What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-21 · 48 added, 51 removed, 180 unchanged (35% of the section changed)

19 unchanged sentences

Cost of Revenues and Operating Expenses

Cost of Revenues - Cost of revenues consist primarily of personnel costs for our customer success and implementation teams, customer support personnel, and application support personnel, as well as amortization related to internally developed software.

Sales and Marketing Expenses - Sales and marketing expenses consist primarily of personnel costs for our sales, marketing, product management teams, and commissions earned by our sales personnel and referral partners.

Research and Development Expenses - Research and development expenses consist primarily of personnel costs and stock-based compensation expense for development of new and maintenance of existing products, net of amounts capitalized as developed software.

General and Administrative Expenses - General and administrative expenses consist primarily of personnel costs and stock-based compensation expense for finance, human resources, and internal technology support, as well as professional services and other fees, such as bad debt expense and credit card processing fees.

Cost of Revenues - Cost of revenues consist primarily of personnel, stock-based compensation, and technology costs for our customer success and implementation teams, customer support personnel, and application support personnel, as well as amortization related to internally developed software.

Sales and Marketing Expenses - Sales and marketing expenses consist primarily of personnel costs and stock-based compensation expense for our sales, marketing, product management teams, and commissions earned by our sales personnel and referral partners.

Research and Development Expenses - Research and development expenses consist primarily of personnel, stock-based compensation, and technology costs for development of new and maintenance of existing products, net of amounts capitalized as developed software.

SPS COMMERCE, INC.

Form 10-K for the Annual Period ended December 31, 2023

Table of Con t ents

Overhead Allocation - We allocate overhead expenses such as rent, certain employee benefit costs, and depreciation of general office assets to cost of revenues and operating expenses categories based on expense type using department headcount or salary.

General and Administrative Expenses - General and administrative expenses consist primarily of personnel, stock-based compensation, and technology costs for finance, human resources, and internal technology support, as well as professional services and other fees, such as bad debt expense and credit card processing fees.

Overhead Allocation - We allocate overhead expenses such as rent, certain employee benefit costs, certain software costs, and depreciation of general office assets to cost of revenues and operating expenses categories based on expense type using department headcount or salary.

Amortization of Intangibles Assets - Amortization expense consists of the expense recognition of acquired intangible assets over their estimated useful lives.

5 unchanged sentences

Metrics and Non-GAAP Financial Measures

Recurring Revenue Customers - As of December 31, 2022, we had 42,300 customers with ongoing contracts to pay us monthly fees, which we refer to as recurring revenue customers.

A small portion of our recurring revenue customers consist of separate units within a larger organization.

We treat each of these units, which may include divisions, departments, affiliates and franchises, as distinct customers.

Recurring Revenue Customers - As of December 31, 2023, we had approximately 44,800 customers with ongoing contracts to pay us monthly fees, which we refer to as recurring revenue customers.

A small portion of our recurring revenue customers consist of separate units within a larger organization and are separately invoiced.

We treat each of these units, which may include divisions, departments, affiliates and franchises, as distinct recurring revenue customers.

Wallet Share - We calculate average recurring revenues per recurring revenue customer, which we also refer to as wallet share, by dividing the recurring revenues from recurring revenue customers for the period by the average of the beginning and ending number of recurring revenue customers for the period.

14 unchanged sentences

Our actual results may differ from these estimates under different assumptions or conditions.

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

SPS COMMERCE, INC.

Form 10-K for the Annual Period ended December 31, 2023

Table of Con t ents

recognition, internally developed software, and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations.

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.

Revenue Recognition

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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.

As such, set-up fees and related costs are deferred and recognized ratably, generally over two years, which is the estimated period for which a material right is present for our customers.

Internally Developed Software

15 unchanged sentences

Form 10-K for the Annual Period ended December 31, 2023

Table of Con t ents

Results of Operations

15 unchanged sentences

Income from operations 77,248 14.4 71,182 15.8 6,066 8.5

Other income (expense), net 142 — (1,544) (0.4) 1,686 (109.2)

Other income, net 8,315 1.5 142 — 8,173 NM (2)

Income before income taxes 85,563 15.9 71,324 15.8 14,239 20.0

2 unchanged sentences

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

Revenues - Revenues increased for the 88th consecutive quarter.

(2) NM = "not meaningful"

Revenues - Revenues increased for the 92nd consecutive quarter.

The increase in revenues resulted from two primary factors:

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 13% to 42,300 at December 31, 2022 from 37,500 at December 31, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.

• Wallet share increased 4% to $10,500 at December 31, 2022 from $10,050 at December 31, 2021.

• The number of recurring revenue customers increased 6% to approximately 44,800 at December 31, 2023 from approximately 42,300 at December 31, 2022 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.

• Wallet share increased 10% to approximately $11,550 at December 31, 2023 from approximately $10,500 at December 31, 2022.

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

Recurring revenues increased 18% in 2022, as compared to 2021, and accounted for 93% and 92% of our total revenues in 2022 and 2021, respectively.

Recurring revenues increased 20% to $502.0 million in 2023, as compared to 2022, and accounted for 94% and 93% of our total revenues in 2023 and 2022, 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 $15.6 million in personnel-related costs and an increase of $1.9 million in stock-based compensation.

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount which resulted in an increase of $9.4 million in personnel-related costs and an increase of $1.3 million in stock-based compensation.

Additionally, there was an increase of $1.2 million in sales commissions due to increased sales.

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount which resulted in increases of personnel costs of $4.4 million and stock-based compensation of $1.3 million.

General and Administrative Expenses - The increase in general and administrative expense was primarily due to increased headcount which resulted in an increase in personnel-related costs of $1.9 million.

There was also an increase of $1.3 million in stock-based compensation.

Additionally, as we continued to support growing operations, there was an increase in professional fees of $1.6 million and an increase of $1.3 million in software subscriptions, partially offset by a decrease of $1.3 million in bad debt expense.

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in increases of $21.9 million in personnel-related costs and $3.0 million of software subscriptions.

Additionally, the increase was due to a $1.5 million increase in stock-based compensation.

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in increases of $13.8 million in personnel-related costs and $2.7 million in variable compensation earned by sales personnel and referral partners.

Additionally, the increase was due to a $2.2 million increase in stock-based compensation.

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in increases of $5.3 million in personnel-related costs and $1.2 million of software subscriptions.

Additionally, the increase was due to a $1.6 million increase in stock-based compensation.

SPS COMMERCE, INC.

Form 10-K for the Annual Period ended December 31, 2023

Table of Con t ents

General and Administrative Expenses - The increase in general and administrative expense was primarily related to increased stock-based compensation of $6.9 million.

Additionally, the increase was due to an increase in headcount which resulted in an increase in personnel-related costs of $6.3 million.

Finally, there was an increase in bad debt expense of $2.3 million due primarily to overall business growth.

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

Other Income (Expense) - The change was primarily due to increased investment income and favorable foreign currency exchange rate changes.

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

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

Income Tax Expense - The increase in income tax expense was driven by an increase in pre-tax income and an increase in nondeductible executive compensation.

This was partially offset by an increase in excess tax benefits due to the current period equity award settlements.

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

Adjusted EBITDA - Adjusted EBITDA 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 year ended December 31, 2021, other 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.

O ther adjustments included the expense impacts from acquisition-related employee severance costs and disposals of certain capitalized internally developed software.

Net income is the comparable GAAP measure of financial performance.

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

6 unchanged sentences

Stock-based compensation expense 45,508 33,399

Realized loss from foreign currency on cash and investments held 1,026 1,456

Realized (gain) loss from foreign currency on cash and investments held (1,726) 1,026

Investment income (7,660) (1,670)

11 unchanged sentences

Adjusted EBITDA Margin 29 % 29 %

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.

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, including the expense impacts from acquisition-related employee severance costs and disposals of certain capitalized internally developed software, 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.

SPS COMMERCE, INC.

Form 10-K for the Annual Period ended December 31, 2023

Table of Con t ents

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.

6 unchanged sentences

Amortization of intangible assets 16,116 11,768

Realized loss from foreign currency on cash and investments held 1,026 1,456

Realized (gain) loss from foreign currency on cash and investments held (1,726) 1,026

Other 1,198 —

1 unchanged sentence

Non-GAAP income $ 106,937 $ 86,688

Shares used to compute non-GAAP income per share

Basic 36,117 35,928

Diluted 36,953 36,962

Non-GAAP income per share

Shares used to compute net income and non-GAAP income per share

Basic 36,646 36,117

Diluted 37,475 36,953

Net income per share, basic $ 1.80 $ 1.53

Non-GAAP adjustments to net income per share, basic 1.12 0.87

Non-GAAP income per share, basic $ 2.92 $ 2.40

Net income per share, diluted $ 1.76 $ 1.49

Non-GAAP adjustments to net income per share, diluted 1.09 0.86

Non-GAAP income per share, diluted $ 2.85 $ 2.35

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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At December 31, 2023, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $275.4 million, and net accounts receivable of $46.8 million.

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

Our investments are selected in accordance with our investment policy, with a goal to preserve principal, provide liquidity, and maximize income consistent with minimizing risk of material loss.

Our cash equivalents and short-term investments are held in highly liquid instruments, primarily money market funds, certificates of deposits, and commercial paper.

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

Twelve Months Ended

Year Ended December 31,

(in thousands) 2023 2022

1 unchanged sentence

Net cash used in investing activities (92,642) (112,790)

Net cash used in financing activities (31,631) (8,361)

Net cash provided by (used in) financing activities 15,970 (31,631)

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.

SPS COMMERCE, INC.

Form 10-K for the Annual Period ended December 31, 2023

Table of Con t ents

Net Cash Flows from Investing Activities

The increase in net cash used in investing activities was primarily due to increased business acquisition activity.

The decrease in net cash used in investing activities was primarily due to business acquisition activity.

Net Cash Flows from Financing Activities

The increase in net cash used in financing activities was primarily due to the increased repurchases of common stock.

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

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The discussion of our liquidity and capital resources for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

26 unchanged sentences

Form 10-K for the Annual Period ended December 31, 2023

Table of Con t ents

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note A, General, in our Notes to Consolidated Financial Statements in the sections entitled “Recently Adopted Accounting Pronouncements” and “Accounting Pronouncements Not Yet Adopted” as applicable, included in Part II, Item 8, “Financial Instruments and Supplementary Data” of this Annual Report on Form 10-K.

For information regarding recent accounting pronouncements, refer to Note A, General, in our Notes to Consolidated Financial Statements in the sections entitled “Accounting Pronouncements Recently Adopted” and “Accounting Pronouncements Not Yet Adopted” as applicable, included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

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-K

Item 7. Management’s Discussion and Analysis