SPS COMMERCE INC 10-Q

Item 1. Financial Statements SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares) September 30, 2023 December 31, 2022 ASSETS (unaudited) Current assets Cash and cash equivalents $ 178,702 $ 162,893 Short-term investments 60,628 51,412 Accounts receivable 48,218 42,501 Allowance for credit losses ( 3,077 ) ( 3,066 ) Accounts receivable, net 45,141 39,435 Deferred costs 59,525 52,755 Other assets 15,743 16,319 Total current assets 359,739 322,814 Property and equipment, net 36,209 35,458 Operating lease right-of-use assets 8,315 9,170 Goodwill 252,045 197,284 Intangible assets, net 103,597 88,352 Other assets Deferred costs, non-current 19,521 17,424 Deferred income tax assets 6,805 227 Other assets, non-current 1,177 2,185 Total assets $ 787,408 $ 672,914 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 6,195 $ 11,256 Accrued compensation 41,474 30,235 Accrued expenses 8,900 7,451 Deferred revenue 71,853 57,423 Operating lease liabilities 4,449 4,277 Total current liabilities 132,871 110,642 Other liabilities Deferred revenue, non-current 6,849 4,771 Operating lease liabilities, non-current 10,563 13,009 Deferred income tax liabilities 10,281 7,419 Total liabilities 160,564 135,841 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; 38,847,028 and 38,309,144 shares issued; and 36,695,930 and 36,158,046 shares outstanding, respectively 39 38 Treasury Stock, at cost; 2,151,098 shares ( 128,892 ) ( 128,892 ) Additional paid-in capital 520,313 476,117 Retained earnings 240,034 193,221 Accumulated other comprehensive loss ( 4,650 ) ( 3,411 ) Total stockholders’ equity 626,844 537,073 Total liabilities and stockholders’ equity $ 787,408 $ 672,914 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 3 Form 10-Q for the Quarterly Period ended September 30, 2023 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) 2023 2022 2023 2022 Revenues $ 135,661 $ 114,486 $ 391,945 $ 328,857 Cost of revenues 45,521 38,605 133,029 111,524 Gross profit 90,140 75,881 258,916 217,333 Operating expenses Sales and marketing 30,289 25,334 89,722 74,571 Research and development 13,558 11,135 39,438 33,268 General and administrative 21,906 16,724 64,275 49,390 Amortization of intangible assets 3,788 2,998 11,118 7,936 Total operating expenses 69,541 56,191 204,553 165,165 Income from operations 20,599 19,690 54,363 52,168 Other income (expense), net 1,702 ( 695 ) 4,859 ( 1,610 ) Income before income taxes 22,301 18,995 59,222 50,558 Income tax expense 5,459 3,132 12,409 11,339 Net income $ 16,842 $ 15,863 $ 46,813 $ 39,219 Other comprehensive income (expense) Foreign currency translation adjustments ( 2,966 ) ( 2,296 ) ( 1,446 ) ( 3,309 ) Unrealized gain on investments, net of tax of $ 190 , $ 53 , $ 459 and $ 49 , respectively 570 158 1,376 147 Reclassification of gain on investments into earnings, net of tax of $( 137 ), $( 13 ), $( 390 ), and $( 17 ), respectively ( 412 ) ( 39 ) ( 1,169 ) ( 51 ) Total other comprehensive expense ( 2,808 ) ( 2,177 ) ( 1,239 ) ( 3,213 ) Comprehensive income $ 14,034 $ 13,686 $ 45,574 $ 36,006 Net income per share Basic $ 0.46 $ 0.44 $ 1.28 $ 1.09 Diluted $ 0.45 $ 0.43 $ 1.25 $ 1.06 Weighted average common shares used to compute net income per share Basic 36,728 36,093 36,584 36,104 Diluted 37,584 36,915 37,417 36,942 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 4 Form 10-Q for the Quarterly Period ended September 30, 2023 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, 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 Balances, June 30, 2023 36,646,819 $ 39 2,151,098 $ ( 128,892 ) $ 508,484 $ 223,192 $ ( 1,842 ) $ 600,981 Stock-based compensation — — — — 10,780 — — 10,780 Shares issued pursuant to stock awards 45,952 — — — 705 — — 705 Employee stock purchase plan activity 3,159 — — — 344 — — 344 Net income — — — — — 16,842 — 16,842 Foreign currency translation adjustments — — — — — — ( 2,966 ) ( 2,966 ) Unrealized gain on investments, net of tax — — — — — — 570 570 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 412 ) ( 412 ) Balances, September 30, 2023 36,695,930 $ 39 2,151,098 $ ( 128,892 ) $ 520,313 $ 240,034 $ ( 4,650 ) $ 626,844 Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Amount Shares Amount 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 Balances, December 31, 2022 36,158,046 $ 38 2,151,098 $ ( 128,892 ) $ 476,117 $ 193,221 $ ( 3,411 ) $ 537,073 Stock-based compensation — — — — 34,192 — — 34,192 Shares issued pursuant to stock awards 496,500 1 — — 5,523 — — 5,524 Employee stock purchase plan activity 41,384 — — — 4,481 — — 4,481 Net income — — — — — 46,813 — 46,813 Foreign currency translation adjustments — — — — — — ( 1,446 ) ( 1,446 ) Unrealized gain on investments, net of tax — — — — — — 1,376 1,376 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 1,169 ) ( 1,169 ) Balances, September 30, 2023 36,695,930 $ 39 2,151,098 $ ( 128,892 ) $ 520,313 $ 240,034 $ ( 4,650 ) $ 626,844 See accompanying notes to these condensed consolidated financial statements. . SPS COMMERCE, INC. 5 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) (unaudited) 2023 2022 Cash flows from operating activities Net income $ 46,813 $ 39,219 Reconciliation of net income to net cash provided by operating activities Deferred income taxes ( 11,906 ) ( 2,092 ) Depreciation and amortization of property and equipment 13,964 11,983 Amortization of intangible assets 11,118 7,936 Provision for credit losses 4,004 2,889 Stock-based compensation 36,097 25,636 Other, net 1,711 43 Changes in assets and liabilities Accounts receivable ( 8,800 ) ( 3,999 ) Deferred costs ( 7,543 ) ( 7,174 ) Other current and non-current assets 2,814 2,202 Accounts payable ( 5,289 ) 129 Accrued compensation 8,073 ( 4,388 ) Accrued expenses ( 169 ) ( 3,035 ) Deferred revenue 10,042 8,261 Operating leases ( 1,417 ) ( 1,127 ) Net cash provided by operating activities 99,512 76,483 Cash flows from investing activities Purchases of property and equipment ( 15,467 ) ( 13,894 ) Purchases of investments ( 102,763 ) ( 134,276 ) Maturities of investments 95,000 132,500 Acquisition of business, net ( 70,218 ) ( 44,923 ) Net cash used in investing activities ( 93,448 ) ( 60,593 ) Cash flows from financing activities Repurchases of common stock — ( 42,700 ) Net proceeds from exercise of options to purchase common stock 5,524 2,457 Net proceeds from employee stock purchase plan activity 4,481 3,588 Net cash provided by (used in) financing activities 10,005 ( 36,655 ) Effect of foreign currency exchange rate changes ( 260 ) ( 557 ) Net increase (decrease) in cash and cash equivalents 15,809 ( 21,322 ) Cash and cash equivalents at beginning of period 162,893 207,552 Cash and cash equivalents at end of period $ 178,702 $ 186,230 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 6 Form 10-Q for the Quarterly Period ended September 30, 2023 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, 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. 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, 2022, 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, 2023. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 , as filed with the SEC, for additional information regarding our significant accounting policies. Accounting Pronouncements Recently Adopted Standard Date of Issuance Description Date of 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 has not had a material impact on the purchase accounting for business combinations. SPS COMMERCE, INC. 7 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents NOTE B – Business Acquisitions 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 was $ 49.1 million, including estimated post-closing adjustments. During the quarter ended June 30, 2023, provisional amounts were adjusted by $ 3.1 million, primarily relating to a $ 3.9 million decrease in estimated value of intangible assets and the corresponding $ 1.0 million change to the deferred tax position, with the offsets to goodwill. During the quarter ended September 30, 2023, there were no significant adjustments made to provisional amounts. The purchase accounting has been finalized as of September 30, 2023. TIE Kinetix Effective September 13, 2023, we acquired all of the outstanding equity ownership interests of TIE Kinetix Holding B.V. ("TIE Kinetix"), a leading provider of supply chain digitalization including EDI and e-invoicing in Europe. Pursuant to the definitive agreement, the purchase price was € 63.9 million ($ 68.7 million at the September 13, 2023 exchange rate), net of cash acquired. The purchase accounting for the acquisition has not been finalized as of September 30, 2023; provisional amounts are primarily related to intangible assets and tax components. We expect to finalize the allocation of the purchase price within the one-year measurement period following the acquisition. Purchase Price Allocations We accounted for the acquisitions as business combinations. 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 following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition dates: InterTrade TIE Kinetix (in thousands) Acquisition Date Estimated Fair Value as of December 31, 2022 Adjustment Acquisition Date Estimated Fair Value as of September 30, 2023 Acquisition Date Estimated Fair Value as of September 30, 2023 Cash paid at transaction date $ 47,165 $ — $ 47,165 $ 73,558 Contingent consideration 2,000 — 2,000 Post-closing adjustments ( 93 ) 116 23 Total consideration $ 49,072 $ 116 $ 49,188 $ 73,558 Estimated fair value of assets and liabilities acquired: Cash $ 668 $ — $ 668 $ 4,859 Accounts receivable 1,302 (94) 1,208 1,347 Other assets 1,903 — 1,903 2,981 Intangible assets Subscriber relationships 17,640 ( 3,960 ) 13,680 18,183 Developed technology 4,410 ( 501 ) 3,909 12,122 Current liabilities ( 2,337 ) ( 35 ) ( 2,372 ) ( 3,606 ) Deferred revenue ( 397 ) 202 ( 195 ) ( 6,421 ) Deferred income tax liabilities, net ( 6,127 ) 1,030 ( 5,097 ) ( 6,112 ) Total fair value of assets and liabilities acquired $ 17,062 $ ( 3,358 ) $ 13,704 $ 23,354 Goodwill $ 32,010 $ 3,475 $ 35,485 $ 50,205 SPS COMMERCE, INC. 8 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents The following table summarizes the estimated useful lives for each acquired intangible asset: Estimated Useful Life InterTrade TIE Kinetix Subscriber relationships 8.0 years 8.0 years Developed technology 6.0 years 6.0 years Other Acquisition Activity During the third quarter of 2023, the Company had other acquisition activity resulting in a total purchase price of $ 1.5 million, paid in cash. Assets acquired were primarily comprised of developed technology and customer relationships, totaling $ 0.9 million of estimated fair value. The remainder of the consideration transferred, $ 0.6 million, was allocated to goodwill. NOTE C – Revenue We derive our revenues from the following revenue streams: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Recurring revenues: Fulfillment $ 110,900 $ 92,952 $ 318,069 $ 265,570 Analytics 13,098 11,902 38,177 34,846 Other 3,373 1,699 9,949 4,867 Recurring revenues 127,371 106,553 366,195 305,283 One-time revenues 8,290 7,933 25,750 23,574 Total revenue $ 135,661 $ 114,486 $ 391,945 $ 328,857 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. SPS COMMERCE, INC. 9 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents 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) 2023 2022 2023 2022 Balance, beginning of period $ 16,978 $ 15,309 $ 14,999 $ 14,459 Invoiced set-up fees 4,496 3,715 14,493 11,776 Recognized set-up fees ( 4,225 ) ( 3,805 ) ( 12,243 ) ( 11,016 ) Balance, end of period $ 17,249 $ 15,219 $ 17,249 $ 15,219 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 D – Deferred Costs The deferred costs activity was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Balance, beginning of period $ 75,255 $ 64,665 $ 70,179 $ 59,720 Incurred deferred costs 20,094 17,442 57,632 52,860 Amortized deferred costs ( 16,303 ) ( 15,551 ) ( 48,765 ) ( 46,024 ) Balance, end of period $ 79,046 $ 66,556 $ 79,046 $ 66,556 NOTE E – Fair Value Measurements Cash Equivalents and Investments Cash equivalents and investments, as measured at fair value on a recurring basis, consisted of the following: September 30, 2023 December 31, 2022 Fair Value Level Amortized Cost Unrealized Gains (Losses), net Fair Value Amortized Cost Unrealized Gains (Losses), net Fair Value (in thousands) Cash equivalents: Money market funds Level 1 $ 120,100 $ — $ 120,100 $ 73,368 $ — $ 73,368 Investments: Certificates of deposit Level 1 6,431 — 6,431 6,813 — 6,813 Marketable securities: Commercial paper Level 2 53,546 651 54,197 44,224 375 44,599 $ 180,077 $ 651 $ 180,728 $ 124,405 $ 375 $ 124,780 SPS COMMERCE, INC. 10 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents 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) 2023 2022 Balance, beginning of period $ 3,066 $ 4,249 Provision for credit losses 4,004 2,889 Write-offs, net of recoveries ( 3,993 ) ( 3,480 ) Balance, end of period $ 3,077 $ 3,658 NOTE G – Property and Equipment, Net Property and equipment, net consisted of the following: (in thousands) September 30, 2023 December 31, 2022 Internally developed software $ 57,933 $ 49,994 Computer equipment 34,048 30,310 Leasehold improvements 15,361 16,531 Office equipment and furniture 10,993 10,981 Property and equipment, cost 118,335 107,816 Less: accumulated depreciation and amortization ( 82,126 ) ( 72,358 ) Total property and equipment, net $ 36,209 $ 35,458 NOTE H – Goodwill and Intangible Assets, Net Goodwill The activity in goodwill was as follows: Nine Months Ended September 30, (in thousands) 2023 Balance, beginning of period $ 197,284 Foreign currency translation ( 1,162 ) Addition from business acquisition(s) 50,842 Remeasurement from provisional purchase accounting amount 5,081 Balance, end of period $ 252,045 Intangible Assets Intangible assets, net consisted of the following: September 30, 2023 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 97,734 $ ( 28,771 ) $ ( 4,173 ) $ 64,790 6.7 years Acquired technology 53,505 ( 13,995 ) ( 703 ) 38,807 5.3 years $ 151,239 $ ( 42,766 ) $ ( 4,876 ) $ 103,597 6.1 years SPS COMMERCE, INC. 11 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents December 31, 2022 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 80,101 $ ( 22,255 ) $ ( 171 ) $ 57,675 6.8 years Acquired technology 40,610 ( 9,934 ) 1 30,677 5.7 years $ 120,711 $ ( 32,189 ) $ ( 170 ) $ 88,352 6.4 years The estimated future annual amortization expense related to intangible assets is as follows: (in thousands) Remainder of 2023 $ 4,718 2024 17,899 2025 17,761 2026 16,757 2027 16,294 Thereafter 30,168 Total future amortization $ 103,597 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) 2023 2022 2023 2022 Operating lease cost $ 729 $ 788 $ 2,306 $ 2,287 Variable lease cost 909 963 2,787 2,612 $ 1,638 $ 1,751 $ 5,093 $ 4,899 Supplemental cash flow information related to leases was as follows: Nine Months Ended September 30, (in thousands) 2023 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 3,835 $ 3,399 Right-of-use assets obtained in exchange for operating lease liabilities 1,072 934 Supplemental balance sheet information related to operating leases was as follows: September 30, 2023 December 31, 2022 Weighted-average remaining lease term 3.3 years 3.9 years Weighted-average discount rate 3.7 % 4.0 % SPS COMMERCE, INC. 12 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents At September 30, 2023, our future minimum payments under operating leases were as follows: (in thousands) Remainder of 2023 $ 767 2024 5,415 2025 4,589 2026 3,942 2027 1,297 Thereafter 97 Total future gross payments $ 16,107 Less: imputed interest ( 1,095 ) Total operating lease liabilities $ 15,012 Purchase Commitments We have entered into separate noncancelable agreements with computing infrastructure, productivity software, customer relationship management, and performance and security data analytics vendors for services through 2026. At September 30, 2023, our remaining purchase commitments and estimated purchase timing were as follows: (in thousands) Remainder of 2023 $ 2,129 2024 11,527 2025 11,178 2026 4,264 Total estimated future purchases $ 29,098 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, 2023 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 2021 Program November 2021 August 2022 $ 50,000 $ 49,992 $ 8 N/A 2022 Program August 2022 July 2024 50,000 2,992 N/A $ 47,008 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) 2023 2022 2023 2022 Number of shares repurchased — 102,234 — 357,430 Shares repurchased cost $ — $ 12,477 $ — $ 42,700 Average price per repurchased share $ — $ 122.04 $ — $ 119.46 SPS COMMERCE, INC. 13 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents 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, 2023 , there were 12.8 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) 2023 2022 2023 2022 Cost of revenues $ 2,506 $ 2,146 $ 7,595 $ 6,477 Operating expenses Sales and marketing 2,428 1,845 7,379 5,835 Research and development 1,798 1,396 5,387 4,250 General and administrative 4,704 2,573 15,736 9,074 $ 11,436 $ 7,960 $ 36,097 $ 25,636 Stock-based compensation expense by grant type or plan was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Stock options $ 487 $ 461 $ 1,472 $ 1,401 PSUs 2,812 1,541 10,236 6,244 RSUs & DSUs 6,722 4,735 20,165 14,467 RSAs 122 110 345 328 ESPP 637 577 1,974 1,609 401(k) stock match 656 536 1,905 1,587 $ 11,436 $ 7,960 $ 36,097 $ 25,636 As of September 30, 2023, there was $ 50.3 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 2.4 years. SPS COMMERCE, INC. 14 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents Stock Options Our stock option activity was as follows: Nine Months Ended September 30, 2023 Options (#) Weighted Average Exercise Price ($/share) Outstanding, beginning of period 562,697 $ 56.24 Granted 39,949 152.08 Exercised ( 154,279 ) 35.80 Forfeited ( 2,236 ) 127.39 Outstanding, end of period 446,131 $ 71.54 Of the total outstanding options at September 30, 2023, 0.4 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $ 59.61 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, 2023 was $ 56.29 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) 4.2 Volatility 39.3 % Dividend yield — Risk-free interest rate 4.0 % Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units In each of the quarters ended March 31, 2023, 2022, 2021, and 2020 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, 2023 , PSU awards granted in 2020 vested at the maximum performance level and 0.1 million shares of common stock were issued. Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows: Nine Months Ended September 30, 2023 # Weighted Average Grant Date Fair Value ($/share) Outstanding, beginning of period 712,158 $ 103.93 Granted 352,457 163.26 Vested and common stock issued ( 341,570 ) 77.06 Forfeited ( 7,607 ) 118.37 Outstanding, end of period 715,438 $ 145.83 The number of PSUs, RSUs, RSAs, and DSUs outstanding at September 30, 2023 included 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. SPS COMMERCE, INC. 15 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents Employee Stock Purchase Plan Our ESPP activity was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except shares) 2023 2022 2023 2022 Amounts for shares purchased $ 344 $ 238 $ 4,481 $ 3,588 Shares purchased 3,159 2,481 41,384 37,516 A total of 1.7 million shares of common stock are reserved for issuance under the ESPP as of September 30, 2023. 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 40.1 % Dividend yield — Risk-free interest rate 4.6 % 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. Our provisions for income taxes includes current federal, state, and foreign income tax expense, as well as deferred tax expense. 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. NOTE M – Other Income and Expense Other income (expense), net included the following: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Investment income $ 2,635 $ 586 $ 5,372 $ 806 Realized gain (loss) from foreign currency on cash and investments held 98 ( 1,151 ) 525 ( 2,010 ) Other expense, net ( 1,031 ) ( 130 ) ( 1,038 ) ( 406 ) Total other income (expense), net $ 1,702 $ ( 695 ) $ 4,859 $ ( 1,610 ) SPS COMMERCE, INC. 16 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents 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) 2023 2022 2023 2022 Numerator Net income $ 16,842 $ 15,863 $ 46,813 $ 39,219 Denominator Weighted average common shares outstanding, basic 36,728 36,093 36,584 36,104 Options to purchase common stock 256 379 279 396 PSUs, RSUs, RSAs, and DSUs 600 443 554 442 Weighted average common shares outstanding, diluted 37,584 36,915 37,417 36,942 Net income per share Basic $ 0.46 $ 0.44 $ 1.28 $ 1.09 Diluted $ 0.45 $ 0.43 $ 1.25 $ 1.06 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) 2023 2022 2023 2022 Anti-dilutive shares 40 107 43 222 NOTE O – Geographic Information Revenue Domestic revenue, which we define as revenue that was attributable to customers based within the U.S., was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Domestic revenue 84 % 85 % 84 % 84 % No single jurisdiction outside of the U.S. had revenues in excess of 10%. Property and Equipment Property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows: September 30, 2023 December 31, 2022 International property and equipment 14 % 13 % SPS COMMERCE, INC. 17 Form 10-Q for the Quarterly Period ended September 30, 2023 Table of Contents