SPS COMMERCE INC 10-K

Item 8. Financial Statements and Supplementary Data SPS Commerce, Inc. and Subsidiaries Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm 36 Consolidated Balance Sheets 39 Consolidated Statements of Comprehensive Income 40 Consolidated Statements of Stockholders’ Equity 41 Consolidated Statements of Cash Flows 42 Notes to Consolidated Financial Statements 43 SPS COMMERCE, INC. 35 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors SPS Commerce, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of SPS Commerce, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of the capitalized internal costs for internally developed software As discussed in Note A to the consolidated financial statements, the Company capitalizes costs incurred for internally developed software during the application development stage. Capitalized internally developed software is recorded within property and equipment and depreciated over the estimated useful life. We identified the assessment of the capitalized internal costs for internally developed software as a critical audit matter. Subjective auditor judgment was required to assess the stage of software development for new internally developed software or upgrades and enhancements for existing internally developed software, which determines when costs should be capitalized. SPS COMMERCE, INC. 36 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s internally developed software process. This included controls related to the evaluation and approval of new internally developed software projects or upgrades and enhancements to existing internally developed software projects, monitoring of the software development stage, and capitalization of internal costs. We examined a sample of capitalized internally developed software costs to evaluate costs that were capitalized for new internally developed software or upgrades and enhancements for existing internally developed software. For each sample, we evaluated the capitalized costs and assessed the stage of software development by inspecting underlying documentation and inquiring of the Company’s technology developers performing the internally developed software activities regarding the specific nature, stage of completion, and hours incurred on the project. /s/ KPMG LLP We have served as the Company’s auditor since 2013. Minneapolis, Minnesota February 20, 2024 SPS COMMERCE, INC. 37 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors SPS Commerce, Inc.: Opinion on Internal Control Over Financial Reporting We have audited SPS Commerce, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated February 20, 2024 expressed an unqualified opinion on those consolidated financial statements. The Company acquired TIE Kinetix Holding B.V. during 2023, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, TIE Kinetix Holding B.V.’s internal control over financial reporting associated with less than 5% of consolidated assets and less than 5% of consolidated revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2023. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of TIE Kinetix Holding B.V. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Minneapolis, Minnesota February 20, 2024 SPS COMMERCE, INC. 38 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (in thousands, except shares) 2023 2022 ASSETS Current assets Cash and cash equivalents $ 219,081 $ 162,893 Short-term investments 56,359 51,412 Accounts receivable 50,160 42,501 Allowance for credit losses ( 3,320 ) ( 3,066 ) Accounts receivable, net 46,840 39,435 Deferred costs 62,403 52,755 Other assets 16,758 16,319 Total current assets 401,441 322,814 Property and equipment, net 36,043 35,458 Operating lease right-of-use assets 7,862 9,170 Goodwill 249,176 197,284 Intangible assets, net 107,344 88,352 Other assets Deferred costs, non-current 20,347 17,424 Deferred income tax assets 505 227 Other assets, non-current 1,126 2,185 Total assets $ 823,844 $ 672,914 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 7,420 $ 11,256 Accrued compensation 41,588 30,235 Accrued expenses 8,014 7,451 Deferred revenue 69,187 57,423 Operating lease liabilities 4,460 4,277 Total current liabilities 130,669 110,642 Other liabilities Deferred revenue, non-current 6,930 4,771 Operating lease liabilities, non-current 9,569 13,009 Deferred income tax liabilities 8,972 7,419 Other liabilities, non-current 229 — Total liabilities 156,369 135,841 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; 38,971,146 and 38,309,144 shares issued; and 36,820,048 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 537,061 476,117 Retained earnings 259,045 193,221 Accumulated other comprehensive gain (loss) 222 ( 3,411 ) Total stockholders’ equity 667,475 537,073 Total liabilities and stockholders’ equity $ 823,844 $ 672,914 See accompanying notes to these consolidated financial statements. SPS COMMERCE, INC. 39 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (in thousands, except per share amounts) 2023 2022 2021 Revenues $ 536,910 $ 450,875 $ 385,276 Cost of revenues 182,069 153,065 131,678 Gross profit 354,841 297,810 253,598 Operating expenses Sales and marketing 122,936 101,772 88,044 Research and development 53,654 45,748 39,038 General and administrative 84,887 67,340 61,305 Amortization of intangible assets 16,116 11,768 10,126 Total operating expenses 277,593 226,628 198,513 Income from operations 77,248 71,182 55,085 Other income (expense), net 8,315 142 ( 1,544 ) Income before income taxes 85,563 71,324 53,541 Income tax expense 19,739 16,190 8,944 Net income $ 65,824 $ 55,134 $ 44,597 Other comprehensive income (expense) Foreign currency translation adjustments 3,393 ( 2,240 ) ( 514 ) Unrealized gain (loss) on investments, net of tax of $ 644 , $ 147 , and $( 34 ), respectively 1,932 441 ( 102 ) Reclassification of (gain) loss on investments into earnings, net of tax of $( 564 ), $( 55 ), and $ 63 , respectively ( 1,692 ) ( 165 ) 190 Total other comprehensive income (expense) 3,633 ( 1,964 ) ( 426 ) Comprehensive income $ 69,457 $ 53,170 $ 44,171 Net income per share Basic $ 1.80 $ 1.53 $ 1.24 Diluted $ 1.76 $ 1.49 $ 1.21 Weighted average common shares used to compute net income per share Basic 36,646 36,117 35,928 Diluted 37,475 36,953 36,962 See accompanying notes to these consolidated financial statements. SPS COMMERCE, INC. 40 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Gain (Loss) Total Stockholders' Equity (in thousands, except shares) 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 — — — — 25,686 — — 25,686 Shares issued pursuant to stock awards 642,417 1 — — 9,373 — — 9,374 Employee stock purchase plan activity 55,726 — — — 4,737 — — 4,737 Repurchases of common stock ( 176,103 ) — 176,103 ( 20,430 ) — — — ( 20,430 ) Net income — — — — — 44,597 — 44,597 Foreign currency translation adjustments — — — — — — ( 514 ) ( 514 ) Unrealized loss on investments, net of tax — — — — — — ( 102 ) ( 102 ) Reclassification of loss on investments into earnings, net of tax — — — — — — 190 190 Balances, December 31, 2021 36,009,257 $ 38 1,789,353 $ ( 85,677 ) $ 433,258 $ 138,087 $ ( 1,447 ) $ 484,259 Stock-based compensation — — — — 31,275 — — 31,275 Shares issued pursuant to stock awards 440,427 — — — 4,908 — — 4,908 Employee stock purchase plan activity 70,107 — — — 6,676 — — 6,676 Repurchases of common stock ( 361,745 ) — 361,745 ( 43,215 ) — — — ( 43,215 ) Net income — — — — — 55,134 — 55,134 Foreign currency translation adjustments — — — — — — ( 2,240 ) ( 2,240 ) Unrealized gain on investments, net of tax — — — — — — 441 441 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 165 ) ( 165 ) Balances, December 31, 2022 36,158,046 $ 38 2,151,098 $ ( 128,892 ) $ 476,117 $ 193,221 $ ( 3,411 ) $ 537,073 Stock-based compensation — — — — 42,975 — — 42,975 Shares issued pursuant to stock awards 598,361 1 — — 9,855 — — 9,856 Employee stock purchase plan activity 63,641 — — — 8,114 — — 8,114 Net income — — — — — 65,824 — 65,824 Foreign currency translation adjustments — — — — — — 3,393 3,393 Unrealized gain on investments, net of tax — — — — — — 1,932 1,932 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 1,692 ) ( 1,692 ) Balances, December 31, 2023 36,820,048 $ 39 2,151,098 $ ( 128,892 ) $ 537,061 $ 259,045 $ 222 $ 667,475 See accompanying notes to these consolidated financial statements. SPS COMMERCE, INC. 41 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands) 2023 2022 2021 Cash flows from operating activities Net income $ 65,824 $ 55,134 $ 44,597 Reconciliation of net income to net cash provided by operating activities Deferred income taxes ( 10,079 ) ( 3,732 ) 3,881 Depreciation and amortization of property and equipment 18,631 16,421 14,788 Amortization of intangible assets 16,116 11,768 10,126 Provision for credit losses 5,707 3,359 4,717 Stock-based compensation 45,508 33,399 27,574 Other, net 2,415 220 323 Changes in assets and liabilities, net of effects of acquisitions Accounts receivable ( 11,949 ) ( 6,435 ) ( 4,959 ) Deferred costs ( 10,724 ) ( 10,646 ) ( 9,299 ) Other assets and liabilities 1,834 2,632 ( 6,181 ) Accounts payable ( 3,947 ) 144 2,259 Accrued compensation 7,143 ( 3,786 ) 6,775 Accrued expenses 1,302 ( 2,829 ) 1,017 Deferred revenue 6,464 5,965 14,483 Operating leases ( 1,947 ) ( 1,562 ) 2,792 Net cash provided by operating activities 132,298 100,052 112,893 Cash flows from investing activities Purchases of property and equipment ( 19,761 ) ( 19,880 ) ( 19,588 ) Purchases of investments ( 133,994 ) ( 160,427 ) ( 121,242 ) Maturities of investments 131,331 158,937 111,193 Acquisition of business, net ( 70,218 ) ( 91,420 ) ( 17,066 ) Net cash used in investing activities ( 92,642 ) ( 112,790 ) ( 46,703 ) Cash flows from financing activities Repurchases of common stock — ( 43,215 ) ( 20,430 ) Net proceeds from exercise of options to purchase common stock 9,856 4,908 9,374 Net proceeds from employee stock purchase plan activity 8,114 6,676 4,737 Payments for contingent consideration ( 2,000 ) — ( 2,042 ) Net cash provided by (used in) financing activities 15,970 ( 31,631 ) ( 8,361 ) Effect of foreign currency exchange rate changes 562 ( 290 ) 31 Net increase (decrease) in cash and cash equivalents 56,188 ( 44,659 ) 57,860 Cash and cash equivalents at beginning of period 162,893 207,552 149,692 Cash and cash equivalents at end of period $ 219,081 $ 162,893 $ 207,552 Supplemental disclosure of cash flow information Cash paid for income taxes $ 29,207 $ 16,076 $ 9,979 Non-cash financing activity: Contingent consideration related to acquisition $ — $ 2,000 $ — See accompanying notes to these consolidated financial statements. SPS COMMERCE, INC. 42 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents SPS COMMERCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 consolidated financial statements. Foreign Currency Translation The functional currency of our foreign operations is generally the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet accounts using current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using an average exchange rate during the year. The translation adjustments are deferred as a component of other comprehensive income within the consolidated statements of comprehensive income and the consolidated statements of stockholders' equity. Gains or losses resulting from transactions denominated in foreign currencies are included in other income (expense), net in our consolidated statements of comprehensive income. 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. Business Combinations We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Assets acquired include tangible and intangible assets. We use estimates and assumptions that we believe are reasonable as a part of the purchase price allocation, which includes the process to determine the value and useful lives of purchased intangible assets and the process to determine the value of any contingent consideration liabilities. We record the acquisition-date fair value of any contingent liabilities, such as earn-out provisions, as part of the consideration transferred, if present. The unsettled earn-out liability, if any, is subsequently remeasured at each reporting date at fair value through earnings. While we believe these estimates and assumptions are reasonable, they are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of the assets acquired and the liabilities assumed. Any such adjustments would be recorded as an offset to goodwill or a working capital purchase price adjustment as applicable. Upon the conclusion of the measurement period or final determination of the fair values, whichever comes first, any subsequent adjustments would be recorded in our consolidated statements of comprehensive income. SPS COMMERCE, INC. 43 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Segment Information Our Chief Executive Officer acts as the Company’s chief operating decision maker and reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by the chief operating decision maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level. Accordingly, we determined we have one operating and reportable segment, which is supply chain management products. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents in financial institutions in excess of federally insured limits, accounts receivable, and investments. Cash and cash equivalents are held with financial institutions that we believe are subject to minimal risk. Concentrations of credit risk with respect to accounts receivable are subject to the financial condition of our customers, which are routinely assessed for potential credit losses. We believe that the receivable credit risk exposure is limited. Our investment policy limits the amount of credit exposure with any one financial institution or commercial issuer and sets requirements regarding credit rating and investment maturities to safeguard liquidity and minimize risk. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with original maturities of less than 90 days. Investments We invest in money market funds, certificates of deposit, and/or marketable securities such as commercial paper, highly liquid debt instruments of the U.S. government, and U.S. corporate debt securities. Investments with remaining maturities of less than one year from the balance sheet date are classified as short-term investments whereas those with remaining maturities of more than one year from the balance sheet date are classified as investments, non-current. Securities classified as available for sale are carried at fair value and the unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive gain (loss) in the consolidated balance sheets. Realized gains or losses are included in other income (expense), net in the consolidated statements of comprehensive income. Certain securities accrue interest that is included in other income (expense), net. If a determination has been made that the fair value of a marketable security is below its amortized cost basis, the portion of the unrealized loss that corresponds to a credit-related factor is realized through a credit allowance on the marketable security and the equivalent expense is realized in other income (expense), net in the consolidated statements of comprehensive income. Fair Value Measurements The carrying amounts of our short-term financial instruments, which include cash, cash equivalents, accounts receivable, and accounts payable, approximates fair value due to their short-term nature. Recurring Fair Value Measurements We measure certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that are used to measure fair value are: • Level 1 – quoted prices in active markets for identical assets or liabilities. • Level 2 – observable inputs other than Level 1 prices, such as (a) quoted prices for similar assets or liabilities, (b) quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or (c) model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 – unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. SPS COMMERCE, INC. 44 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Nonrecurring Fair Value Measurements We measure certain assets and liabilities at fair value on a nonrecurring basis, including long-lived assets, goodwill, and indefinite-lived intangible assets. Accounts Receivable Accounts receivable are initially recorded upon the sale and invoicing of products to customers. Credit is granted in the normal course of business without collateral. Accounts receivable are stated net of allowances for credit losses, which represent estimated losses resulting from customers not making required payments on accounts receivables. When determining the allowance, we pool our outstanding accounts receivable invoices based on the contractual due date of payment. We take several factors into consideration for estimated credit losses by pool, primarily our historical credit losses, with additional adjustments made for current and future macro-economic conditions and retail bankruptcy trends. We write-off accounts receivable when they are determined to be uncollectible. Changes in the allowance are recorded as bad debt expense and are included in general and administrative expense in our consolidated statements of comprehensive income. Property and Equipment Property and equipment, including assets acquired under lease obligations, are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives, commencing on the earlier date in which the asset is placed in service or ready for its intended use. The estimated useful lives of property and equipment were as follows: Estimated Useful Life Internally developed software 3 years Computer equipment 3 years Office equipment and furniture 5 - 7 years Leasehold improvements Shorter of the useful life of the asset or the remaining term of the lease Significant additions or improvements extending asset lives beyond one year are capitalized, while repairs and maintenance are charged to expense as incurred. The assets and related accumulated depreciation and amortization are adjusted for asset retirements and disposals with the resulting gain or loss included in our consolidated statements of comprehensive income. We capitalize and amortize eligible costs to acquire or generate internally developed software that are incurred during the application development stage. Costs incurred during the preliminary project stage and post-implementation stage are expensed as incurred. Additionally, maintenance of internally developed software are expensed as incurred. The assets and related accumulated amortization are adjusted for abandoned internally developed software with the resulting loss included in our consolidated statements of comprehensive income. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and non-current operating lease liabilities in our consolidated balance sheets. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit interest rate when readily determinable. We estimate the discount rate for a similar collateralized asset by estimating costs of borrowing. The operating lease ROU asset also includes any lease payments made and lease incentives that have been incurred. The options to extend our leases are not recognized as part of our ROU assets and lease liabilities unless it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For all leases, we combine non-lease components with the related lease components and account for it as a single lease component. The ROU assets are subject to the same impairment process as our long-lived assets. Additionally, we review our lease liabilities for remeasurement whenever there is a triggering event or when relevant facts and circumstances change. SPS COMMERCE, INC. 45 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Research and Development Research and development costs primarily include development, maintenance, and data conversion activities related to our cloud-based supply chain management products and are expensed as incurred. Research and development costs are net of amounts capitalized as developed software. Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. 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. We test goodwill for impairment annually at November 30, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is conducted by comparing the fair value of the net assets with the carrying amount of the reporting unit. We determine the fair value of the reporting unit based on our market capitalization at the testing date. If the carrying amount exceeds the fair value of the reporting unit, we would recognize an impairment loss in the consolidated statements of comprehensive income, to the extent that the carrying amount exceeds fair value. Intangible Assets Assets acquired in business combinations may include identifiable intangible assets such as subscriber relationships and developed technology. We recognize the fair value of the identifiable intangible assets acquired separately from goodwill. We have determined the fair value and useful lives of our purchased intangible assets using certain estimates and assumptions that we believe are reasonable. The purchased intangible assets are being amortized on a straight-line basis over their estimated useful lives. The estimated useful lives for intangible were as follows: Estimated Useful Life Subscriber relationships 7 - 10 years Developed technology 5 - 10 years Impairment of Long-Lived Assets We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount of an asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets at the date it is tested for recoverability, whether in use or under development. An impairment loss is measured and recorded as an expense in the consolidated statements of comprehensive income as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Revenue Recognition 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. We determine revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, we satisfy a performance obligation See Note C for further descriptions of our revenue recognition policy. SPS COMMERCE, INC. 46 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Deferred Costs Deferred costs are those that are incurred to fulfill or obtain customer contracts and that are considered incremental and recoverable costs. These consist primarily of customer implementation costs and certain commissions paid to sales personnel and referral partners, respectively. These costs are deferred and amortized over the expected period of benefit which we have determined primarily to be two years . Customer implementation costs are based on actual costs incurred. Related amortization expense is included in cost of revenues in the consolidated statements of comprehensive income. Sales commissions are calculated based on estimated annual recurring revenue to be generated over the customer’s initial contract period. Related amortization expense is included in sales and marketing expenses in the consolidated statements of comprehensive income. Stock-Based Compensation Stock-based compensation includes grants of incentive and nonqualified stock options, performance share units (“PSUs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), deferred stock units (“DSUs”), employee stock purchase plan (“ESPP”) activity, and 401(k) stock match and is used to compensate employees, executive officers, and non-employee directors. We recognize the cost of all stock-based payments based on the grant date fair value of those awards. This cost is recognized over the period for which an 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. For all awards, we recognize forfeitures as they occur. RSAs result in the issuance of new shares when granted. For other stock-based awards, new shares are issued when the award is exercised, vested, or released according to the terms of the agreement. Our ESPP allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The plan is available to all employees subject to certain eligibility requirements. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price that is the lower of 85 % of the fair market value of our common stock at the beginning or end of each stock purchase period. The plan is a Type B plan, so the number of shares a participants can acquire is variable. Participants purchase more shares as the stock price decreases, up to the total amount originally elected to withhold at the beginning of the offering period. The plan consists of two six-month offering periods, beginning on January 1 and July 1 of each calendar year. The fair value of stock options and ESPP activity is estimated using the Black-Scholes option valuation model. The fair value for RSAs, RSUs, and DSUs is the closing market value of the underlying stock on the date of grant less the purchase price (if any). The fair value of PSUs is estimated using a Monte Carlo simulation. Judgment is required in determining the expected volatility of common stock and the expected term individuals will hold their share-based awards prior to exercising. The expected volatility of the options is based on the historical volatility of our common stock. The expected term of the options is derived from historical data on option holder exercises and post-vesting employment termination behavior. Additional valuation inputs include our expected non-issuance of future common stock dividends and the risk-free interest rate that is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equaling the expected life at the grant date. For PSUs, the Monte Carlo simulation utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award. Income Taxes We account for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in our judgment, it is more likely than not that some or all of the deferred tax asset will not be realized. Deferred tax positions are net by jurisdiction on the consolidated balance sheet. SPS COMMERCE, INC. 47 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents We assess our ability to realize our deferred tax assets at the end of each reporting period. Realization of our deferred tax assets is contingent upon future taxable earnings. Accordingly, this assessment requires estimates and judgment. If the estimates of future taxable income vary from actual results, our assessment regarding the realization of these deferred tax assets could change. Future changes in the estimated amount of deferred taxes expected to be realized will be reflected in our consolidated financial statements in the period the estimate is changed, with a corresponding adjustment to our operating results. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would “more likely than not” sustain the position following an audit. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. It is our practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Net Income Per Share Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share also includes the impact of our outstanding potential common shares. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share. 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. Accounting Pronouncements Not Yet Adopted Standard Date of Issuance Description Date of Required Adoption Effect on the Financial Statements ASU 2023-09 , Income Taxes (Topic 740) - Improvements to Income Tax Disclosures December 2023 This amendment requires that an entity disclose specific categories in the effective tax rate reconciliation table as well as provide disclosure of disaggregated information related to income tax expense, income before income taxes, and income taxes paid. January 2024 We are currently evaluating the adoption on our financial statements and anticipate the impact will result in additional disclosure. ASU 2023-07 , Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures November 2023 This amendment requires that an entity disclose significant segment expenses impacting profit and loss that are regularly provided to the chief operating decision maker. January 2024 We are currently evaluating the adoption on our financial statements and anticipate the impact will result in additional disclosure. SPS COMMERCE, INC. 48 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents NOTE B – Business Acquisitions 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 and the United States. 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 December 31, 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. The goodwill associated with the acquisition is not deductible for income tax purposes. 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 following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date: (in thousands) Acquisition Date Estimated Fair Value as of September 30, 2023 Adjustment Acquisition Date Estimated Fair Value as of December 31, 2023 Cash paid $ 73,558 $ — $ 73,558 Estimated fair value of assets and liabilities acquired: Cash $ 4,859 $ — $ 4,859 Accounts receivable 1,347 ( 80 ) 1,267 Other assets 2,981 659 3,640 Intangible assets Subscriber relationships 18,183 11,137 29,320 Developed technology 12,122 ( 4,279 ) 7,843 Current liabilities ( 3,606 ) ( 232 ) ( 3,838 ) Deferred revenue ( 6,421 ) — ( 6,421 ) Deferred income tax liabilities, net ( 6,112 ) ( 1,757 ) ( 7,869 ) Total fair value of assets and liabilities acquired $ 23,353 $ 5,448 $ 28,801 Goodwill $ 50,205 $ ( 5,448 ) $ 44,757 The following table summarizes the estimated useful lives for each acquired intangible asset, each of which are subject to finalization: Estimated Useful Life Subscriber relationships 8.0 years Developed technology 6.0 years SPS COMMERCE, INC. 49 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Other Acquisition Activity In the year ended December 31, 2023, we 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. 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. In the year ended December 31, 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. The purchase accounting was finalized in the year ended December 31, 2023. 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 was $ 45.1 million, including post-closing adjustments. In the year ended December 31, 2023, provisional amounts were adjusted by $ 1.6 million, primarily relating to a $ 1.5 million decrease in the estimated value of deferred income tax assets, with the corresponding offset to goodwill. The purchase accounting was finalized in the year ended December 31, 2023. NOTE C – Revenue We derive our revenues from the following revenue streams: Year Ended December 31, (in thousands) 2023 2022 2021 Recurring revenues: Fulfillment $ 436,702 $ 364,148 $ 306,851 Analytics 51,703 46,894 42,674 Other 13,608 8,005 5,481 Recurring Revenues 502,013 419,047 355,006 One-time revenues 34,897 31,828 30,270 Total revenue $ 536,910 $ 450,875 $ 385,276 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 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. SPS COMMERCE, INC. 50 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents 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, generally 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: Year Ended December 31, (in thousands) 2023 2022 Balance, beginning of year $ 14,999 $ 14,459 Invoiced set-up fees 19,146 15,457 Recognized set-up fees ( 16,542 ) ( 14,917 ) Balance, end of year $ 17,603 $ 14,999 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 fees Miscellaneous fees primarily 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. Deferred Revenue In the year ended December 31, 2023, we recognized revenue of $ 57.4 million from amounts included in deferred revenue at December 31, 2022. NOTE D – Deferred Costs The deferred costs activity was as follows: Year Ended December 31, (in thousands) 2023 2022 Balance, beginning of year $ 70,179 $ 59,720 Incurred deferred costs 89,012 72,509 Amortized deferred costs ( 76,441 ) ( 62,050 ) Balance, end of year $ 82,750 $ 70,179 SPS COMMERCE, INC. 51 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents NOTE E – Fair Value Measurements Cash equivalents and investments, as measured at fair value on a recurring basis, consisted of the following: December 31, 2023 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 $ 161,233 $ — $ 161,233 $ 73,368 $ — $ 73,368 Investments: Certificates of deposit Level 1 6,805 — 6,805 6,813 — 6,813 Marketable securities: Commercial paper Level 2 48,860 694 49,554 44,224 375 44,599 $ 216,898 $ 694 $ 217,592 $ 124,405 $ 375 $ 124,780 NOTE F – Allowance for Credit Losses The allowance for credit losses activity, included in accounts receivable, net, was as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Balance, beginning of year $ 3,066 $ 4,249 $ 4,233 Provision for credit losses 5,707 3,359 4,717 Write-offs, net of recoveries ( 5,453 ) ( 4,542 ) ( 4,790 ) Initial allowance for business combination acquired receivables — — 89 Balance, end of year $ 3,320 $ 3,066 $ 4,249 NOTE G – Property and Equipment, Net Property and equipment, net consisted of the following: December 31, (in thousands) 2023 2022 Internally developed software $ 60,396 $ 49,994 Computer equipment 34,402 30,310 Leasehold improvements 15,387 16,531 Office equipment and furniture 10,966 10,981 Property and equipment, cost 121,151 107,816 Less: accumulated depreciation and amortization ( 85,108 ) ( 72,358 ) Total property and equipment, net $ 36,043 $ 35,458 Depreciation and amortization expense of property and equipment was as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Depreciation and amortization expense $ 18,631 $ 16,421 $ 14,788 SPS COMMERCE, INC. 52 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents NOTE H – Goodwill and Intangible Assets, Net Goodwill The activity in goodwill was as follows: Year Ended December 31, (in thousands) 2023 Balance, beginning of year $ 197,284 Additions from business acquisitions 45,393 Foreign currency translation 2,328 Remeasurement from provisional purchase accounting amount 4,171 Balance, end of year $ 249,176 Intangible Assets Intangible assets, net consisted of the following: December 31, 2023 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 105,228 $ ( 32,097 ) $ 724 $ 73,855 6.6 years Developed technology 48,843 ( 15,669 ) 315 33,489 5.0 years $ 154,071 $ ( 47,766 ) $ 1,039 $ 107,344 6.1 years 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 Developed technology 40,610 ( 9,934 ) 1 30,677 5.4 years $ 120,711 $ ( 32,189 ) $ ( 170 ) $ 88,352 6.4 years Amortization expense of intangible assets was as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Amortization expense $ 16,116 $ 11,768 $ 10,126 The estimated future annual amortization expense related to intangible assets is as follows: (in thousands) 2024 $ 18,842 2025 18,704 2026 17,700 2027 17,226 2028 15,959 Thereafter 18,913 Total future amortization $ 107,344 SPS COMMERCE, INC. 53 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents NOTE I – Commitments and Contingencies Leases We are engaged in a lease agreement for our current headquarters located in Minneapolis, Minnesota where we lease approximately 198,000 square feet under an agreement that expires in 2027. The lease also has two options to extend the term for five years each at a market rate determined in accordance with the lease. We lease other smaller facilities across the U.S. and international locations. The components of lease expense were as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Operating lease cost $ 3,123 $ 3,087 $ 3,089 Variable lease cost 3,771 3,576 3,660 $ 6,894 $ 6,663 $ 6,749 Supplemental cash flow information related to leases was as follows: December 31, (in thousands) 2023 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 5,022 $ 4,639 Right-of-use assets obtained in exchange for operating lease liabilities 1,147 934 Supplemental balance sheet information related to operating leases was as follows: December 31, 2023 December 31, 2022 Weighted-average remaining lease term 3.1 years 3.9 years Weighted-average discount rate 4.0 % 4.0 % At December 31, 2023, our future minimum payments under operating leases were as follows: (in thousands) 2024 $ 4,910 2025 4,694 2026 3,947 2027 1,299 2028 25 Thereafter 76 Total future gross payments 14,951 Less: imputed interest ( 922 ) Total operating lease liabilities $ 14,029 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 December 31, 2023, our remaining purchase commitments and estimated purchase timing were as follows: (in thousands) 2024 $ 14,536 2025 14,186 2026 6,342 Total remaining purchase commitments $ 35,064 SPS COMMERCE, INC. 54 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Contingencies We may be involved in various claims and legal actions in the normal course of business. We believe that the outcome of any such claim or legal action is not expected to have a material adverse effect on our financial position or results of operations. NOTE J – Stockholders’ Equity Share Repurchase Program Our board of directors has authorized multiple non-concurrent programs to repurchase our common stock. Details of the programs and activity thereunder through December 31, 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 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 2,992 N/A $ 47,008 The share repurchase activity by period was as follows: Year Ended December 31, (in thousands, except shares and per share amounts) 2023 2022 2021 Number of shares repurchased — 361,745 176,103 Shares repurchased cost $ — $ 43,215 $ 20,430 Average price per repurchased share $ — $ 119.46 $ 116.01 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 PSUs, RSAs, RSUs, and DSUs, to employees, non-employee directors and other consultants who provide services to us. We also provide an ESPP and 401(k) stock 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 December 31, 2023 there were 12.7 million shares available for grant under approved equity compensation plans. Stock-based compensation expense was allocated in the consolidated statements of comprehensive income as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Cost of revenues $ 10,169 $ 8,684 $ 6,760 Operating expenses Sales and marketing 9,774 7,590 6,248 Research and development 7,200 5,634 4,384 General and administrative 18,365 11,491 10,182 $ 45,508 $ 33,399 $ 27,574 SPS COMMERCE, INC. 55 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Stock-based compensation expense by grant type or plan was as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Stock options $ 1,947 $ 1,903 $ 2,057 PSUs 11,886 7,509 6,417 RSUs & DSUs 26,185 19,282 15,388 RSAs 472 437 434 ESPP 2,488 2,144 1,391 401(k) stock match 2,530 2,124 1,887 $ 45,508 $ 33,399 $ 27,574 As of December 31, 2023, there was $ 52.0 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. Stock Options Options generally vest over four years and, upon vesting, the holder is given the option to purchase shares of common stock at a specific strike price until expiration, which is generally seven years from the grant date. Our stock option activity was as follows: Options (#) Weighted Average Exercise Price ($/share) Outstanding at December 31, 2020 944,886 36.71 Granted 53,223 105.53 Exercised ( 311,378 ) 30.10 Forfeited ( 8,081 ) 68.62 Outstanding at December 31, 2021 678,650 44.76 Granted 56,430 122.59 Exercised ( 164,393 ) 29.86 Forfeited ( 7,990 ) 92.48 Outstanding at December 31, 2022 562,697 56.24 Granted 42,215 152.68 Exercised ( 254,353 ) 38.75 Forfeited ( 3,737 ) 129.43 Outstanding at December 31, 2023 346,822 80.02 Of the total outstanding options at December 31, 2023, 0.3 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $ 67.07 per share and a weighted average remaining contractual life of 3.1 years. The table below presents additional information related to our stock options: Year Ended December 31, (in thousands, except per share data) 2023 2022 2021 Fair value of options vested $ 1,966 $ 1,996 $ 2,509 Intrinsic value of options exercised 31,227 16,705 27,713 Intrinsic value of options outstanding 39,474 40,692 66,235 Weighted-average fair value per share of options granted 56.47 41.34 31.31 SPS COMMERCE, INC. 56 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents The fair values of the options granted were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Year Ended December 31, 2023 2022 2021 Life (in years) 4.2 4.3 4.4 Volatility 39 % 38 % 35 % Dividend yield — — — Risk-free interest rate 4.00 % 2.50 % 0.59 % Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units In 2023, 2022, and 2021 we granted PSU awards with certain target performance levels. 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. Expense is recognized on a straight-line basis over the performance period, regardless of whether the market condition is satisfied as the likelihood of the market condition being met is included in the fair-value measurement of the award. In 2023 , PSU awards granted in 2020 were earned and vested at the maximum performance level and less than 0.2 million shares of common stock were issued. RSUs generally vest over four years and, upon vesting, the holder is entitled to receive shares of our common stock. RSAs vest over one year and, upon vesting, the holder is entitled to receive shares of our common stock. In lieu of RSAs, a participant may elect to receive DSUs with one year vesting, but the participant directs delayed receipt of common shares of up to ten years after the end of service to us. Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows: # Weighted Average Grant Date Fair Value ($/share) Outstanding at December 31, 2020 738,422 52.37 Granted 314,290 101.85 Vested and common stock issued ( 331,669 ) 44.14 Forfeited ( 18,883 ) 66.35 Outstanding at December 31, 2021 702,160 78.03 Granted 312,880 126.44 Vested and common stock issued ( 276,872 ) 64.12 Forfeited ( 26,010 ) 99.37 Outstanding at December 31, 2022 712,158 103.93 Granted 416,377 163.55 Vested and common stock issued ( 344,087 ) 77.52 Forfeited ( 11,034 ) 122.97 Outstanding at December 31, 2023 773,414 147.50 The number of PSUs, RSUs, RSAs, and DSUs outstanding at December 31, 2023 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 agreements. SPS COMMERCE, INC. 57 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Employee Stock Purchase Plan Our ESPP activity was as follows: Year Ended December 31, (in thousands, except share data) 2023 2022 2021 Amounts for shares purchased $ 8,114 $ 6,676 $ 4,737 Shares purchased 63,641 70,107 55,726 A total of 1.7 million shares of common stock are remaining for issuance under the plan at December 31, 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: Year Ended December 31, 2023 2022 2021 Life (in years) 0.5 0.5 0.5 Volatility 36 % 42 % 32 % Dividend yield — — — Risk-free interest rate 4.92 % 1.27 % 0.07 % Note L – Income Taxes Our provision for income taxes was comprised of the following components: Year Ended December 31, (in thousands) 2023 2022 2021 Current Federal $ 20,168 $ 13,881 $ 1,559 State 4,221 4,149 1,890 Foreign 2,103 1,990 1,610 Deferred Federal ( 5,425 ) ( 2,530 ) 4,294 State ( 390 ) ( 751 ) ( 88 ) Foreign ( 938 ) ( 549 ) ( 321 ) $ 19,739 $ 16,190 $ 8,944 Our income tax expense differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following: Year Ended December 31, 2023 2022 2021 U.S. statutory federal income tax rate 21.0 % 21.0 % 21.0 % Increase (decrease) resulting from: U.S. state income taxes, net of federal tax effect 5.1 4.6 4.5 Tax impact of stock activity ( 5.6 ) ( 4.7 ) ( 12.8 ) Nondeductible compensation 4.7 3.5 5.0 Research and development credit ( 1.5 ) ( 1.5 ) ( 1.1 ) Foreign derived intangible income ( 1.3 ) ( 1.4 ) ( 1.3 ) Other 0.7 1.2 1.4 Effective tax rate 23.1 % 22.7 % 16.7 % SPS COMMERCE, INC. 58 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents The significant components of our deferred income tax assets and liabilities were as follows: December 31, (in thousands) 2023 2022 Deferred income tax assets Net operating loss and credit carryforwards $ 10,212 $ 9,970 Stock-based compensation expense 6,304 5,084 Accrued expenses 6,067 4,469 Operating lease liabilities 3,470 4,384 Research and development capitalized 17,007 9,591 Other deferred income tax assets 2,705 2,408 Gross deferred income tax assets 45,765 35,906 Less: valuation allowance ( 2,545 ) ( 1,873 ) Total net deferred income tax assets $ 43,220 $ 34,033 Deferred income tax liabilities Deferred costs $ ( 20,672 ) $ ( 17,696 ) Right-of-use assets ( 1,884 ) ( 2,338 ) Depreciation and amortization ( 28,066 ) ( 20,282 ) Other deferred income tax liabilities ( 1,065 ) ( 909 ) Total deferred income tax liabilities ( 51,687 ) ( 41,225 ) Net deferred income tax liabilities $ ( 8,467 ) $ ( 7,192 ) As of December 31, 2023, we had net operating loss carryforwards of $ 28.9 million for U.S. federal tax purposes, $ 5.6 million for state tax purposes, and $ 9.8 million for foreign tax purposes. If not utilized, the loss carryforwards will expire between 2024 and 2036 for federal tax purposes, between 2024 and 2043 for state tax purposes, and will not expire for foreign tax purposes. Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. As of December 31, 2023, all $ 28.9 million of our federal net operating loss carryforwards are subject to Section 382 limitations, of which we believe $ 6.5 million will expire unused due to Section 382 limitations. Accordingly, our deferred income tax assets are reported net of the Section 382 limitations. We are subject to income taxes for U.S. federal and various state and international jurisdictions. We are generally subject to U.S. federal and state tax examinations for most prior tax years due to our net operating loss and R&D credit carryforwards and the utilization of the carryforwards in years still open under statute. NOTE M – Other Income and Expense Other income (expense), net included the following: Year Ended December 31, (in thousands) 2023 2022 2021 Investment income $ 7,660 $ 1,670 $ 278 Realized gain (loss) from foreign currency on cash and investments held 1,726 ( 1,026 ) ( 1,456 ) Other expense, net ( 1,071 ) ( 502 ) ( 366 ) Total other income (expense), net $ 8,315 $ 142 $ ( 1,544 ) SPS COMMERCE, INC. 59 Form 10-K for the Annual Period ended December 31, 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: Year Ended December 31, (in thousands, except per share amounts) 2023 2022 2021 Numerator Net income $ 65,824 $ 55,134 $ 44,597 Denominator Weighted average common shares outstanding, basic 36,646 36,117 35,928 Options to purchase common stock and ESPP 265 382 529 PSUs, RSUs, RSAs, and DSUs 564 454 505 Weighted average common shares outstanding, diluted 37,475 36,953 36,962 Net income per share Basic $ 1.80 $ 1.53 $ 1.24 Diluted $ 1.76 $ 1.49 $ 1.21 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: Year Ended December 31, (in thousands) 2023 2022 2021 Anti-dilutive shares 36 75 31 NOTE O – Retirement Contributions We sponsor a 401(k) retirement savings plan for our U.S. employees. Eligible employees can contribute up to 80 % of their compensation, subject to the limits established by law, and we match 50 % of the employee’s contribution up to the first 6 % of pre-tax annual compensation. A portion of our match is in Company stock, which is purchased from the open market by our plan provider and immediately deposited into the employee’s 401(k) account. Additionally, we make statutory contributions to retirement plans as required by local foreign government regulations. Our total contributions were as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Retirement contributions $ 6,627 $ 5,386 $ 4,790 NOTE P – Geographic Information Statements of Comprehensive Income The percentage of domestic revenue, which we define as consolidated revenue that was attributable to customers based within the U.S., and domestic income before income taxes, which we define as the percentage of consolidated income before income taxes that was attributable to our subsidiaries based in the U.S., were as follows: Year Ended December 31, 2023 2022 2021 Domestic revenue 84 % 84 % 84 % Domestic income before income taxes 94 % 91 % 89 % No single jurisdiction outside of the U.S. had revenues in excess of 10%. SPS COMMERCE, INC. 60 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Property and Equipment Property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows: December 31, 2023 2022 International property and equipment 15 % 13 % NOTE Q– Related Party Transactions The SPS Commerce Foundation (the “Foundation”) is a Minnesota non-profit organization exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code. The Foundation was formed in 2015 to engage in, advance, support, promote and administer charitable activities. The directors of the Foundation are also our executive officers. These directors receive no compensation from the Foundation or us for the management services performed for the Foundation. The Foundation is not a subsidiary of ours and the financial results of the Foundation are not consolidated with our financial statements. We have no current legal obligations for future commitments to the Foundation. Our contributions to the Foundation were as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Foundation contributions $ 2,300 $ 2,750 $ 2,400 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.