What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-25 compared with 2023-10-26 · 51 added, 149 removed, 133 unchanged (60% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2023.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S.

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We have several key financial terms, metrics, and non-GAAP measures as discussed in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC, under the heading “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

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

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

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

Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

Form 10-Q for the Quarterly Period ended March 31, 2024

Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

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

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 Change

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Income from operations 15,403 10 16,730 13 (1,327) (8)

Other income (expense), net 1,702 1.3 (695) (0.6) 2,397 (344.9)

Other income, net 3,132 2 1,276 1 1,856 145

Income before income taxes 18,535 12 18,006 14 529 3

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

Revenues - Revenues increased for the 91st consecutive quarter.

The increase in revenue resulted from two primary factors:

Revenues - Revenues increased for the 93rd consecutive quarter.

The increase in revenue period-over-period 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 44,500 at September 30, 2023 from 39,550 at September 30, 2022 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.

• Wallet share increased 7% to $11,650 for the three months ended September 30, 2023 from $10,900 for the same period in 2022.

• The number of recurring revenue customers increased 5% to approximately 44,800 at March 31, 2024 from approximately 42,750 at March 31, 2023, primarily d ue to sales and marketing efforts to acquire new customers and recent acquisitions.

New customers do not have a meaningful contribution to revenue at the beginning of their tenure as our customer, and therefore a majority of the increased revenue was generated from existing customers.

• Approximately 1,000 customers were added in September 2023 due to the acquisition of the existing customer base of TIE Kinetix.

• Wallet share increased 13% to approximately $12,450 for the three months ended March 31, 2024 from approximately $11,050 for the same period in 2023.

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

Recurring revenues increased 20% to $127.4 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Recurring revenues accounted for 94% of our total revenues for the three months ended September 30, 2023 compared to 93% for the three months ended September 30, 2022 .

Recurring revenues increased 19% to $139.7 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 .

Recurring revenues accounted for 93% of our total revenues for the three months ended March 31, 2024 and 2023.

We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we execute our growth strategy focused on further penetration of our market.

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $5.5 million in personnel-related costs.

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $3.2 million in personnel-related costs.

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $1.8 million in personnel-related costs.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

General and Administrative Expenses - The increase in general and administrative expense was primarily related to increased stock-based compensation of $2.1 million.

Additionally, the increase was due to supporting continued business growth, including an increase in headcount which resulted in an increase in personnel-related costs of $1.8 million.

Finally, there was an increase in credit loss expense of $1.3 million due primarily to overall business growth.

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

Other Income (Expense), Net - The increase in other income (expense), net was primarily due to favorable investment returns and foreign currency exchange rate changes.

Income Tax Expense - The increase in income tax expense was primarily driven by the increase in pre-tax income, and reduction in the excess tax deductions from the current period equity award settlements as compared to prior year.

Form 10-Q for the Quarterly Period ended March 31, 2024

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $4.7 million in personnel-related costs, and an increase of $1.6 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 $4.2 million in personnel-related costs, and an increase of $2.0 million in stock-based compensation.

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $1.5 million in personnel-related costs, and an increase of $1.5 million in stock-based compensation.

General and Administrative Expenses - The increase in general and administrative expense was primarily due to increased headcount, which resulted in an increase of $1.6 million in personnel-related costs, and an increase of $3.2 million in stock-based compensation.

Amortization of Intangible Assets - No significant changes.

Other Income, Net - The increase was primarily due to increased investment income from favorable interest rates.

Income Tax Expense - The decrease in income tax expense was primarily driven by an increase in the excess tax benefits due to the current period equity award settlements and an increase in deductible compensation.

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.

Other adjustments included the expense impact from acquisition-related employee severance costs.

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, and other adjustments as necessary for a fair presentation.

Net income is the comparable GAAP measure of financial performance.

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Three Months Ended

September 30,

(in thousands) 2024 2023

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Stock-based compensation expense 20,018 11,780

Realized (gain) loss from foreign currency on cash and investments held (98) 1,151

Realized gain from foreign currency on cash and investments held (304) (137)

Investment income (2,879) (1,127)

Other 1,036 —

Adjusted EBITDA $ 44,402 $ 36,999

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended March 31, 2024

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

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Three Months Ended

September 30,

(in thousands, except Margin and Adjusted EBITDA Margin) 2024 2023

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SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

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 impact from acquisition-related employee severance costs, 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.

Form 10-Q for the Quarterly Period ended March 31, 2024

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.

Net income per share, the comparable GAAP measure of financial performance, consists of net income divided by the weighted average number of shares of common and diluted stock outstanding during each period.

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Three Months Ended

September 30,

(in thousands, except per share amounts) 2024 2023

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Amortization of intangible assets 4,338 3,851

Realized (gain) loss from foreign currency on cash and investments held (98) 1,151

Other 1,036 —

Income tax effects of adjustments (4,981) (4,866)

Non-GAAP income $ 28,023 $ 23,106

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

Basic 36,728 36,093

Diluted 37,584 36,915

Net income per share, basic $ 0.46 $ 0.44

Non-GAAP adjustments to net income per share, basic 0.30 0.20

Non-GAAP income per share, basic $ 0.76 $ 0.64

Net income per share, diluted $ 0.45 $ 0.43

Non-GAAP adjustments to net income per share, diluted 0.30 0.20

Non-GAAP income per share, diluted $ 0.75 $ 0.63

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

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

Nine Months Ended September 30,

2023 2022 Change

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

$ % of revenue (1)

Revenues $ 391,945 100.0 % $ 328,857 100.0 % $ 63,088 19.2 %

Cost of revenues 133,029 33.9 111,524 33.9 21,505 19.3

Gross profit 258,916 66.1 217,333 66.1 41,583 19.1

Operating expenses

Sales and marketing 89,722 22.9 74,571 22.7 15,151 20.3

Research and development 39,438 10.1 33,268 10.1 6,170 18.5

General and administrative 64,275 16.4 49,390 15.0 14,885 30.1

Amortization of intangible assets 11,118 2.8 7,936 2.4 3,182 40.1

Total operating expenses 204,553 52.2 165,165 50.2 39,388 23.8

Income from operations 54,363 13.9 52,168 15.9 2,195 4.2

Other income (expense), net 4,859 1.2 (1,610) (0.5) 6,469 (401.8)

Income before income taxes 59,222 15.1 50,558 15.4 8,664 17.1

Income tax expense 12,409 3.2 11,339 3.4 1,070 9.4

Net income $ 46,813 11.9 % $ 39,219 11.9 % $ 7,594 19.4 %

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

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

• Wallet share increased 7% to $11,250 for the nine months ended September 30, 2023 from $10,550 for the same period in 2022.

The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

Recurring revenues increased 20% to $366.2 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Recurring revenues from recurring revenue customers accounted for 93% of our total revenues for the nine months ended September 30, 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 increases of $16.3 million in personnel-related costs and $2.0 million of software subscriptions.

Additionally, the increase was due to a $1.1 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 $10.2 million in personnel-related costs and $1.9 million in variable compensation earned by sales personnel and referral partners.

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

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $4.1 million in personnel-related costs.

Additionally, the increase was due to a $1.1 million increase in stock-based compensation.

General and Administrative Expenses - The increase in general and administrative expense was primarily related to increased stock-based compensation of $6.7 million.

Additionally, the increase was due to supporting continued business growth, including an increase in headcount which resulted in an increases in personnel-related costs of $4.3 million and software subscriptions of $1.0 million.

Finally, there was an increase in credit loss expense of $1.1 million due primarily to overall business growth.

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

Other Income (Expense), Net - The increase in other income (expense), net was primarily due to favorable investment returns and foreign currency exchange rate changes.

Income Tax Expense - The increase in income tax expense was primarily driven by the increase in pre-tax income, as partially offset by the change in the excess tax deductions due to the current period equity award settlements.

Other 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:

Nine Months Ended

September 30,

(in thousands) 2023 2022

Net income $ 46,813 $ 39,219

Income tax expense 12,409 11,339

Depreciation and amortization of property and equipment 13,964 11,983

Amortization of intangible assets 11,118 7,936

Stock-based compensation expense 36,097 25,636

Realized (gain) loss from foreign currency on cash and investments held (525) 2,010

Investment income (5,372) (806)

Other 1,170 —

Adjusted EBITDA $ 115,674 $ 97,317

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

Margin, the comparable GAAP measure of financial performance, consists of net income divided by revenue.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

The following table provides a comparison of Margin to Adjusted EBITDA Margin:

Nine Months Ended

September 30,

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

Revenue $ 391,945 $ 328,857

Net income 46,813 39,219

Margin 12 % 12 %

Adjusted EBITDA 115,674 97,317

Adjusted EBITDA Margin 30 % 30 %

Non-GAAP Income per Share - Non-GAAP income per share consists of net income adjusted for stock-based compensation expense, amortization expense related to intangible assets, realized gain or loss from foreign currency on cash and investments held, other adjustments as necessary for a fair presentation, 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.

To quantify the tax effects, we recalculated income tax expense excluding the direct book and tax effects of the specific items constituting the non-GAAP adjustments.

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

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

Nine Months Ended

September 30,

(in thousands, except per share amounts) 2023 2022

Net income $ 46,813 $ 39,219

Stock-based compensation expense 36,097 25,636

Amortization of intangible assets 11,118 7,936

Realized (gain) loss from foreign currency on cash and investments held (525) 2,010

Other 1,170 —

Realized gain from foreign currency on cash and investments held (304) (137)

Income tax effects of adjustments (9,554) (5,909)

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SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

Form 10-Q for the Quarterly Period ended March 31, 2024

Critical Accounting Policies and Estimates

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

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

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

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

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

During the nine months ended September 30, 2023, there were no changes in our critical accounting policies or estimates.

During the three months ended March 31, 2024, there were no changes in our critical accounting policies or estimates.

For additional information regarding our critical accounting policies and estimates, see the discussion under "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.

Liquidity and Capital Resources

As of September 30, 2023 , our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $239.3 million and net accounts receivable of $45.1 million.

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

Sources of Liquidity

As of March 31, 2024, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $290.8 million and net accounts receivable of $52.1 million.

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 money market funds, certificates of deposits, and commercial paper.

Statements of Cash Flows Summary

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

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2024 2023

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Net cash provided by (used in) financing activities (14,889) 2,425

Net Cash Flows from Operating Activities

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

Net Cash Flows from Investing Activities

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

Net Cash Flows from Financing Activities

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

Operating Activities

The increase in cash provided by operating activities from the three months ended March 31, 2023 to the three months ended March 31, 2024 was primarily due to an increase in net income as adjusted for non-cash expenses, of $ 8.9 million, driven by continued growth in revenue, as partially offset by growth in cash paid for expenses to operate the growing business.

Additionally, fluctuations in operating assets and liabilities resulted in an increase of $3.6 million, driven by changes in the amount and timing of settlements and general growth of the business.

Investing Activities

The decrease in cash used in investing activities from the three months ended March 31, 2023 to the three months ended March 31, 2024 was primarily due to a decrease in cash used to purchase property and equipment of $ 1.7 million year-over-year.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended September 30, 2023

Form 10-Q for the Quarterly Period ended March 31, 2024

Financing Activities

Given our financing activities are not a direct result of servicing our customers, the increase in cash used in financing activities from the three months ended March 31, 2023 to the three months ended March 31, 2024 was primarily due to an increase in cash used for share repurchases of $ 16.5 million year-over-year to continue to deliver shareholder value.

Contractual and Commercial Commitment Summary

Our contractual obligations and commercial commitments as o f September 30, 2023 are summarized below:

Our contractual obligations and commercial commitments as o f March 31, 2024 are summarized below:

Payments Due by Period

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For information regarding the effect of foreign currency exchange rate changes, refer to the section entitled “Foreign Currency Exchange Risk,” included in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q.

Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2023 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

Inflation and changing prices did not have a material effect on our business during the three months ended March 31, 2024 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended March 31, 2024

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis