SPS COMMERCE INC 10-Q

Item 1. Financial Statements SPS COMMERCE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares) June 30, 2024 December 31, 2023 ASSETS (unaudited) Current assets Cash and cash equivalents $ 240,232 $ 219,081 Short-term investments 31,554 56,359 Accounts receivable 59,355 50,160 Allowance for credit losses ( 3,958 ) ( 3,320 ) Accounts receivable, net 55,397 46,840 Deferred costs 64,318 62,403 Other assets 15,437 16,758 Total current assets 406,938 401,441 Property and equipment, net 35,083 36,043 Operating lease right-of-use assets 7,076 7,862 Goodwill 268,872 249,176 Intangible assets, net 107,519 107,344 Other assets Deferred costs, non-current 20,610 20,347 Deferred income tax assets 7,347 505 Other assets, non-current 1,076 1,126 Total assets $ 854,521 $ 823,844 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 5,877 $ 7,420 Accrued compensation 32,236 41,588 Accrued expenses 9,446 8,014 Deferred revenue 76,393 69,187 Operating lease liabilities 4,594 4,460 Total current liabilities 128,546 130,669 Other liabilities Deferred revenue, non-current 7,111 6,930 Operating lease liabilities, non-current 7,751 9,569 Deferred income tax liabilities 7,012 8,972 Other liabilities, non-current 680 229 Total liabilities 151,100 156,369 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; 39,419,726 and 38,971,146 shares issued; and 37,086,627 and 36,820,048 shares outstanding, respectively 39 39 Treasury stock, at cost; 2,333,099 and 2,151,098 shares, respectively ( 162,187 ) ( 128,892 ) Additional paid-in capital 574,842 537,061 Retained earnings 295,080 259,045 Accumulated other comprehensive gain (loss) ( 4,353 ) 222 Total stockholders’ equity 703,421 667,475 Total liabilities and stockholders’ equity $ 854,521 $ 823,844 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 3 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents SPS COMMERCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) (unaudited) 2024 2023 2024 2023 Revenues $ 153,596 $ 130,416 $ 303,172 $ 256,284 Cost of revenues 52,018 44,544 103,505 87,508 Gross profit 101,578 85,872 199,667 168,776 Operating expenses Sales and marketing 35,691 30,349 72,123 59,433 Research and development 14,366 13,318 30,375 25,880 General and administrative 23,516 21,693 49,423 42,369 Amortization of intangible assets 4,840 3,479 9,178 7,330 Total operating expenses 78,413 68,839 161,099 135,012 Income from operations 23,165 17,033 38,568 33,764 Other income, net 4,056 1,882 7,188 3,157 Income before income taxes 27,221 18,915 45,756 36,921 Income tax expense 9,189 4,233 9,721 6,950 Net income $ 18,032 $ 14,682 $ 36,035 $ 29,971 Other comprehensive income (expense) Foreign currency translation adjustments ( 901 ) 1,615 ( 4,218 ) 1,520 Unrealized gain on investments, net of tax of $ 164 , $ 136 , $ 335 and $ 269 , respectively 491 408 1,004 806 Reclassification of gain on investments into earnings, net of tax of $( 238 ), $( 127 ), $( 454 ) and $( 252 ), respectively ( 715 ) ( 381 ) ( 1,361 ) ( 757 ) Total other comprehensive income (expense) ( 1,125 ) 1,642 ( 4,575 ) 1,569 Comprehensive income $ 16,907 $ 16,324 $ 31,460 $ 31,540 Net income per share Basic $ 0.49 $ 0.40 $ 0.97 $ 0.82 Diluted $ 0.48 $ 0.39 $ 0.96 $ 0.80 Weighted average common shares used to compute net income per share Basic 37,078 36,593 37,063 36,511 Diluted 37,683 37,426 37,690 37,327 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 4 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents SPS COMMERCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity (in thousands, except shares) (unaudited) Shares Amount Shares Amount Balances, March 31, 2023 36,532,756 $ 39 2,151,098 $ ( 128,892 ) $ 489,716 $ 208,510 $ ( 3,484 ) $ 565,889 Stock-based compensation — — — — 12,237 — — 12,237 Shares issued pursuant to stock awards 78,387 — — — 2,636 — — 2,636 Employee stock purchase plan activity 35,676 — — — 3,895 — — 3,895 Net income — — — — — 14,682 — 14,682 Foreign currency translation adjustments — — — — — — 1,615 1,615 Unrealized gain on investments, net of tax — — — — — — 408 408 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 381 ) ( 381 ) Balances, June 30, 2023 36,646,819 $ 39 2,151,098 $ ( 128,892 ) $ 508,484 $ 223,192 $ ( 1,842 ) $ 600,981 Balances, March 31, 2024 37,049,001 $ 39 2,260,578 $ ( 148,892 ) $ 557,998 $ 277,048 $ ( 3,228 ) $ 682,965 Stock-based compensation — — — — 10,793 — — 10,793 Shares issued pursuant to stock awards 79,962 — — — 1,054 — — 1,054 Employee stock purchase plan activity 30,185 — — — 4,828 — — 4,828 Repurchases of common stock, net of costs ( 95,395 ) — 95,395 ( 17,483 ) — — — ( 17,483 ) Reissuances of treasury stock 22,874 — ( 22,874 ) 4,188 169 — — 4,357 Net income — — — — — 18,032 — 18,032 Foreign currency translation adjustments — — — — — — ( 901 ) ( 901 ) Unrealized gain on investments, net of tax — — — — — — 491 491 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 715 ) ( 715 ) Balances, June 30, 2024 37,086,627 $ 39 2,333,099 $ ( 162,187 ) $ 574,842 $ 295,080 $ ( 4,353 ) $ 703,421 SPS COMMERCE, INC. 5 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Gain (Loss) Total Stockholders' Equity (in thousands, except shares) (unaudited) Shares Amount Shares Amount Balances, December 31, 2022 36,158,046 $ 38 2,151,098 $ ( 128,892 ) $ 476,117 $ 193,221 $ ( 3,411 ) $ 537,073 Stock-based compensation — — — — 23,412 — — 23,412 Shares issued pursuant to stock awards 450,548 1 — — 4,819 — — 4,820 Employee stock purchase plan activity 38,225 — — — 4,136 — — 4,136 Net income — — — — — 29,971 — 29,971 Foreign currency translation adjustments — — — — — — 1,520 1,520 Unrealized gain on investments, net of tax — — — — — — 806 806 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 757 ) ( 757 ) Balances, June 30, 2023 36,646,819 $ 39 2,151,098 $ ( 128,892 ) $ 508,484 $ 223,192 $ ( 1,842 ) $ 600,981 Balances, December 31, 2023 36,820,048 $ 39 2,151,098 $ ( 128,892 ) $ 537,061 $ 259,045 $ 222 $ 667,475 Stock-based compensation — — — — 30,078 — — 30,078 Shares issued pursuant to stock awards 415,997 — — — 2,315 — — 2,315 Employee stock purchase plan activity 32,583 — — — 5,219 — — 5,219 Repurchases of common stock, net of costs ( 204,875 ) — 204,875 ( 37,483 ) — — — ( 37,483 ) Reissuances of treasury stock 22,874 — ( 22,874 ) 4,188 169 — — 4,357 Net income — — — — — 36,035 — 36,035 Foreign currency translation adjustments — — — — — — ( 4,218 ) ( 4,218 ) Unrealized gain on investments, net of tax — — — — — — 1,004 1,004 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 1,361 ) ( 1,361 ) Balances, June 30, 2024 37,086,627 $ 39 2,333,099 $ ( 162,187 ) $ 574,842 $ 295,080 $ ( 4,353 ) $ 703,421 See accompanying notes to these condensed consolidated financial statements. . SPS COMMERCE, INC. 6 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents SPS COMMERCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (in thousands) (unaudited) 2024 2023 Cash flows from operating activities Net income $ 36,035 $ 29,971 Reconciliation of net income to net cash provided by operating activities Deferred income taxes ( 8,172 ) ( 8,654 ) Depreciation and amortization of property and equipment 9,377 9,289 Amortization of intangible assets 9,178 7,330 Provision for credit losses 3,646 2,491 Stock-based compensation 31,512 24,661 Other, net ( 907 ) 1,143 Changes in assets and liabilities, net of effects of acquisitions Accounts receivable ( 11,407 ) ( 9,937 ) Deferred costs ( 1,996 ) ( 5,136 ) Other assets and liabilities 1,899 3,614 Accounts payable ( 1,450 ) ( 4,414 ) Accrued compensation ( 10,763 ) ( 2,910 ) Accrued expenses 1,489 ( 728 ) Deferred revenue 5,965 9,909 Operating leases ( 900 ) ( 959 ) Net cash provided by operating activities 63,506 55,670 Cash flows from investing activities Purchases of property and equipment ( 8,592 ) ( 9,769 ) Purchases of investments ( 78,994 ) ( 68,579 ) Maturities of investments 105,000 60,000 Acquisition of businesses, net ( 29,343 ) — Net cash used in investing activities ( 11,929 ) ( 18,348 ) Cash flows from financing activities Repurchases of common stock ( 37,483 ) — Net proceeds from exercise of options to purchase common stock 2,314 4,819 Net proceeds from employee stock purchase plan activity 5,219 4,136 Net cash provided by (used in) financing activities ( 29,950 ) 8,955 Effect of foreign currency exchange rate changes ( 476 ) 94 Net increase in cash and cash equivalents 21,151 46,371 Cash and cash equivalents at beginning of period 219,081 162,893 Cash and cash equivalents at end of period $ 240,232 $ 209,264 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 7 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents SPS COMMERCE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A – General Business Description SPS Commerce is a leading provider of cloud-based supply chain management services across our global retail network. Our products make it easier for retailers, grocers, distributors, suppliers, and logistics firms to communicate and collaborate by simplifying how they manage and share item, inventory, order and sales data across omnichannel retail channels. We deliver our products using a full-service model, which includes industry-leading technology and a team of experts that optimize, update, and operate the technology on customers' behalf. Our products enable customers to increase supply chain performance, optimize inventory levels and sell-through, reduce operational costs, improve order visibility, and satisfy consumer demands for a seamless omnichannel experience. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of SPS Commerce, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. This interim financial information has been prepared under the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission (“SEC”). We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations, stockholders’ equity, and cash flows for the interim periods presented. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year. Use of Estimates Preparing financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant Accounting Policies There were no material changes in our significant accounting policies during the six months ended June 30, 2024 . See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 , as filed with the SEC, for additional information regarding our significant accounting policies. Accounting Pronouncements Recently Issued and Adopted Standard Date of Issuance Description Date of Adoption Effect on the Financial Statements 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. 2024 The adoption will result in additional disclosure in our Annual Report on Form 10-K for the year ended December 31, 2024. 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. 2025 We are currently evaluating the adoption on our financial statements and anticipate the impact will result in additional disclosure. SPS COMMERCE, INC. 8 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents NOTE B – Business Acquisitions Traverse Systems Effective May 8, 2024, we entered into an asset purchase agreement to acquire certain assets of Traverse Systems LLC ("Traverse Systems"), an industry-leading provider in retailer supply chain performance and vendor management. Total consideration transferred at close was $ 29.4 million, subject to customary post-close adjustments, which was comprised of $ 25.0 million paid in cash and 22,874 shares of SPS common stock (valued at $ 4.4 million, determined based on the opening price of SPS common stock at acquisition date). The shares were issued from SPS treasury shares, see Note J - Stockholders' Equity for further detail on the treasury share reissuance. 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. Assets acquired primarily comprised of subscriber relationships and developed technology intangible assets, totaling $ 7.7 million and $ 3.6 million of estimated fair value, respectively, and $ 18.4 million was allocated to goodwill based on preliminary measurement. The remainder of the consideration transferred was allocated to net assets acquired other than the intangible assets. The purchase accounting for the acquisition has not been finalized as of June 30, 2024; provisional amounts are primarily related to intangible assets. We will finalize the allocation of the purchase price within the one-year measurement period following the acquisition. The goodwill associated with the acquisition is deductible for income tax purposes. 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 ("U.S."). 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 was finalized as of June 30, 2024. 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 presents the purchase consideration and fair values of acquired assets and liabilities recorded in the Company's condensed consolidated balance sheet as of the acquisition date: (in thousands) Cash paid $ 73,558 Estimated fair value of assets and liabilities acquired: Cash $ 4,859 Accounts receivable 1,311 Other assets 3,717 Intangible assets Subscriber relationships 24,952 Developed technology 9,349 Current liabilities ( 3,838 ) Deferred revenue ( 6,421 ) Deferred income tax liabilities, net ( 6,791 ) Total fair value of assets and liabilities acquired $ 27,138 Goodwill $ 46,420 SPS COMMERCE, INC. 9 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents The following table summarizes the estimated useful lives for each acquired intangible asset: Estimated Useful Life Subscriber relationships 8.0 years Developed technology 7.0 years Other Acquisition Activity Effective April 10, 2024, the Company entered into an asset purchase agreement to acquire Vision33's SAP Business One SPS Integration Technology. Pursuant to the definitive agreement, the purchase price, denominated in Canadian dollars ("CAD"), was $ 5.8 million CAD ($ 4.3 million U.S. dollars ["USD"] at the Agreement date exchange rate), of which $ 4.5 million CAD ($ 3.3 million USD) was paid in cash at close, with the remainder payable in cash within two years , subject to certain closing conditions. Assets acquired were primarily comprised of developed technology and subscriber relationships, totaling $ 1.7 million USD and $ 0.4 million USD of estimated fair value, respectively. The remainder of the consideration transferred, $ 2.2 million USD, was allocated to goodwill. The goodwill associated with the acquisition is deductible for income tax purposes. NOTE C – Revenue We derive our revenues from the following revenue streams: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Recurring revenues: Fulfillment $ 125,512 $ 105,500 $ 247,365 $ 207,169 Analytics 13,510 12,709 27,524 25,079 Other 4,959 3,314 8,776 6,576 Recurring revenues 143,981 121,523 283,665 238,824 One-time revenues 9,615 8,893 19,507 17,460 Total revenue $ 153,596 $ 130,416 $ 303,172 $ 256,284 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. Revenue by Geographic Area Domestic revenue, which we define as revenue that was attributable to customers based within the U.S., was as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Domestic revenue 83 % 84 % 83 % 84 % No single jurisdiction outside of the U.S. had revenues in excess of 10%. Recurring Revenues Recurring revenues consist of recurring subscriptions from customers that utilize our Fulfillment, Analytics, and Other supply chain management products. Revenue for these products is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our contracts with our recurring revenue customers are recurring in nature, generally ranging from monthly to annual, and generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice. Timing of billings varies by customer and by contract type and generally are either in advance or within 30 days of the service being performed. Given that the recurring revenue contracts are for one year or less, we have applied the optional exemption to not disclose information about the remaining performance obligations for recurring revenue contracts. SPS COMMERCE, INC. 10 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents One-time Revenues One-time revenues consist of set-up fees and miscellaneous fees from customers. Set-up revenues Set-up fees are specific for each connection a customer has with a trading partner. These nonrefundable fees are necessary for our customers to utilize our services and do not provide any standalone value. Many of our customers have connections with numerous trading partners. Set-up fees constitute a material renewal option right that provide customers a significant future incentive that would not be otherwise available to that customer unless they entered into the contract, as the set-up fees will not be incurred again upon contract renewal. As such, set-up fees and related costs are deferred and recognized ratably 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: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Balance, beginning of period $ 17,418 $ 15,287 $ 17,603 $ 14,999 Invoiced set-up fees 5,353 5,739 9,520 9,990 Recognized set-up fees ( 4,411 ) ( 4,048 ) ( 8,763 ) ( 8,011 ) Balance, end of period $ 18,360 $ 16,978 $ 18,360 $ 16,978 Miscellaneous one-time revenues Miscellaneous one-time fees consist of professional services and testing and certification. The contract period for these one-time fees is for one year or less and recognized at the time service is provided. We have applied the optional exemption to not disclose information about the remaining performance obligations for miscellaneous one-time fee contracts since they have original durations of one year or less. NOTE D – Deferred Costs The deferred costs activity was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Balance, beginning of period $ 84,248 $ 71,809 $ 82,750 $ 70,179 Incurred deferred costs 23,022 19,304 44,952 37,538 Amortized deferred costs ( 22,342 ) ( 15,858 ) ( 42,774 ) ( 32,462 ) Balance, end of period $ 84,928 $ 75,255 $ 84,928 $ 75,255 SPS COMMERCE, INC. 11 Form 10-Q for the Quarterly Period ended June 30, 2024 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: June 30, 2024 December 31, 2023 Fair Value Level Amortized Cost Unrealized Gains (Losses), net Fair Value Fair Value Level Amortized Cost Unrealized Gains (Losses), net Fair Value (in thousands) Cash equivalents: Money market funds Level 1 $ 187,559 $ — $ 187,559 Level 1 $ 161,233 $ — $ 161,233 Investments: Certificates of deposit Level 2 6,666 — 6,666 Level 1 6,805 — 6,805 Marketable securities: Commercial paper Level 2 24,669 219 24,888 Level 2 48,860 694 49,554 $ 218,894 $ 219 $ 219,113 $ 216,898 $ 694 $ 217,592 NOTE F – Allowance for Credit Losses The allowance for credit losses activity, included in accounts receivable, net, was as follows: Six Months Ended June 30, (in thousands) 2024 2023 Balance, beginning of period $ 3,320 $ 3,066 Provision for credit losses 3,646 2,491 Write-offs, net of recoveries ( 3,008 ) ( 2,457 ) Balance, end of period $ 3,958 $ 3,100 NOTE G – Property and Equipment, Net Property and equipment, net consisted of the following: (in thousands) June 30, 2024 December 31, 2023 Internally developed software $ 64,731 $ 60,396 Computer equipment 35,205 34,402 Leasehold improvements 15,363 15,387 Office equipment and furniture 10,883 10,966 Property and equipment, cost 126,182 121,151 Less: accumulated depreciation and amortization ( 91,099 ) ( 85,108 ) Total property and equipment, net $ 35,083 $ 36,043 Property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows: June 30, 2024 December 31, 2023 International property and equipment 17 % 15 % SPS COMMERCE, INC. 12 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents NOTE H – Goodwill and Intangible Assets, Net Goodwill The activity in goodwill was as follows: (in thousands) Six Months Ended June 30, 2024 Balance, beginning of period $ 249,176 Addition from business acquisitions 20,564 Foreign currency translation ( 2,685 ) Remeasurement from provisional purchase accounting amount 1,817 Balance, end of period $ 268,872 Intangible Assets Intangible assets, net consisted of the following: June 30, 2024 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 109,923 $ ( 37,983 ) $ ( 851 ) $ 71,089 6.5 years Developed technology 56,018 ( 19,217 ) ( 371 ) 36,430 5.1 years $ 165,941 $ ( 57,200 ) $ ( 1,222 ) $ 107,519 6.0 years 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 The estimated future annual amortization expense related to intangible assets is as follows: (in thousands) Remainder of 2024 $ 9,908 2025 19,689 2026 18,685 2027 18,211 2028 16,873 Thereafter 24,153 Total future amortization $ 107,519 SPS COMMERCE, INC. 13 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents NOTE I – Commitments and Contingencies Leases The components of lease expense were as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Operating lease cost $ 798 $ 779 $ 1,612 $ 1,578 Variable lease cost 965 950 1,919 1,878 $ 1,763 $ 1,729 $ 3,531 $ 3,456 Supplemental cash flow information related to leases was as follows: Six Months Ended June 30, (in thousands) 2024 2023 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,423 $ 1,329 Right-of-use assets obtained in exchange for operating lease liabilities 533 268 Supplemental balance sheet information related to operating leases was as follows: June 30, 2024 December 31, 2023 Weighted-average remaining lease term 2.8 years 3.1 years Weighted-average discount rate 4.1 % 4.0 % At June 30, 2024, our future minimum payments under operating leases were as follows: (in thousands) Remainder of 2024 $ 3,047 2025 4,307 2026 4,082 2027 1,435 Thereafter 222 Total future gross payments $ 13,093 Less: imputed interest ( 748 ) Total operating lease liabilities $ 12,345 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 June 30, 2024, our remaining purchase commitments and estimated purchase timing were as follows: (in thousands) Remainder of 2024 $ 5,779 2025 14,187 2026 5,244 Total estimated future purchases $ 25,210 SPS COMMERCE, INC. 14 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents NOTE J – Stockholders’ Equity Share Repurchase Programs Our board of directors has authorized a program to repurchase our common stock. Details of the program and activity thereunder through June 30, 2024 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 2022 Program August 2022 July 2024 $ 50,000 $ 40,471 N/A $ 9,529 Share repurchases are accounted for as the trade date occurs and are reflected in the condensed consolidated financial statements net of the costs incurred to acquire the shares. Share repurchases that have not yet settled in cash are included in accrued expenses in the condensed consolidated balance sheet. The share repurchase activity by period was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except shares and per share amounts) 2024 2023 2024 2023 Number of shares repurchased 95,395 — 204,875 — Total share repurchased cost $ 17,483 $ — $ 37,483 $ — Average total cost per repurchased share $ 183.27 $ — $ 182.96 $ — On July 24, 2024 (announced July 25, 2024), our board of directors authorized a program to repurchase up to $ 100.0 million of our common stock, excluding costs to obtain. Under the program, purchases may be made from time to time in the open market or in privately negotiated purchases, or both. The share repurchase program will become effective August 23, 2024 and expires on July 24, 2026. Treasury Stock Reissuance In connection with the acquisition of Traverse Systems, the Company re-issued treasury shares as part of the purchase consideration (see Note B – Business Combinations for further information). Treasury stock reissuances are accounted for using the specific identification method, with gains (or losses to the extent of previously recognized gains) recognized in additional paid-in capital and any remaining loss recorded in retained earnings. NOTE K – Stock-Based Compensation Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as other stock-based awards including performance share units (“PSUs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and deferred stock units (“DSUs”), to employees, non-employee directors and other consultants who provide services to us. We also provide an employee stock purchase plan (“ESPP”) and 401(k) match to eligible participants. We recognize stock-based compensation expense based on grant date award fair value. This cost is recognized over the period for which the employee is required to provide service in exchange for the award or the award performance period, except for expenses relating to retirement-eligible employees. If retirement-eligible employees have not given their required notice, expense is recognized on a pro-rata basis over the notice period prior to retirement; if they have given their notice, expense is recognized over the notice period; if they have given their notice and completed the notice period, expense is recognized upon grant. At June 30, 2024, there were 12.3 million shares available for grant under approved equity compensation plans. SPS COMMERCE, INC. 15 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents Stock-based compensation expense was allocated in the condensed consolidated statements of comprehensive income as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Cost of revenues $ 2,730 $ 2,586 $ 6,812 $ 5,089 Operating expenses Sales and marketing 2,512 2,528 6,956 4,951 Research and development 1,820 1,812 5,062 3,589 General and administrative 4,432 5,955 12,682 11,032 $ 11,494 $ 12,881 $ 31,512 $ 24,661 Stock-based compensation expense by grant type or plan was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Stock options $ 506 $ 494 $ 1,003 $ 985 PSUs 2,445 3,499 4,890 7,424 RSUs & DSUs 6,952 7,381 22,443 13,443 RSAs 89 115 215 223 ESPP 802 748 1,523 1,337 401(k) stock match 700 644 1,438 1,249 $ 11,494 $ 12,881 $ 31,512 $ 24,661 As of June 30, 2024, there was $ 74.8 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 2.6 years. Stock Options Our stock option activity was as follows: Six Months Ended June 30, 2024 Options (#) Weighted Average Exercise Price ($/share) Outstanding, beginning of period 346,822 $ 80.02 Granted 33,930 196.37 Exercised ( 48,400 ) 47.83 Forfeited ( 760 ) 167.08 Outstanding, end of period 331,592 $ 96.43 Of the total outstanding options at June 30, 2024, 0.3 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $ 77.15 per share and a weighted average remaining contractual life of 3.0 years. SPS COMMERCE, INC. 16 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents The weighted average grant date fair value of options granted during the six months ended June 30, 2024 was $ 69.86 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Life (in years) 4.1 Volatility 36.7 % Dividend yield — Risk-free interest rate 4.3 % Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units In each of the quarters ended March 31, 2024, 2023, 2022, and 2021 we granted PSU awards with a target performance level. These awards are earned based upon our Company’s total shareholder return as compared to an indexed total shareholder return over the course of a fiscal based three-year performance period, starting in the year of grant. Earned awards vest in the quarter following the conclusion of the performance period. In the three months ended March 31, 2024, PSU awards granted in 2021 vested at the maximum performance level and 0.1 million shares of common stock were issued. Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows: Six Months Ended June 30, 2024 # Weighted Average Grant Date Fair Value ($/share) Outstanding, beginning of period 773,414 $ 147.50 Granted 324,896 179.31 Vested and common stock issued ( 366,823 ) 124.01 Forfeited ( 3,423 ) 154.70 Outstanding, end of period 728,064 $ 173.50 The number of PSUs, RSUs, RSAs, and DSUs outstanding at June 30, 2024 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 underlying agreements. Employee Stock Purchase Plan Our ESPP activity was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except shares) 2024 2023 2024 2023 Amounts for shares purchased $ 4,828 $ 3,895 $ 5,219 $ 4,136 Shares purchased 30,185 35,676 32,583 38,225 A total of 1.6 million shares of common stock are reserved for issuance under the plan at June 30, 2024. The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the following assumptions: Life (in years) 0.5 Volatility 30.9 % Dividend yield — Risk-free interest rate 5.3 % SPS COMMERCE, INC. 17 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents NOTE L – Income Taxes We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust the provision for discrete tax items recorded in the period. Our provisions for income taxes includes current federal, state, and foreign income tax expense, as well as deferred tax expense. Differences between our effective tax rate and statutory tax rates are primarily due to the impact of permanently non-deductible expenses partially offset by the federal research and development credits and tax benefits associated with foreign-derived intangible income. Additionally, excess tax benefits generated upon settlement or exercise of stock awards are recognized as a reduction to income tax expense as a discrete tax item in the quarter that the event occurs, creating potentially significant fluctuation in tax expense by quarter and by year. NOTE M – Other Income and Expense Other income, net included the following: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Investment income $ 2,794 $ 1,611 $ 5,673 $ 2,737 Realized gain from foreign currency on cash and investments held 1,255 290 1,559 427 Other income (expense), net 7 ( 19 ) ( 44 ) ( 7 ) Total other income, net $ 4,056 $ 1,882 $ 7,188 $ 3,157 NOTE N – Net Income Per Share The components and computation of basic and diluted net income per share were as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2024 2023 2024 2023 Numerator Net income $ 18,032 $ 14,682 $ 36,035 $ 29,971 Denominator Weighted average common shares outstanding, basic 37,078 36,593 37,063 36,511 Options to purchase common stock and ESPP 157 274 167 291 PSUs, RSUs, RSAs, and DSUs 448 559 460 525 Weighted average common shares outstanding, diluted 37,683 37,426 37,690 37,327 Net income per share Basic $ 0.49 $ 0.40 $ 0.97 $ 0.82 Diluted $ 0.48 $ 0.39 $ 0.96 $ 0.80 The number of outstanding potential common shares that were excluded from the calculation of diluted net income per share as they were anti-dilutive was as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Anti-dilutive shares 276 37 227 63 SPS COMMERCE, INC. 18 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents