SPS COMMERCE INC 10-Q

Item 2. 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. Private Securities Litigation Reform Act of 1995. Forward looking statements regarding us, our business prospects and our results of operations are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Similarly, statements that describe our future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public. Shareholders, potential investors, and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report, including the risks and uncertainties described under the heading “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 2023, as may be updated in our subsequent Quarterly Reports on Form 10-Q from time to time. We expressly disclaim any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business. Overview 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. We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new products and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions, or allow us to offer new functionalities. Key Financial Terms, Metrics and Non-GAAP Measures 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 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. Our management uses these non-GAAP financial measures to compare our performance to that of prior periods for trend analyses and planning purposes. Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation. We believe these non-GAAP financial measures are useful to an investor as they are widely used in evaluating operating performance. 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. SPS COMMERCE, INC. 19 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents 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 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 June 30, 2024 2023 Change ($ in thousands) $ % of revenue (1) $ % of revenue (1) $ % (2) Revenues $ 153,596 100 % $ 130,416 100 % $ 23,180 18 % Cost of revenues 52,018 34 44,544 34 7,474 17 Gross profit 101,578 66 85,872 66 15,706 18 Operating expenses Sales and marketing 35,691 23 30,349 23 5,342 18 Research and development 14,366 9 13,318 10 1,048 8 General and administrative 23,516 15 21,693 17 1,823 8 Amortization of intangible assets 4,840 3 3,479 3 1,361 39 Total operating expenses 78,413 51 68,839 53 9,574 14 Income from operations 23,165 15 17,033 13 6,132 36 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 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 (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 44,950 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. SPS COMMERCE, INC. 20 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents 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 June 30, (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) Other — 134 Adjusted EBITDA $ 44,189 $ 38,171 SPS COMMERCE, INC. 21 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents 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 June 30, (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 June 30, (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) Other — 134 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. 22 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents 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) $ % (2) 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: 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 44,950 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 $12,650 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. 23 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents 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. Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $3.0 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 $3.4 million in personnel-related costs, and an increase of $1.7 million in stock-based 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 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: Six Months Ended June 30, (in thousands) 2024 2023 Net income $ 36,035 $ 29,971 Income tax expense 9,721 6,950 Depreciation and amortization of property and equipment 9,377 9,289 Amortization of intangible assets 9,178 7,330 Stock-based compensation expense 31,512 24,661 Realized gain from foreign currency on cash and investments held (1,559) (427) Investment income (5,673) (2,737) Other — 134 Adjusted EBITDA $ 88,591 $ 75,171 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. 24 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents The following table provides a comparison of Margin to Adjusted EBITDA Margin: Six Months Ended June 30, (in thousands, except Margin and Adjusted EBITDA Margin) 2024 2023 Revenue $ 303,172 $ 256,284 Net income 36,035 29,971 Margin 12 % 12 % Adjusted EBITDA 88,591 75,171 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: Six Months Ended June 30, (in thousands, except per share amounts) 2024 2023 Net income $ 36,035 $ 29,971 Stock-based compensation expense 31,512 24,661 Amortization of intangible assets 9,178 7,330 Realized gain from foreign currency on cash and investments held (1,559) (427) Other — 134 Income tax effects of adjustments (12,620) (11,108) Non-GAAP income $ 62,546 $ 50,561 Shares used to compute net income and non-GAAP income per share Basic 37,063 36,511 Diluted 37,690 37,327 Net income per share, basic $ 0.97 $ 0.82 Non-GAAP adjustments to net income per share, basic 0.72 0.56 Non-GAAP income per share, basic $ 1.69 $ 1.38 Net income per share, diluted $ 0.96 $ 0.80 Non-GAAP adjustments to net income per share, diluted 0.70 0.55 Non-GAAP income per share, diluted $ 1.66 $ 1.35 SPS COMMERCE, INC. 25 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents 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 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. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Our actual results may differ from these estimates under different assumptions or conditions. A critical accounting policy or estimate is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective, or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, we believe that our policies for revenue 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 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. Liquidity and Capital Resources Sources of Liquidity 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 deposit, and commercial paper. Statements of Cash Flows Summary The summary of activity within the condensed consolidated statements of cash flows was as follows: Six Months Ended June 30, (in thousands) 2024 2023 Net cash provided by operating activities $ 63,506 $ 55,670 Net cash used in investing activities (11,929) (18,348) Net cash provided by (used in) financing activities (29,950) 8,955 Operating Activities 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 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. 26 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents Financing Activities 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 June 30, 2024 are summarized below: Payments Due by Period (in thousands) Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Total Operating lease obligations, including imputed interest $ 4,844 $ 7,896 $ 291 $ 62 $ 13,093 Purchase commitments 13,412 11,798 — — 25,210 Total $ 18,256 $ 19,694 $ 291 $ 62 $ 38,303 Future Capital Requirements Our future capital requirements may vary significantly from those now planned and will depend on many factors, including: • costs to develop and implement new products and applications, if any; • sales and marketing resources needed to further penetrate our market and gain acceptance of new products and applications that we may develop; • expansion of our operations in the U.S. and internationally; • response of competitors to our products and applications; and • use of capital for acquisitions. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business. We believe our cash, cash equivalents, investments, and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases. Foreign Currency Exchange and Inflation Rate Changes 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 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. 27 Form 10-Q for the Quarterly Period ended June 30, 2024 Table of Contents