What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-27 · 46 added, 149 removed, 123 unchanged (61% of the section changed)

10 unchanged sentences

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 Securities and Exchange Commission (“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 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.

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.

Our products make it easier for retailers, grocers, distributors, suppliers, and logistics firms to communicate and collaborate by simplifying how they manage and share item, inventory, order and sales data across omnichannel retail channels.

We deliver our products using a full-service model, which includes industry-leading technology and a team of experts that optimize, update, and operate the technology on customers' behalf.

Our products enable customers to increase supply chain performance, optimize inventory levels and sell-through, reduce operational costs, improve order visibility, and satisfy consumer demands for a seamless omnichannel experience.

We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new products and applications.

1 unchanged sentence

Key Financial Terms, Metrics and Non-GAAP Measures

We have several key financial terms and metrics, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC, under the heading “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

To supplement our financial statements, we provide investors with Adjusted EBITDA, Adjusted EBITDA Margin, and non-GAAP income per share, all of which are non-GAAP financial measures.

We believe that these non-GAAP measures provide useful information to our management, board of directors, and investors regarding certain financial and business trends relating to our financial condition and results of operations.

Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses and planning purposes.

We have several key financial terms, metrics, and non-GAAP measures as discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC, under the heading “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

To supplement our consolidated financial statements, we provide investors with Adjusted EBITDA, Adjusted EBITDA Margin, and non-GAAP income per share, all of which are non-GAAP financial measures.

We believe that these non-GAAP financial measures provide useful information to our management, Board of Directors, and investors regarding certain financial and business trends relating to our financial condition and results of operations.

Our management uses these non-GAAP financial measures to compare our performance to that of prior periods for trend analyses and planning purposes.

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

1 unchanged sentence

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.

These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations.

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

These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our consolidated financial statements and are subject to inherent limitations.

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 March 31, 2023

Results of Operations

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

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change

11 unchanged sentences

Income from operations 16,730 13.3 16,510 15.7 220 1.3

Other expense, net (695) (0.6) (716) (0.7) 21 (2.9)

Other income, net 1,276 1.0 423 0.4 853 201.7

Income before income taxes 18,006 14.3 16,933 16.1 1,073 6.3

5 unchanged sentences

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 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.

• The number of recurring revenue customers increased 13% to 42,750 at March 31, 2023 from 37,900 at March 31, 2022 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.

• Wallet share increased 7% to $11,050 for the three months ended March 31, 2023 from $10,350 for the same period in 2022.

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

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.

Recurring revenues increased 20% to $117.3 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Recurring revenues accounted for 93% of our total revenues for the three months ended March 31, 2023 and 2022.

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 penetration of our market.

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $5.8 million in personnel-related costs, and an increase of $0.7 million in software subscriptions.

SPS COMMERCE, INC.

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 $3.4 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.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended March 31, 2023

General and Administrative Expenses - The increase in general and administrative expense was primarily due to increased headcount, which resulted in an increase of $1.5 million in personnel-related costs.

Additionally, there were also increases in stock-based compensation of $1.7 million and $1.0 million in charitable contributions.

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.

Other Expense, Net - No significant changes.

Income Tax Expense - The decrease in income tax expense was primarily driven by the increase in the excess tax deductions from current period equity award settlements, partially offset by an increase in pre-tax income.

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.

2 unchanged sentences

Three Months Ended

September 30,

(in thousands) 2023 2022

4 unchanged sentences

Stock-based compensation expense 11,780 9,015

Realized loss from foreign currency on cash and investments held 1,151 854

Realized gain from foreign currency on cash and investments held (137) (468)

Investment income (1,127) (48)

Adjusted EBITDA $ 36,999 $ 31,766

SPS COMMERCE, INC.

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

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

2 unchanged sentences

Three Months Ended

September 30,

(in thousands, except Margin and Adjusted EBITDA Margin) 2023 2022

4 unchanged sentences

Adjusted EBITDA Margin 29 % 30 %

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.

The difference between this recalculated income tax expense and GAAP income tax expense is presented as the income tax effect of the non-GAAP adjustments.

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

Three Months Ended

September 30,

(in thousands, except per share amounts) 2022 2021

Net income $ 15,863 $ 11,449

Stock-based compensation expense 7,960 6,849

Amortization of intangible assets 2,998 2,399

Realized loss from foreign currency on cash and investments held 1,151 854

Income tax effects of adjustments (4,866) (4,178)

Non-GAAP income $ 23,106 $ 17,373

Shares used to compute non-GAAP income per share

Basic 36,093 35,961

Diluted 36,915 37,015

Non-GAAP income per share

Basic $ 0.64 $ 0.48

Diluted $ 0.63 $ 0.47

SPS COMMERCE, INC.

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:

Nine Months Ended September 30,

2022 2021 Change

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

$ % of revenue (1)

Revenues $ 328,857 100.0 % $ 282,520 100.0 % $ 46,337 16.4 %

Cost of revenues 111,524 33.9 96,043 34.0 15,481 16.1

Gross profit 217,333 66.1 186,477 66.0 30,856 16.5

Operating expenses

Sales and marketing 74,571 22.7 65,386 23.1 9,185 14.0

Research and development 33,268 10.1 28,459 10.1 4,809 16.9

General and administrative 49,390 15.0 45,186 16.0 4,204 9.3

Amortization of intangible assets 7,936 2.4 7,734 2.7 202 2.6

Total operating expenses 165,165 50.2 146,765 51.9 18,400 12.5

Income from operations 52,168 15.9 39,712 14.1 12,456 31.4

Other expense, net (1,610) (0.5) (1,424) (0.5) (186) 13.1

Income before income taxes 50,558 15.4 38,288 13.6 12,270 32.0

Income tax expense 11,339 3.4 6,456 2.3 4,883 75.6

Net income $ 39,219 11.9 % $ 31,832 11.3 % $ 7,387 23.2 %

(1) Amounts in column may not foot due to rounding

Revenues - The increase in revenue resulted from two primary factors:

• 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 $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 $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 $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 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.

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

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.

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:

Nine Months Ended

September 30,

(in thousands) 2022 2021

Net income $ 39,219 $ 31,832

Income tax expense 11,339 6,456

Depreciation and amortization of property and equipment 11,983 10,989

Amortization of intangible assets 7,936 7,734

Stock-based compensation expense 25,636 21,273

Realized loss from foreign currency on cash and investments held 2,010 1,492

Investment income (806) (242)

Other — (213)

Adjusted EBITDA $ 97,317 $ 79,321

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.

SPS COMMERCE, INC.

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

Revenue $ 328,857 $ 282,520

Net income 39,219 31,832

Margin 12 % 11 %

Adjusted EBITDA 97,317 79,321

Adjusted EBITDA Margin 30 % 28 %

Form 10-Q for the Quarterly Period ended March 31, 2023

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.

1 unchanged sentence

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

Nine Months Ended

September 30,

Three Months Ended

(in thousands, except per share amounts) 2023 2022

2 unchanged sentences

Amortization of intangible assets 3,851 2,470

Realized loss from foreign currency on cash and investments held 2,010 1,492

Other — (213)

Realized gain from foreign currency on cash and investments held (137) (468)

Income tax effects of adjustments (5,909) (3,219)

7 unchanged sentences

SPS COMMERCE, INC.

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

Form 10-Q for the Quarterly Period ended March 31, 2023

Critical Accounting Policies and Estimates

This discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with GAAP and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.

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.

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

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

2 unchanged sentences

A critical accounting policy or estimate is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective, or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations.

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

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

During the three months ended March 31, 2023, 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, 2022, as filed with the SEC.

Liquidity and Capital Resources

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.

As of March 31, 2023 , our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $233.5 million and net accounts receivable of $43.4 million.

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

1 unchanged sentence

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

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2023 2022

Net cash provided by operating activities $ 21,631 $ 4,347

Net cash used in investing activities (60,593) (32,087)

Net cash used in financing activities (36,655) (3,360)

Net cash provided by (used in) investing activities (4,590) 5,668

Net cash provided by (used in) financing activities 2,425 (14,575)

Net Cash Flows from Operating Activities

The decrease in cash provided by operating activities was primarily driven by changes in the amount and timing of settlement of operating assets and liabilities, primarily the change in accrued compensation.

The increase in cash provided by operating activities was primarily driven by changes in the amount and timing of settlement of operating assets and liabilities, in addition to increased net income.

Net Cash Flows from Investing Activities

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

The change in cash provided by (used in) investing activities was primarily due to the net investment activity.

Net Cash Flows from Financing Activities

The increase in cash used in financing activities was primarily due to the increase in cash used for share repurchases.

The change in cash provided by (used in) financing activities was primarily due to the decrease in cash used for share repurchases.

SPS COMMERCE, INC.

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

Form 10-Q for the Quarterly Period ended March 31, 2023

Contractual and Commercial Commitment Summary

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

Our contractual obligations and commercial commitments as o f March 31, 2023 are summarized below:

Payments Due by Period

(in thousands) Less Than

1 Year 1-3 Years 3-5 Years More Than

5 Years Total

1 Year 1-3 Years 3-5 Years Total

Operating lease obligations, including imputed interest $ 4,689 $ 8,634 $ 4,105 $ 17,428

8 unchanged sentences

• response of competitors to our products and applications;

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

• use of capital for acquisitions.

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.

5 unchanged sentences

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 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.

Inflation and changing prices did not have a material effect on our business during the three months ended March 31, 2023 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