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Item 2. Management’s Discussion and Analysis

2024-10-24 compared with 2024-07-25 · 72 added, 59 removed, 223 unchanged (37% of the section changed)

27 unchanged sentences

SPS COMMERCE, INC.

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

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

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

2 unchanged sentences

Results of Operations

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

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

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

Three Months Ended June 30,

Three Months Ended September 30,

2024 2023 Change

13 unchanged sentences

Income before income taxes 29,349 18 22,301 16 7,048 32

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

Income tax expense 5,889 4 5,459 4 430 8

Net income $ 23,460 14 % $ 16,842 12 % $ 6,618 39 %

2 unchanged sentences

Revenues - Revenues increased for the 95th 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.

The increase in revenue period-over-period resulted primarily from the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

Additionally, the revenue growth was attributable to an increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions.

• Wallet share increased 18% to approximately $13,700 for the three months ended September 30, 2024 from approximately $11,650 for the same period in 2023.

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

• The number of recurring revenue customers increased 2% to approximately 45,200 at September 30, 2024 from approximately 44,500 at September 30, 2023, primarily d ue to sales and marketing efforts to acquire new customers and recent acquisitions.

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.

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

• 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, and approximately 200 recurring revenue customers were added in July 2024 due to the acquisition of the existing customer base of SupplyPike.

Recurring revenues increased 21% to $154.5 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 .

Recurring revenues accounted for 94% of our total revenues for the three months ended September 30, 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.

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Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $2.4 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.

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

Additionally, there was an expense increase of $1.1 million associated with current and projected future credit losses and 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.

Other Income, Net - The increase in other income, net was primarily due to realized gains from favorable foreign currency exchange rates.

Income Tax Expense - The increase in income tax expense was primarily driven by increases in pre-tax income and our US state effective rate, as partially offset by favorable return to provision adjustments made in the current period.

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.

Other adjustments for the three months ended September 30, 2024 included the expense impacts from disposals of certain capitalized internally developed software and one-time acquisition-related insurance costs.

Other adjustments for the three months ended September 30, 2023 included the expense impact from acquisition-related employee severance costs.

Net income is the comparable GAAP measure of financial performance.

1 unchanged sentence

Three Months Ended

September 30,

(in thousands) 2024 2023

6 unchanged sentences

Investment income (2,704) (2,635)

Other 978 1,036

Adjusted EBITDA $ 48,401 $ 40,503

SPS COMMERCE, INC.

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

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

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

2 unchanged sentences

Three Months Ended

September 30,

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

4 unchanged sentences

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 for the three months ended September 30, 2024 the expense impacts from disposals of certain capitalized internally developed software and one-time acquisition-related insurance costs and for the three months ended September 30, 2023 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.

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.

3 unchanged sentences

Three Months Ended

September 30,

(in thousands, except per share amounts) 2024 2023

3 unchanged sentences

Realized gain from foreign currency on cash and investments held (1,077) (98)

Other 978 1,036

Income tax effects of adjustments (5,514) (4,981)

10 unchanged sentences

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

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

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

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

Six Months Ended June 30,

Nine Months Ended September 30,

2024 2023 Change

18 unchanged sentences

Revenues - Revenues increased for the 95th consecutive quarter.

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

The increase in revenue period-over-period resulted primarily from the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

Additionally, the revenue growth was attributable to an increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions.

• Wallet share increased 16% to approximately $13,000 for the nine months ended September 30, 2024 from approximately $11,250 for the same period in 2023.

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

Recurring revenues increased 20% to $438.1 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 .

Recurring revenues accounted for 94% of our total revenues for the nine months ended September 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

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

Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $14.1 million in personnel-related costs.

Additionally, there was an increase in our software subscriptions of $3.1 million due primarily to the general growth of our business.

Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $13.2 million in personnel-related costs, and an increase of $2.4 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.

Additionally, there was an increase of $2.2 million in product management costs.

Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $5.4 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 $5.2 million in personnel-related costs.

Additionally, there was an expense increase of $2.2 million associated with current and projected future credit losses and 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 investment allocations 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 excess tax benefits from current period equity award settlements, as partially offset by a decrease in nondeductible compensation.

Other adjustments included the expense impact from disposals of certain capitalized internally developed software.

Other adjustments for the nine months ended September 30, 2024 included the expense impacts from disposals of certain capitalized internally developed software and one-time acquisition-related insurance costs.

Other adjustments for the nine months ended September 30, 2023 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:

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2024 2023

6 unchanged sentences

Investment income (8,377) (5,372)

Other 978 1,170

Adjusted EBITDA $ 136,992 $ 115,674

2 unchanged sentences

SPS COMMERCE, INC.

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

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

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

Six Months Ended

Nine Months Ended

September 30,

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

4 unchanged sentences

Adjusted EBITDA Margin 29 % 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 for the nine months ended September 30, 2024 the expense impacts from disposals of certain capitalized internally developed software and one-time acquisition-related insurance costs and for the nine months ended September 30, 2023 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.

2 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

(in thousands, except per share amounts) 2024 2023

3 unchanged sentences

Realized gain from foreign currency on cash and investments held (2,636) (525)

Other 978 1,170

Income tax effects of adjustments (18,134) (16,089)

10 unchanged sentences

SPS COMMERCE, INC.

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

Form 10-Q for the Quarterly Period ended September 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 six months ended June 30, 2024, there were no changes in our critical accounting policies or estimates.

During the nine months ended September 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 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.

As of September 30, 2024, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $205.8 million and net accounts receivable of $55.6 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.

Our cash equivalents and short-term investments are generally 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

Nine Months Ended

September 30,

(in thousands) 2024 2023

3 unchanged sentences

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.

The increase in cash provided by operating activities from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 was primarily due to an increase in net income as adjusted for non-cash expenses, of $ 25.0 million, driven by continued growth in revenue, as partially offset by cash paid for expenses to operate the growing business.

Additionally, fluctuations in operating assets and liabilities resulted in a decrease of $7.7 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.

The increase in cash used in investing activities from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 was primarily due to an increase in cash used to acquire businesses of $ 77.2 million year-over-year to further grow our business, partially offset by an increase in cash provided by net maturities of investments of $ 58.8 million year-over-year.

SPS COMMERCE, INC.

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

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

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.

The increase in cash used in financing activities from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 was primarily due to an increase in cash used for share repurchases of $ 37.6 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:

Our contractual obligations and commercial commitments as o f September 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 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.

Inflation and changing prices did not have a material effect on our business during the nine months ended September 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 June 30, 2024

Form 10-Q for the Quarterly Period ended September 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