investments consisted of the following: September 30, 2022 December 31, 2021 (in thousands) Amortized Cost Unrealized Gains, net Fair Value Amortized Cost Unrealized Gains (Losses), net Fair Value Cash equivalents: Money market funds $ 111,498 $ — $ 111,498 $ 138,205 $ — $ 138,205 Certificates of deposit 6,437 — 6,437 7,268 — 7,268 Marketable securities: Commercial paper 44,358 133 44,491 34,984 7 34,991 U.S. treasury securities — — — 7,500 ( 1 ) 7,499 $ 162,293 $ 133 $ 162,426 $ 187,957 $ 6 $ 187,963 SPS COMMERCE, INC. 10 Form 10-Q for the Quarterly Period ended September 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: September 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 $ 111,498 $ — $ — $ 111,498 $ 138,205 $ — $ — $ 138,205 Certificates of deposit 6,437 — — 6,437 7,268 — — 7,268 Marketable securities: Commercial paper — 44,491 — 44,491 — 34,991 — 34,991 U.S. treasury securities — — — — — 7,499 — 7,499 $ 117,935 $ 44,491 $ — $ 162,426 $ 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 F – Allowance for Credit Losses The allowance for credit losses activity, included in accounts receivable, net, was as follows: Nine Months Ended September 30, (in thousands) 2022 2021 Balance, beginning of period $ 4,249 $ 4,233 Provision for credit losses 2,889 4,037 Write-offs, net of recoveries ( 3,480 ) ( 3,666 ) Balance, end of period $ 3,658 $ 4,604 NOTE G – Property and Equipment, Net Property and equipment, net consisted of the following: (in thousands) September 30, 2022 December 31, 2021 Internally developed software $ 50,311 $ 44,981 Computer equipment 32,520 29,329 Leasehold improvements 16,871 16,685 Office equipment and furniture 11,157 10,972 Property and equipment, cost 110,859 101,967 Less: accumulated depreciation and amortization ( 77,936 ) ( 70,066 ) Total property and equipment, net $ 32,923 $ 31,901 SPS COMMERCE, INC. 11 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents NOTE H – Goodwill and Intangible Assets, Net Goodwill The activity in goodwill was as follows: Nine Months Ended September 30, (in thousands) 2022 2021 Balance, beginning of period $ 143,663 $ 134,853 Addition from business acquisition 24,556 — Foreign currency translation ( 2,311 ) ( 441 ) Remeasurement from provisional purchase accounting amount — 268 Balance, end of period $ 165,908 $ 134,680 Intangible Assets Intangible assets, net consisted of the following: September 30, 2022 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 79,365 $ ( 35,823 ) $ ( 159 ) $ 43,383 6.6 years Acquired technology 37,351 ( 9,992 ) — 27,359 6.0 years $ 116,716 $ ( 45,815 ) $ ( 159 ) $ 70,742 6.4 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 $ 3,112 2023 12,379 2024 11,217 2025 11,079 2026 10,075 Thereafter 22,880 Total future amortization $ 70,742 SPS COMMERCE, INC. 12 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents NOTE I – Commitments and Contingencies Leases The components of lease expense were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Operating lease cost $ 788 $ 873 $ 2,287 $ 2,309 Variable lease cost 963 976 2,612 2,694 $ 1,751 $ 1,849 $ 4,899 $ 5,003 Supplemental cash flow information related to leases was as follows: Nine Months Ended September 30, (in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 3,399 $ 2,488 Right-of-use assets obtained in exchange for operating lease liabilities 934 — Supplemental balance sheet information related to operating leases was as follows: September 30, 2022 December 31, 2021 Weighted-average remaining lease term 4.2 years 4.8 years Weighted-average discount rate 4.0 % 4.0 % At September 30, 2022, our future minimum payments under operating leases were as follows: (in thousands) Remainder of 2022 $ 1,515 2023 4,871 2024 4,474 2025 4,088 2026 3,760 Thereafter 1,266 Total future gross payments $ 19,974 Less: imputed interest ( 1,664 ) Total operating lease liabilities $ 18,310 Purchase Commitments We have entered into separate noncancelable agreements with computing infrastructure, customer relationship management, and performance and security data analytics vendors for services through 2025. At September 30, 2022, the total remaining purchase commitments were $ 7.4 million . SPS COMMERCE, INC. 13 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents NOTE J – 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 through September 30, 2022 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 August 2022 50,000 49,992 8 N/A 2022 Program August 2022 July 2024 50,000 2,477 N/A $ 47,523 The share repurchase activity by period was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except shares and per share amounts) 2022 2021 2022 2021 Number of shares repurchased 102,234 42,299 357,430 105,814 Shares repurchased cost $ 12,477 $ 4,211 $ 42,700 $ 10,661 Average price per repurchased share $ 122.04 $ 99.55 $ 119.46 $ 100.75 NOTE K – 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 September 30, 2022 , there were 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Cost of revenues $ 2,146 $ 1,696 $ 6,477 $ 4,945 Operating expenses Sales and marketing 1,845 1,634 5,835 4,854 Research and development 1,396 1,195 4,250 3,212 General and administrative 2,573 2,324 9,074 8,262 $ 7,960 $ 6,849 $ 25,636 $ 21,273 SPS COMMERCE, INC. 14 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents Stock-based compensation expense by grant type or plan was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Stock options $ 461 $ 496 $ 1,401 $ 1,569 PSUs 1,541 1,342 6,244 5,357 RSUs 4,735 4,039 14,467 11,577 RSAs & DSUs 110 109 328 325 ESPP 577 376 1,609 1,038 401(k) stock match 536 487 1,587 1,407 $ 7,960 $ 6,849 $ 25,636 $ 21,273 As of September 30, 2022, there was $ 42.1 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 2.5 years. Stock Options Our stock option activity was as follows: Nine Months Ended September 30, 2022 Options (#) Weighted Average Exercise Price ($/share) Outstanding, beginning of period 678,650 $ 44.76 Granted 49,085 122.64 Exercised ( 79,089 ) 31.07 Forfeited ( 6,711 ) 89.21 Outstanding, end of period 641,935 $ 51.94 Of the total outstanding options at September 30, 2022, 0.5 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $ 43.96 per share and a weighted average remaining contractual life of 2.9 years. The weighted average grant date fair value of options granted during the nine months ended September 30, 2022 was $ 40.95 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 37.5 % 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 , PSU awards granted in 2019 vested at the maximum performance level and less than 0.1 million shares of common stock were issued. SPS COMMERCE, INC. 15 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows: Nine Months Ended September 30, 2022 # Weighted Average Grant Date Fair Value ($/share) Outstanding, beginning of period 702,160 $ 78.03 Granted 284,739 126.88 Vested and common stock issued ( 268,607 ) 63.04 Forfeited ( 21,114 ) 96.81 Outstanding, end of period 697,178 $ 103.19 The number of PSUs, RSUs, RSAs, and DSUs outstanding at September 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 September 30, Nine Months Ended September 30, (in thousands, except shares) 2022 2021 2022 2021 Amounts for shares purchased $ 238 $ 130 $ 3,588 $ 2,316 Shares purchased 2,481 1,526 37,516 27,675 A total of 1.8 million shares of common stock are reserved for issuance under the ESPP as of September 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 L – Income Taxes We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax 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. 16 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents NOTE M – Other Income and Expense Other expense, net included the following: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Investment income $ 586 $ 66 $ 806 $ 242 Realized loss from foreign currency on cash and investments held ( 1,151 ) ( 854 ) ( 2,010 ) ( 1,492 ) Other income (expense), net ( 130 ) 72 ( 406 ) ( 174 ) Total other expense, net $ ( 695 ) $ ( 716 ) $ ( 1,610 ) $ ( 1,424 ) NOTE N – Net Income Per Share The components and computation of basic and diluted net income per share were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2022 2021 2022 2021 Numerator Net income $ 15,863 $ 11,449 $ 39,219 $ 31,832 Denominator Weighted average common shares outstanding, basic 36,093 35,961 36,104 35,873 Options to purchase common stock 379 520 396 533 PSUs, RSUs, RSAs, and DSUs 443 534 442 492 Weighted average common shares outstanding, diluted 36,915 37,015 36,942 36,898 Net income per share Basic $ 0.44 $ 0.32 $ 1.09 $ 0.89 Diluted $ 0.43 $ 0.31 $ 1.06 $ 0.86 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Anti-dilutive shares 107 34 222 46 SPS COMMERCE, INC. 17 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents NOTE O – 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Domestic revenue 85 % 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: September 30, 2022 December 31, 2021 International property and equipment 13 % 12 % SPS COMMERCE, INC. 18 Form 10-Q for the Quarterly Period ended September 30, 2022 Table of Contents