SPS COMMERCE INC 10-Q

Item 1. Financial Statements SPS COMMERCE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares) September 30, 2024 December 31, 2023 ASSETS (unaudited) Current assets Cash and cash equivalents $ 198,842 $ 219,081 Short-term investments 6,931 56,359 Accounts receivable 60,044 50,160 Allowance for credit losses ( 4,474 ) ( 3,320 ) Accounts receivable, net 55,570 46,840 Deferred costs 64,665 62,403 Other assets 18,639 16,758 Total current assets 344,647 401,441 Property and equipment, net 36,148 36,043 Operating lease right-of-use assets 8,412 7,862 Goodwill 423,508 249,176 Intangible assets, net 168,131 107,344 Other assets Deferred costs, non-current 20,802 20,347 Deferred income tax assets 412 505 Other assets, non-current 1,240 1,126 Total assets $ 1,003,300 $ 823,844 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 8,107 $ 7,420 Accrued compensation 46,010 41,588 Accrued expenses 8,968 8,014 Deferred revenue 78,883 69,187 Operating lease liabilities 4,363 4,460 Total current liabilities 146,331 130,669 Other liabilities Deferred revenue, non-current 6,550 6,930 Operating lease liabilities, non-current 8,807 9,569 Deferred income tax liabilities 11,607 8,972 Other liabilities, non-current 640 229 Total liabilities 173,935 156,369 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; 39,495,411 and 38,971,146 shares issued; and 37,566,443 and 36,820,048 shares outstanding, respectively 39 39 Treasury stock, at cost; 1,928,968 and 2,151,098 shares, respectively ( 99,748 ) ( 128,892 ) Additional paid-in capital 611,719 537,061 Retained earnings 318,540 259,045 Accumulated other comprehensive gain (loss) ( 1,185 ) 222 Total stockholders’ equity 829,365 667,475 Total liabilities and stockholders’ equity $ 1,003,300 $ 823,844 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 3 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents SPS COMMERCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) (unaudited) 2024 2023 2024 2023 Revenues $ 163,686 $ 135,661 $ 466,858 $ 391,945 Cost of revenues 51,624 45,521 155,129 133,029 Gross profit 112,062 90,140 311,729 258,916 Operating expenses Sales and marketing 37,577 30,289 109,700 89,722 Research and development 15,292 13,558 45,667 39,438 General and administrative 27,152 21,906 76,575 64,275 Amortization of intangible assets 6,470 3,788 15,648 11,118 Total operating expenses 86,491 69,541 247,590 204,553 Income from operations 25,571 20,599 64,139 54,363 Other income, net 3,778 1,702 10,966 4,859 Income before income taxes 29,349 22,301 75,105 59,222 Income tax expense 5,889 5,459 15,610 12,409 Net income $ 23,460 $ 16,842 $ 59,495 $ 46,813 Other comprehensive income (expense) Foreign currency translation adjustments 3,332 ( 2,966 ) ( 886 ) ( 1,446 ) Unrealized gain on investments, net of tax of $ 28 , $ 190 , $ 363 and $ 459 , respectively 84 570 1,089 1,376 Reclassification of gain on investments into earnings, net of tax of $( 83 ), $( 137 ), $( 537 ) and $( 390 ), respectively ( 248 ) ( 412 ) ( 1,610 ) ( 1,169 ) Total other comprehensive income (expense) 3,168 ( 2,808 ) ( 1,407 ) ( 1,239 ) Comprehensive income $ 26,628 $ 14,034 $ 58,088 $ 45,574 Net income per share Basic $ 0.63 $ 0.46 $ 1.60 $ 1.28 Diluted $ 0.62 $ 0.45 $ 1.57 $ 1.25 Weighted average common shares used to compute net income per share Basic 37,447 36,728 37,192 36,584 Diluted 37,996 37,584 37,785 37,417 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 4 Form 10-Q for the Quarterly Period ended September 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, June 30, 2023 36,646,819 $ 39 2,151,098 $ ( 128,892 ) $ 508,484 $ 223,192 $ ( 1,842 ) $ 600,981 Stock-based compensation — — — — 10,780 — — 10,780 Shares issued pursuant to stock awards 45,952 — — — 705 — — 705 Employee stock purchase plan activity 3,159 — — — 344 — — 344 Net income — — — — — 16,842 — 16,842 Foreign currency translation adjustments — — — — — — ( 2,966 ) ( 2,966 ) Unrealized gain on investments, net of tax — — — — — — 570 570 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 412 ) ( 412 ) Balances, September 30, 2023 36,695,930 $ 39 2,151,098 $ ( 128,892 ) $ 520,313 $ 240,034 $ ( 4,650 ) $ 626,844 Balances, June 30, 2024 37,086,627 $ 39 2,333,099 $ ( 162,187 ) $ 574,842 $ 295,080 $ ( 4,353 ) $ 703,421 Stock-based compensation — — — — 9,996 — — 9,996 Shares issued pursuant to stock awards 72,852 — — — 1,884 — — 1,884 Employee stock purchase plan activity 2,833 — — — 453 — — 453 Repurchases of common stock, net of costs ( 456 ) — 456 ( 84 ) — — — ( 84 ) Reissuances of treasury stock 404,587 — ( 404,587 ) 62,523 24,544 — — 87,067 Net income — — — — — 23,460 — 23,460 Foreign currency translation adjustments — — — — — — 3,332 3,332 Unrealized gain on investments, net of tax — — — — — — 84 84 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 248 ) ( 248 ) Balances, September 30, 2024 37,566,443 $ 39 1,928,968 $ ( 99,748 ) $ 611,719 $ 318,540 $ ( 1,185 ) $ 829,365 SPS COMMERCE, INC. 5 Form 10-Q for the Quarterly Period ended September 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 — — — — 34,192 — — 34,192 Shares issued pursuant to stock awards 496,500 1 — — 5,523 — — 5,524 Employee stock purchase plan activity 41,384 — — — 4,481 — — 4,481 Net income — — — — — 46,813 — 46,813 Foreign currency translation adjustments — — — — — — ( 1,446 ) ( 1,446 ) Unrealized gain on investments, net of tax — — — — — — 1,376 1,376 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 1,169 ) ( 1,169 ) Balances, September 30, 2023 36,695,930 $ 39 2,151,098 $ ( 128,892 ) $ 520,313 $ 240,034 $ ( 4,650 ) $ 626,844 Balances, December 31, 2023 36,820,048 $ 39 2,151,098 $ ( 128,892 ) $ 537,061 $ 259,045 $ 222 $ 667,475 Stock-based compensation — — — — 40,075 — — 40,075 Shares issued pursuant to stock awards 488,849 — — — 4,198 — — 4,198 Employee stock purchase plan activity 35,416 — — — 5,672 — — 5,672 Repurchases of common stock, net of costs ( 205,331 ) — 205,331 ( 37,567 ) — — — ( 37,567 ) Reissuances of treasury stock 427,461 — ( 427,461 ) 66,711 24,713 — — 91,424 Net income — — — — — 59,495 — 59,495 Foreign currency translation adjustments — — — — — — ( 886 ) ( 886 ) Unrealized gain on investments, net of tax — — — — — — 1,089 1,089 Reclassification of gain on investments into earnings, net of tax — — — — — — ( 1,610 ) ( 1,610 ) Balances, September 30, 2024 37,566,443 $ 39 1,928,968 $ ( 99,748 ) $ 611,719 $ 318,540 $ ( 1,185 ) $ 829,365 See accompanying notes to these condensed consolidated financial statements. . SPS COMMERCE, INC. 6 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents SPS COMMERCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) (unaudited) 2024 2023 Cash flows from operating activities Net income $ 59,495 $ 46,813 Reconciliation of net income to net cash provided by operating activities Deferred income taxes ( 9,918 ) ( 11,906 ) Depreciation and amortization of property and equipment 14,010 13,964 Amortization of intangible assets 15,648 11,118 Provision for credit losses 6,239 4,004 Stock-based compensation 42,264 36,097 Other, net ( 925 ) 1,711 Changes in assets and liabilities, net of effects of acquisitions Accounts receivable ( 11,456 ) ( 8,800 ) Deferred costs ( 2,240 ) ( 7,543 ) Other assets and liabilities ( 2,258 ) 2,814 Accounts payable 665 ( 5,289 ) Accrued compensation 458 8,073 Accrued expenses 842 ( 169 ) Deferred revenue 5,424 10,042 Operating leases ( 1,412 ) ( 1,417 ) Net cash provided by operating activities 116,836 99,512 Cash flows from investing activities Purchases of property and equipment ( 13,832 ) ( 15,467 ) Purchases of investments ( 85,759 ) ( 102,763 ) Maturities of investments 136,765 95,000 Acquisition of businesses, net ( 147,401 ) ( 70,218 ) Net cash used in investing activities ( 110,227 ) ( 93,448 ) Cash flows from financing activities Repurchases of common stock ( 37,567 ) — Net proceeds from exercise of options to purchase common stock 4,198 5,524 Net proceeds from employee stock purchase plan activity 5,672 4,481 Net cash provided by (used in) financing activities ( 27,697 ) 10,005 Effect of foreign currency exchange rate changes 849 ( 260 ) Net increase (decrease) in cash and cash equivalents ( 20,239 ) 15,809 Cash and cash equivalents at beginning of period 219,081 162,893 Cash and cash equivalents at end of period $ 198,842 $ 178,702 See accompanying notes to these condensed consolidated financial statements. SPS COMMERCE, INC. 7 Form 10-Q for the Quarterly Period ended September 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 nine months ended September 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 September 30, 2024 Table of Contents NOTE B – Business Acquisitions SupplyPike, Inc. Effective July 31, 2024, we acquired SupplyPike, Inc. ("SupplyPike"), an automated invoice deduction management and prevention solution, through the purchase of all of the outstanding equity ownership interests of SupplyPike. Pursuant to the definitive agreement and plan of merger, the total consideration transferred at close was $ 205.8 million, net of cash acquired and subject to customary post-close adjustments. The consideration was comprised of $ 118.6 million paid in cash and 404,587 shares of SPS common stock (valued at $ 87.2 million, determined at acquisition close based on the price of SPS common stock). The shares were issued from SPS treasury shares, see Note J - Stockholders' Equity for further detail on the treasury share reissuance. The purchase accounting for the acquisition has not been finalized as of September 30, 2024; provisional amounts are primarily related to intangible assets and tax components. 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 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 estimated 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 $ 124,769 Equity consideration 87,156 Total consideration $ 211,925 Estimated fair value of assets and liabilities acquired: Cash $ 6,118 Other assets 3,659 Intangible assets Subscriber relationships 16,500 Developed technology 49,500 Deferred revenue ( 2,297 ) Other liabilities ( 2,643 ) Deferred income tax liabilities, net ( 11,580 ) Total fair value of assets and liabilities acquired $ 59,257 Goodwill $ 152,668 The following table summarizes the preliminary estimated useful lives for each acquired intangible asset: Useful Life Subscriber relationships 7.0 years Developed technology 8.0 years 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 at acquisition close based o n the price of S PS common stock). The shares were issued from SPS treasury shares, see Note J - Stockholders' Equity for further detail on the treasury share reissuance. SPS COMMERCE, INC. 9 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents 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. The remainder of the consideration transferred was allocated to net assets acquired other than the intangible assets. The purchase accounting for the acquisition was finalized as of September 30, 2024. The goodwill associated with the acquisition is deductible for income tax purposes. 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 purchase accounting for the acquisition was finalized as of June 30, 2024. 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 September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Recurring revenues: Fulfillment $ 135,290 $ 110,900 $ 382,654 $ 318,069 Analytics 13,838 13,098 41,361 38,177 Other 5,328 3,373 14,107 9,949 Recurring revenues 154,456 127,371 438,122 366,195 One-time revenues 9,230 8,290 28,736 25,750 Total revenue $ 163,686 $ 135,661 $ 466,858 $ 391,945 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 United States ("U.S."), was as follows: Three Months Ended September 30, Nine Months Ended September 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. SPS COMMERCE, INC. 10 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents Given that the recurring revenue contracts are generally for one year or less, we have applied the optional exemption to not disclose information about the remaining performance obligations for recurring revenue contracts. 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. We expect to recognize $ 13.5 million of the balance as of September 30, 2024 as revenue over the next 12 months with the remaining amount recognized thereafter. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Balance, beginning of period $ 18,360 $ 16,978 $ 17,603 $ 14,999 Invoiced set-up fees 3,866 4,496 13,387 14,493 Recognized set-up fees ( 4,519 ) ( 4,225 ) ( 13,283 ) ( 12,243 ) Balance, end of period $ 17,707 $ 17,249 $ 17,707 $ 17,249 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. Deferred Revenue We recognized revenue of $ 61.8 million and $ 52.4 million in the nine months ended September 30, 2024 and 2023, respectively, from amounts included in deferred revenue at the beginning of the period. NOTE D – Deferred Costs The deferred costs activity was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Balance, beginning of period $ 84,928 $ 75,255 $ 82,750 $ 70,179 Incurred deferred costs 22,532 20,094 67,483 57,632 Amortized deferred costs ( 21,993 ) ( 16,303 ) ( 64,766 ) ( 48,765 ) Balance, end of period $ 85,467 $ 79,046 $ 85,467 $ 79,046 SPS COMMERCE, INC. 11 Form 10-Q for the Quarterly Period ended September 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: September 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 $ 135,700 $ — $ 135,700 Level 1 $ 161,233 $ — $ 161,233 Investments: Certificates of deposit Level 2 6,931 — 6,931 Level 1 6,805 — 6,805 Marketable securities: Commercial paper Level 2 — — — Level 2 48,860 694 49,554 $ 142,631 $ — $ 142,631 $ 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: Nine Months Ended September 30, (in thousands) 2024 2023 Balance, beginning of period $ 3,320 $ 3,066 Provision for credit losses 6,239 4,004 Write-offs, net of recoveries ( 5,085 ) ( 3,993 ) Balance, end of period $ 4,474 $ 3,077 NOTE G – Property and Equipment, Net Property and equipment, net consisted of the following: (in thousands) September 30, 2024 December 31, 2023 Internally developed software $ 69,727 $ 60,396 Computer equipment 35,904 34,402 Leasehold improvements 15,381 15,387 Office equipment and furniture 10,980 10,966 Property and equipment, cost 131,992 121,151 Less: accumulated depreciation and amortization ( 95,844 ) ( 85,108 ) Total property and equipment, net $ 36,148 $ 36,043 Property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows: September 30, 2024 December 31, 2023 International property and equipment 18 % 15 % SPS COMMERCE, INC. 12 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents NOTE H – Goodwill and Intangible Assets, Net Goodwill The activity in goodwill was as follows: (in thousands) Nine Months Ended September 30, 2024 Balance, beginning of period $ 249,176 Addition from business acquisitions 173,164 Foreign currency translation ( 649 ) Remeasurement from provisional purchase accounting amount 1,817 Balance, end of period $ 423,508 Intangible Assets Intangible assets, net consisted of the following: September 30, 2024 ($ in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Weighted Average Remaining Amortization Period Subscriber relationships $ 126,423 $ ( 41,513 ) $ ( 138 ) $ 84,772 6.2 years Developed technology 105,518 ( 22,151 ) ( 8 ) 83,359 6.6 years $ 231,941 $ ( 63,664 ) $ ( 146 ) $ 168,131 6.4 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 $ 7,231 2025 28,792 2026 27,788 2027 27,314 2028 25,974 Thereafter 51,032 Total future amortization $ 168,131 SPS COMMERCE, INC. 13 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents NOTE I – Commitments and Contingencies Leases The components of lease expense were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Operating lease cost $ 884 $ 729 $ 2,496 $ 2,306 Variable lease cost 824 909 2,743 2,787 $ 1,708 $ 1,638 $ 5,239 $ 5,093 Supplemental cash flow information related to leases was as follows: Nine Months Ended September 30, (in thousands) 2024 2023 Cash paid for amounts included in the measurement of lease liabilities Operating cash outflows from operating leases $ 3,801 $ 3,835 Right-of-use assets obtained in exchange for operating lease liabilities 2,554 1,072 Supplemental balance sheet information related to operating leases was as follows: September 30, 2024 December 31, 2023 Weighted-average remaining lease term 2.6 years 3.1 years Weighted-average discount rate 4.2 % 4.0 % At September 30, 2024, our future minimum payments under operating leases were as follows: (in thousands) Remainder of 2024 $ 1,716 2025 5,460 2026 4,784 2027 1,740 Thereafter 240 Total future gross payments $ 13,940 Less: imputed interest ( 770 ) Total operating lease liabilities $ 13,170 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 September 30, 2024, our remaining purchase commitments and estimated purchase timing were as follows: (in thousands) Remainder of 2024 $ 2,890 2025 14,187 2026 4,692 Total estimated future purchases $ 21,769 SPS COMMERCE, INC. 14 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents NOTE J – Stockholders’ Equity Share Repurchase Programs Our board of directors has authorized multiple non-concurrent programs to repurchase our common stock. Details of the programs and activity thereunder through September 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 $ 40,556 $ 9,444 N/A 2024 Program August 2024 July 2026 100,000 — N/A $ 100,000 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 September 30, Nine Months Ended September 30, (in thousands, except shares and per share amounts) 2024 2023 2024 2023 Number of shares repurchased 456 — 205,331 — Total share repurchased cost $ 84 $ — $ 37,567 $ — Average total cost per repurchased share $ 184.21 $ — $ 182.96 $ — Treasury Stock Reissuance In connection with the acquisitions of SupplyPike and Traverse Systems, the Company re-issued treasury shares as part of the purchase considerations (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 September 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 September 30, 2024 Table of Contents Stock-based compensation expense was allocated in the condensed consolidated statements of comprehensive income as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Cost of revenues $ 1,412 $ 2,506 $ 8,224 $ 7,595 Operating expenses Sales and marketing 2,820 2,428 9,776 7,379 Research and development 1,939 1,798 7,001 5,387 General and administrative 4,581 4,704 17,263 15,736 $ 10,752 $ 11,436 $ 42,264 $ 36,097 Stock-based compensation expense by grant type or plan was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Stock options $ 514 $ 487 $ 1,517 $ 1,472 PSUs 2,260 2,812 7,149 10,236 RSUs & DSUs 6,309 6,722 28,751 20,165 RSAs 112 122 329 345 ESPP 800 637 2,323 1,974 401(k) stock match 757 656 2,195 1,905 $ 10,752 $ 11,436 $ 42,264 $ 36,097 As of September 30, 2024, there was $ 78.9 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 2.5 years. Stock Options Our stock option activity was as follows: Nine Months Ended September 30, 2024 Options (#) Weighted Average Exercise Price ($/share) Outstanding, beginning of period 346,822 $ 80.02 Granted 36,993 197.42 Exercised ( 85,364 ) 49.18 Forfeited ( 2,094 ) 158.63 Outstanding, end of period 296,357 $ 103.01 Of the total outstanding options at September 30, 2024, 0.2 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $ 83.65 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 September 30, 2024 Table of Contents The weighted average grant date fair value of options granted during the nine months ended September 30, 2024 was $ 69.82 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: Nine Months Ended September 30, 2024 # Weighted Average Grant Date Fair Value ($/share) Outstanding, beginning of period 773,414 $ 147.50 Granted 409,843 185.73 Vested and common stock issued ( 403,291 ) 124.30 Forfeited ( 33,725 ) 180.49 Outstanding, end of period 746,241 $ 179.54 The number of PSUs, RSUs, RSAs, and DSUs outstanding at September 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 September 30, Nine Months Ended September 30, (in thousands, except shares) 2024 2023 2024 2023 Amounts for shares purchased $ 453 $ 344 $ 5,672 $ 4,481 Shares purchased 2,833 3,159 35,416 41,384 A total of 1.6 million shares of common stock are reserved for issuance under the plan at September 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 September 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 September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Investment income $ 2,704 $ 2,635 $ 8,377 $ 5,372 Realized gain from foreign currency on cash and investments held 1,077 98 2,636 525 Other expense, net ( 3 ) ( 1,031 ) ( 47 ) ( 1,038 ) Total other income, net $ 3,778 $ 1,702 $ 10,966 $ 4,859 NOTE N – Net Income Per Share The components and computation of basic and diluted net income per share were as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2024 2023 2024 2023 Numerator Net income $ 23,460 $ 16,842 $ 59,495 $ 46,813 Denominator Weighted average common shares outstanding, basic 37,447 36,728 37,192 36,584 Options to purchase common stock and ESPP 145 256 159 279 PSUs, RSUs, RSAs, and DSUs 404 600 434 554 Weighted average common shares outstanding, diluted 37,996 37,584 37,785 37,417 Net income per share Basic $ 0.63 $ 0.46 $ 1.60 $ 1.28 Diluted $ 0.62 $ 0.45 $ 1.57 $ 1.25 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 September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Anti-dilutive shares 130 40 118 43 SPS COMMERCE, INC. 18 Form 10-Q for the Quarterly Period ended September 30, 2024 Table of Contents