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Item 2. Management’s Discussion and Analysis

2024-07-25 compared with 2024-04-25 · 137 added, 39 removed, 145 unchanged (55% of the section changed)

26 unchanged sentences

Adjusted EBITDA and Adjusted EBITDA Margin are used to measure operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of capital structure and the method by which assets were acquired.

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 condensed consolidated financial statements and are subject to inherent

SPS COMMERCE, INC.

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

Form 10-Q for the Quarterly Period ended June 30, 2024

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 condensed 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.

Results of Operations

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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

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

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 Change

11 unchanged sentences

Income from operations 23,165 15 17,033 13 6,132 36

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

Other income, net 4,056 3 1,882 1 2,174 NM

Income before income taxes 27,221 18 18,915 15 8,306 44

Income tax expense 532 — 2,717 2 (2,185) (80)

Income tax expense 9,189 6 4,233 3 4,956 NM

Net income $ 18,032 12 % $ 14,682 11 % $ 3,350 23 %

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

Revenues - Revenues increased for the 93rd consecutive quarter.

(2) NM = not meaningful

Revenues - Revenues increased for the 94th 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 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.

• The number of recurring revenue customers increased 5% to approximately 44,950 at June 30, 2024 from approximately 43,000 at June 30, 2023, primarily d ue to sales and marketing efforts to acquire new customers and recent acquisitions.

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

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

Additionally, approximately 50 recurring revenue customers were added in May 2024 due to the acquisition of the existing customer base of Traverse Systems.

• Wallet share increased 13% to approximately $12,850 for the three months ended June 30, 2024 from approximately $11,350 for the same period in 2023.

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

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.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2024

Recurring revenues increased 18% to $144.0 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 .

Recurring revenues accounted for 94% of our total revenues for the three months ended June 30, 2024 compared to 93% for the same period in 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 $4.7 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 $3.9 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 $1.5 million in personnel-related costs.

General and Administrative Expenses - The increase in general and administrative expense was primarily due to increased headcount, which resulted in an increase of $1.9 million in personnel-related costs, partially offset by a decrease in stock-based compensation of $1.5 million.

Additionally, there was an increase in credit loss expense of $1.0 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, Net - The increase in other income, net was primarily due to increased investment income from favorable interest rates and realized gains due to favorable foreign currency exchange rates.

Income Tax Expense - The increase in income tax expense was primarily driven by an increase in pre-tax income, as well as decreases in the deductible excess tax benefits from current period equity award settlements and 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, and other adjustments as necessary for a fair presentation.

Other adjustments included the expense impact from 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:

Three Months Ended

(in thousands) 2024 2023

Net income $ 18,032 $ 14,682

Income tax expense 9,189 4,233

Depreciation and amortization of property and equipment 4,683 4,663

Amortization of intangible assets 4,840 3,479

Stock-based compensation expense 11,494 12,881

Realized gain from foreign currency on cash and investments held (1,255) (290)

Investment income (2,794) (1,611)

Adjusted EBITDA $ 44,189 $ 38,171

SPS COMMERCE, INC.

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

Form 10-Q for the Quarterly Period ended June 30, 2024

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.

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

Three Months Ended

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

Revenue $ 153,596 $ 130,416

Net income 18,032 14,682

Margin 12 % 11 %

Adjusted EBITDA 44,189 38,171

Adjusted EBITDA Margin 29 % 29 %

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

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.

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:

Three Months Ended

(in thousands, except per share amounts) 2024 2023

Net income $ 18,032 $ 14,682

Stock-based compensation expense 11,494 12,881

Amortization of intangible assets 4,840 3,479

Realized gain from foreign currency on cash and investments held (1,255) (290)

Income tax effects of adjustments (3,066) (5,199)

Non-GAAP income $ 30,045 $ 25,687

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

Basic 37,078 36,593

Diluted 37,683 37,426

Net income per share, basic $ 0.49 $ 0.40

Non-GAAP adjustments to net income per share, basic 0.32 0.30

Non-GAAP income per share, basic $ 0.81 $ 0.70

Net income per share, diluted $ 0.48 $ 0.39

Non-GAAP adjustments to net income per share, diluted 0.32 0.30

Non-GAAP income per share, diluted $ 0.80 $ 0.69

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2024

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

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

Six Months Ended June 30,

2024 2023 Change

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

$ % of revenue (1)

Revenues $ 303,172 100 % $ 256,284 100 % $ 46,888 18 %

Cost of revenues 103,505 34 87,508 34 15,997 18

Gross profit 199,667 66 168,776 66 30,891 18

Operating expenses

Sales and marketing 72,123 24 59,433 23 12,690 21

Research and development 30,375 10 25,880 10 4,495 17

General and administrative 49,423 16 42,369 17 7,054 17

Amortization of intangible assets 9,178 3 7,330 3 1,848 25

Total operating expenses 161,099 53 135,012 53 26,087 19

Income from operations 38,568 13 33,764 13 4,804 14

Other income, net 7,188 2 3,157 1 4,031 NM

Income before income taxes 45,756 15 36,921 14 8,835 24

Income tax expense 9,721 3 6,950 3 2,771 40

Net income $ 36,035 12 % $ 29,971 12 % $ 6,064 20 %

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

(2) NM = "not meaningful"

Revenues - Revenues increased for the 94th consecutive quarter.

The increase in revenue period-over-period resulted from two primary factors:

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

Additionally, approximately 50 recurring revenue customers were added in May 2024 due to the acquisition of the existing customer base of Traverse Systems.

• Wallet share increased 13% to approximately $12,650 for the six months ended June 30, 2024 from approximately $11,200 for the same period in 2023.

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

Recurring revenues increased 19% to $283,665 for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 .

Recurring revenues accounted for 94% of our total revenues for the six months ended June 30, 2024 compared to 93% for the same period in 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 $9.5 million in personnel-related costs, and an increase of $1.7 million in stock-based compensation.

Additionally, there was an increase in our software subscriptions of $1.9 million due primarily to the general growth of our business.

SPS COMMERCE, INC.

Form 10-Q for the Quarterly Period ended June 30, 2024

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $8.1 million in personnel-related costs, and an increase of $2.0 million in stock-based compensation.

1 unchanged sentence

General and Administrative Expenses - The increase in general and administrative expense was primarily due to increased headcount, which resulted in an increase of $3.4 million in personnel-related costs, and an increase of $1.7 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.

Additionally, there was an increase in credit loss expense of $2.0 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 adjustments included the expense impact from 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:

Three Months Ended

Six Months Ended

(in thousands) 2024 2023

7 unchanged sentences

Adjusted EBITDA $ 88,591 $ 75,171

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.

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 June 30, 2024

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

Three Months Ended

Six Months Ended

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

4 unchanged sentences

Adjusted EBITDA Margin 29 % 29 %

SPS COMMERCE, INC.

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.

2 unchanged sentences

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

Three Months Ended

Six Months Ended

(in thousands, except per share amounts) 2024 2023

15 unchanged sentences

SPS COMMERCE, INC.

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

Form 10-Q for the Quarterly Period ended June 30, 2024

Critical Accounting Policies and Estimates

6 unchanged sentences

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

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

During the six months ended June 30, 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.

1 unchanged sentence

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.

As of June 30, 2024, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $271.8 million and net accounts receivable of $55.4 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.

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

Statements of Cash Flows Summary

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

Three Months Ended

Six Months Ended

(in thousands) 2024 2023

3 unchanged sentences

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.

The increase in cash provided by operating activities from the six months ended June 30, 2023 to the six months ended June 30, 2024 was primarily due to an increase in net income as adjusted for non-cash expenses, of $ 14.4 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 a decrease of $6.6 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.

The decrease in cash used in investing activities from the six months ended June 30, 2023 to the six months ended June 30, 2024 was primarily due to an increase in cash provided by net maturities of investments of $ 34.6 million year-over-year, partially offset by an increase in cash used to acquire businesses of $ 29.3 million year-over-year to further grow our business.

SPS COMMERCE, INC.

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

Form 10-Q for the Quarterly Period ended June 30, 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.

The increase in cash used in financing activities from the six months ended June 30, 2023 to the six months ended June 30, 2024 was primarily due to an increase in cash used for share repurchases of $ 37.5 million year-over-year to continue to deliver shareholder value.

Contractual and Commercial Commitment Summary

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

Our contractual obligations and commercial commitments as o f June 30, 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 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.

Inflation and changing prices did not have a material effect on our business during the six months ended June 30, 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

Form 10-Q for the Quarterly Period ended June 30, 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