SPS COMMERCE INC 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Sensitivity Risk The principal objectives of our investment activities are to preserve principal, provide liquidity, and maximize income consistent with minimizing risk of material loss. We are exposed to market risk related to changes in interest rates. We may choose based on our investment strategy to hold cash, cash equivalents, and investments in interest-bearing or non-interest-bearing accounts. Based upon a sensitivity model, an immediate hypothetical 50-basis point change in interest rates on interest-bearing balances at March 31, 2026, would have resulted in a $0.2 million impact on our investment income included in net income for the three months ended March 31, 2026. We do not enter into investments for trading or speculative purposes. We did not have any variable interest rate outstanding debt as of March 31, 2026. SPS COMMERCE, INC. 22 Form 10-Q for the Quarterly Period ended March 31, 2026 Table of Contents Results of Operations Three Months Ended March 31, 2026 Compared to Three Months Ended March 31, 2025 The following table presents our results of operations for the periods indicated: Three Months Ended March 31, 2026 2025 Change ($ in thousands) $ % of revenue (1) $ % of revenue (1) $ % Revenues $ 192,121 100 % $ 181,549 100 % $ 10,572 6 % Cost of revenues 59,217 31 56,914 31 2,303 4 Gross profit 132,904 69 124,635 69 8,269 7 Operating expenses Sales and marketing 44,734 23 41,634 23 3,100 7 Research and development 17,917 9 17,439 10 478 3 General and administrative 36,374 19 31,018 17 5,356 17 Amortization of intangible assets 9,320 5 8,588 5 732 9 Total operating expenses 108,345 56 98,679 54 9,666 10 Income from operations 24,559 13 25,956 14 (1,397) (5) Other income, net 1,405 1 2,207 1 (802) (36) Income before income taxes 25,964 14 28,163 16 (2,199) (8) Income tax expense 6,235 3 5,967 3 268 4 Net income $ 19,729 10 % $ 22,196 12 % $ (2,467) (11) % (1) Amounts in column may not foot due to rounding Revenues - The increase in revenue period-over-period resulted from an increase in recurring revenue customers that was driven primarily by business acquisitions and continued business growth. • ARPU decreased 2% to approximately $13,550 for the three months ended March 31, 2026. The decrease was driven by the addition of 3P recurring revenue customers, which have much lower ARPU, partially offset by the increased usage of our products by our 1P recurring revenue customers. • The number of recurring revenue customers increased 0.1% to approximately 54,200 at March 31, 2026. Of the total recurring reve nue customers, a pproximately 46,900 are 1P recurring revenue customers and the remainder are 3P recurring revenue customers. New recurring revenue customers do not have a meaningful contribution to revenue at the beginning of their tenure, and therefore a majority of the increased revenue was generated from existing recurring revenue customers. • Approximately 8,500 recurring revenue customers were added in February 2025 due to the acquisition of the existing customer base of Carbon6 , of which approximately 300 are 1P recurring revenue customers and the remainder are 3P recurring revenue customers. Recurring revenues increased 7% to $184.5 million for the three months ended March 31, 2026 compared to the three months ended March 31, 2025 . Recurring revenues accounted for 96% and 94% of our total revenues for the three months ended March 31, 2026 and 2025, respectively. We anticipate that the number of recurring revenue customers and ARPU will increase as we execute our growth strategy focused on further penetration of our market. Co st of Revenues - The increase in cost of revenues was primarily driven by $1.0 million of lower capitalization of deferred costs due to slowed hiring, as well as $0.7 million of expenses associated with an all-company meeting held in the current quarter, previously held in the fourth quarter of the calendar year. Sales and Marketing Expenses - The increase in sales and marketing expense was primarily driven by a $1.8 million increase in stock-based compensation related to leadership transitions. SPS COMMERCE, INC. 23 Form 10-Q for the Quarterly Period ended March 31, 2026 Table of Contents Research and Development Expenses - The increase in research and development expense was primarily due to higher stock-based compensation expense and increased software subscription costs. The rise in software subscription costs was further attributable to expanded investment in our artificial intelligence strategy. General and Administrative Expenses - The increase in general and administrative expense was primarily driven by a $2.8 million increase in total compensation and personnel-related costs related to non-capitalizable activities supporting enterprise system implementations. Additionally, stock-based compensation expense increased by $2.1 million, partially attributable to $1.1 million of expense recognized from the contractual acceleration of equity-related awards upon executive retirement. 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 decrease in other income, net was primarily due to a decrease in investment income. Income Tax Expense - The increase in income tax expense was primarily driven by the reduction in tax benefits recognized from equity award exercise and settlement activity due to the fluctuations in share price. The increase was partially offset by the decrease in pre-tax book income and increased benefit for research & development tax credits. Adjusted EBITDA - Adjusted EBITDA consists of net income adjusted for income tax expense, depreciation and amortization expense, stock-based compensation expense, realized gain from investments and foreign currency transactions, investment income, and other adjustments as necessary for a fair presentation. Other adjustments for the three months ended March 31, 2026, included the expense impact from disposals of other equipment. Net income is the most directly comparable GAAP measure of financial performance. The following table provides a reconciliation of net income to Adjusted EBITDA: Three Months Ended March 31, (in thousands) 2026 2025 Net income $ 19,729 $ 22,196 Income tax expense 6,235 5,967 Depreciation and amortization of property and equipment 5,834 4,957 Amortization of intangible assets 9,320 8,588 Stock-based compensation expense 18,073 13,867 Realized gain from investments and foreign currency transactions (120) (366) Investment income (1,151) (1,849) Other 11 1,013 Adjusted EBITDA $ 57,931 $ 54,373 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 March 31, (in thousands, except Margin and Adjusted EBITDA Margin) 2026 2025 Revenue $ 192,121 $ 181,549 Net income 19,729 22,196 Margin 10 % 12 % Adjusted EBITDA 57,931 54,373 Adjusted EBITDA Margin 30 % 30 % SPS COMMERCE, INC. 24 Form 10-Q for the Quarterly Period ended March 31, 2026 Table of Contents 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 from investments and foreign currency transactions, other adjustments as necessary for a fair presentation, including for the three months ended March 31, 2026, the expense impact from disposals of other equipment, 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 most directly 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 March 31, (in thousands, except per share amounts) 2026 2025 Net income $ 19,729 $ 22,196 Stock-based compensation expense 18,073 13,867 Amortization of intangible assets 9,320 8,588 Realized gain from investments and foreign currency transactions (120) (366) Other 11 1,013 Income tax effects of adjustments (5,879) (7,285) Non-GAAP income $ 41,134 $ 38,013 Shares used to compute net income and non-GAAP income per share Basic 37,379 37,990 Diluted 37,442 38,163 Net income per share, basic $ 0.53 $ 0.58 Non-GAAP adjustments to net income per share, basic 0.57 0.42 Non-GAAP income per share, basic $ 1.10 $ 1.00 Net income per share, diluted $ 0.53 $ 0.58 Non-GAAP adjustments to net income per share, diluted 0.57 0.42 Non-GAAP income per share, diluted $ 1.10 $ 1.00 Foreign Currency Exchange Risk Due to international operations, we have revenue, expenses, assets, and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian dollar, Canadian dollar, and Euro. Our consolidated balance sheet, results of operations, and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. Our predominate exposure to foreign currency exchange rates are due to non-monetary assets held in currencies other than the U.S. dollar, and thus fluctuations in foreign currencies primarily result in comprehensive income (loss), not net income (loss). Our sales are primarily denominated in U.S. dollars. Our expenses are generally denominated in the local currencies in which our operations are located. As of March 31, 2026, we maintained 9% of our total cash and cash equivalents in foreign currencies. Based upon a sensitivity model, an immediate hypothetical 10% unfavorable change in all foreign currency exchange rates would have resulted in a $1.5 million impact on our cash and cash equivalents held in currencies other than the U.S. dollar as of March 31, 2026. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future. During the three months ended March 31, 2026, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. SPS COMMERCE, INC. 25 Form 10-Q for the Quarterly Period ended March 31, 2026 Table of Contents