SPS Commerce Inc.

10/24/2024 | Press release | Distributed by Public on 10/24/2024 14:17

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

spsc-20240930
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2024
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission file number 001-34702
SPS COMMERCE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 41-2015127
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
333 South Seventh Street, Suite 1000, Minneapolis, MN55402
(Address of principal executive offices, including Zip Code)
(612) 435-9400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of exchange on which registered
Common Stock, par value $0.001 per share SPSC
The Nasdaq Stock Market LLC (Nasdaq Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o
Non-accelerated filer o Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x
The number of shares of the registrant's common stock, par value $0.001 per share, outstanding at October 17, 2024 was 37,568,061shares.
Table of Contents
SPS COMMERCE, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
3
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Comprehensive Income
4
Condensed Consolidated Statements of Stockholders' Equity
5
Condensed Consolidated Statements of Cash Flows
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4.
Controls and Procedures
28
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
29
Item 1A.
Risk Factors
29
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
29
Item 3.
Defaults Upon Senior Securities
29
Item 4.
Mine Safety Disclosures
29
Item 5.
Other Information
30
Item 6.
Exhibits
30
SIGNATURES
31
Unless the context otherwise requires, for purposes of the Quarterly Report on Form 10-Q, the words "we," "us," "our," the "Company," "SPS," and "SPS Commerce" refer to SPS Commerce, Inc.
SPS COMMERCE, INC.
2
Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
PART I. - FINANCIAL INFORMATION
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.
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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 ninemonths 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.
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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' Equityfor 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 on the price of SPS common stock).The shares were issued from SPS treasury shares, see Note J - Stockholders' Equityfor further detail on the treasury share reissuance.
SPS COMMERCE, INC.
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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.
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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.
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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.
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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
ShareRepurchase 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 Combinationsfor 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
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 September 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 September 30, 2024Compared to Three Months Ended September 30, 2023
The following table presents our results of operations for the periods indicated:
Three Months Ended September 30,
2024 2023 Change
($ in thousands) $
% of revenue(1)
$
% of revenue(1)
$
%(2)
Revenues $ 163,686 100 % $ 135,661 100 % $ 28,025 21 %
Cost of revenues 51,624 32 45,521 34 6,103 13
Gross profit 112,062 68 90,140 66 21,922 24
Operating expenses
Sales and marketing 37,577 23 30,289 22 7,288 24
Research and development 15,292 9 13,558 10 1,734 13
General and administrative 27,152 17 21,906 16 5,246 24
Amortization of intangible assets 6,470 4 3,788 3 2,682 71
Total operating expenses 86,491 53 69,541 51 16,950 24
Income from operations 25,571 16 20,599 15 4,972 24
Other income, net 3,778 2 1,702 1 2,076 NM
Income before income taxes 29,349 18 22,301 16 7,048 32
Income tax expense 5,889 4 5,459 4 430 8
Net income $ 23,460 14 % $ 16,842 12 % $ 6,618 39 %
(1) Amounts in column may not foot due to rounding
(2) NM = not meaningful
Revenues-Revenues increased for the 95th consecutive quarter. 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 due 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.
SPS COMMERCE, INC.
20
Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
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, 2024compared to the three months ended September 30, 2023. Recurring revenues accounted for 94% of our total revenues for the three months ended September 30, 2024and2023. 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 $5.0 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 $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 $1.7 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 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 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.
The following table provides a reconciliation of net income to Adjusted EBITDA:
Three Months Ended
September 30,
(in thousands) 2024 2023
Net income $ 23,460 $ 16,842
Income tax expense 5,889 5,459
Depreciation and amortization of property and equipment 4,633 4,675
Amortization of intangible assets 6,470 3,788
Stock-based compensation expense 10,752 11,436
Realized gain from foreign currency on cash and investments held (1,077) (98)
Investment income (2,704) (2,635)
Other 978 1,036
Adjusted EBITDA $ 48,401 $ 40,503
SPS COMMERCE, INC.
21
Form 10-Q for the Quarterly Period ended September 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
September 30,
(in thousands, except Margin and Adjusted EBITDA Margin) 2024 2023
Revenue $ 163,686 $ 135,661
Net income 23,460 16,842
Margin 14 % 12 %
Adjusted EBITDA 48,401 40,503
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. 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
September 30,
(in thousands, except per share amounts) 2024 2023
Net income $ 23,460 $ 16,842
Stock-based compensation expense 10,752 11,436
Amortization of intangible assets 6,470 3,788
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)
Non-GAAP income $ 35,069 $ 28,023
Shares used to compute net income and non-GAAP income per share
Basic 37,447 36,728
Diluted 37,996 37,584
Net income per share, basic $ 0.63 $ 0.46
Non-GAAP adjustments to net income per share, basic 0.31 0.30
Non-GAAP income per share, basic $ 0.94 $ 0.76
Net income per share, diluted $ 0.62 $ 0.45
Non-GAAP adjustments to net income per share, diluted 0.30 0.30
Non-GAAP income per share, diluted $ 0.92 $ 0.75
SPS COMMERCE, INC.
22
Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
Nine Months Ended September 30, 2024Compared to Nine Months Ended September 30, 2023
The following table presents our results of operations for the periods indicated:
Nine Months Ended September 30,
2024 2023 Change
($ in thousands) $
% of revenue(1)
$
% of revenue(1)
$
%(2)
Revenues $ 466,858 100 % $ 391,945 100 % $ 74,913 19 %
Cost of revenues 155,129 33 133,029 34 22,100 17
Gross profit 311,729 67 258,916 66 52,813 20
Operating expenses
Sales and marketing 109,700 23 89,722 23 19,978 22
Research and development 45,667 10 39,438 10 6,229 16
General and administrative 76,575 16 64,275 16 12,300 19
Amortization of intangible assets 15,648 3 11,118 3 4,530 41
Total operating expenses 247,590 53 204,553 52 43,037 21
Income from operations 64,139 14 54,363 14 9,776 18
Other income, net 10,966 2 4,859 1 6,107 NM
Income before income taxes 75,105 16 59,222 15 15,883 27
Income tax expense 15,610 3 12,409 3 3,201 26
Net income $ 59,495 13 % $ 46,813 12 % $ 12,682 27 %
(1) Amounts in column may not foot due to rounding
(2) NM = "not meaningful"
Revenues-Revenues increased for the 95th consecutive quarter. 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.
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 due 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, 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 20% to $438.1 million for the nine months ended September 30, 2024compared to the ninemonths ended September 30, 2023. Recurring revenues accounted for 94% of our total revenues for the nine months ended September 30, 2024compared 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.
SPS COMMERCE, INC.
23
Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
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. 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. 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 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:
Nine Months Ended
September 30,
(in thousands) 2024 2023
Net income $ 59,495 $ 46,813
Income tax expense 15,610 12,409
Depreciation and amortization of property and equipment 14,010 13,964
Amortization of intangible assets 15,648 11,118
Stock-based compensation expense 42,264 36,097
Realized gain from foreign currency on cash and investments held (2,636) (525)
Investment income (8,377) (5,372)
Other 978 1,170
Adjusted EBITDA $ 136,992 $ 115,674
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.
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Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
The following table provides a comparison of Margin to Adjusted EBITDA Margin:
Nine Months Ended
September 30,
(in thousands, except Margin and Adjusted EBITDA Margin) 2024 2023
Revenue $ 466,858 $ 391,945
Net income 59,495 46,813
Margin 13 % 12 %
Adjusted EBITDA 136,992 115,674
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. 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:
Nine Months Ended
September 30,
(in thousands, except per share amounts) 2024 2023
Net income $ 59,495 $ 46,813
Stock-based compensation expense 42,264 36,097
Amortization of intangible assets 15,648 11,118
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)
Non-GAAP income $ 97,615 $ 78,584
Shares used to compute net income and non-GAAP income per share
Basic 37,192 36,584
Diluted 37,785 37,417
Net income per share, basic $ 1.60 $ 1.28
Non-GAAP adjustments to net income per share, basic 1.02 0.87
Non-GAAP income per share, basic $ 2.62 $ 2.15
Net income per share, diluted $ 1.57 $ 1.25
Non-GAAP adjustments to net income per share, diluted 1.01 0.85
Non-GAAP income per share, diluted $ 2.58 $ 2.10
SPS COMMERCE, INC.
25
Form 10-Q for the Quarterly Period ended September 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 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.
Liquidity and Capital Resources
Sources of Liquidity
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 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:
Nine Months Ended
September 30,
(in thousands) 2024 2023
Net cash provided by operating activities $ 116,836 $ 99,512
Net cash used in investing activities (110,227) (93,448)
Net cash provided by (used in) financing activities (27,697) 10,005
Operating Activities
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 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 millionyear-over-year to further grow our business, partially offset by an increase in cash provided by net maturities of investments of $58.8million year-over-year.
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Form 10-Q for the Quarterly Period ended September 30, 2024
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Financing Activities
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 toan increase in cash used for share repurchases of $37.6million year-over-year to continue to deliver shareholder value.
Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of September 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 $ 5,474 $ 8,125 $ 284 $ 57 $ 13,940
Purchase commitments 13,799 7,970 - - 21,769
Total $ 19,273 $ 16,095 $ 284 $ 57 $ 35,709
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 ninemonths ended September 30, 2024 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
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Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
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. However, based on the nature and current level of our cash, cash equivalents, and investments, we believe there is no material risk exposure. We do not enter into investments for trading or speculative purposes.
We did not have any variable interest rate outstanding debt as of September 30, 2024. Therefore, we do not have any material risk to interest rate fluctuations.
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 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 September 30, 2024, we maintained 15% of our total cash and cash equivalents and investments in foreign currencies.
We believe that a hypothetical 10% change in foreign currency exchange rates or an inability to access foreign funds would not materially affect our ability to meet our operational needs or result in a material foreign currency impact classified within net income (loss).
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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In May 2024 we acquired the Traverse Systems business and in July 2024 we acquired the SupplyPike business. Pursuant to the SEC's general guidance that the assessment of a recently acquired business' internal control over financial reporting may be omitted in the year of acquisition, we anticipate the scope of our assessment as of December 31, 2024 will exclude the operations for Traverse Systems and SupplyPike. We are currently in the process of incorporating internal controls specific to Traverse Systems and SupplyPike that we believe are appropriate and necessary to consolidate and report upon our financial results. Excluding net intangible assets and goodwill, Traverse Systems and SupplyPike combined represented less than 5% of our consolidated assets as of September 30, 2024 and less than 5% of our consolidated revenues for the nine months ended September 30, 2024.
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Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to, or aware of, any claims or actions that would have a material adverse effect on our business, financial condition, or results of operations. From time to time, we may be named as a defendant in legal actions or otherwise be subject to claims arising from our normal business activities. We believe that we have obtained adequate insurance coverage and/or rights to indemnification in connection with potential legal proceedings that may arise.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed under the heading "Risk Factors"in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
On July 31, 2024, we issued 404,587shares of our common stock to the sellers of SupplyPike as partial consideration for the acquisition. The issuance of these shares of common stock was exempt from registration under the Securities Act of 1933 ("Securities Act") pursuant to Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering.
(c) ShareRepurchases
Period Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program(1)(2)
Approximate
Dollar Value of
Shares that
May Yet be
Purchased
Under the
Program (1)(2)
July 1 - 31, 2024 456 $ 184.21 456 $ 9,445,000
August 1 - 31, 2024 - - - 100,000,000
September 1 - 30, 2024 - - - 100,000,000
Total 456 $ 184.21 456 $ 100,000,000
For more information regarding our sharerepurchase programs, refer to Note Jto our condensed consolidated financial statements, included in Part I of this Quarterly Report on Form 10-Q.
(1) On July 26, 2022 (announced July 27, 2022), our board of directors authorized a program to repurchase up to $50.0 million of our common stock, excluding costs to obtain. Under the program, purchases may be made from time to time in the open market or in privately negotiated purchases, or both.At the program's expiration, July 26, 2024, $9.4 million of unused share repurchase value expired from the program.
(2) On July 23, 2024 (announced July 25, 2024), our board of directors authorized a program to repurchase up to $100.0 million of our common stock, excluding costs to obtain. Under the program, purchases may be made from time to time in the open market or in privately negotiated purchases, or both. The share repurchase program became effective August 23, 2024 and expires on July 24, 2026.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
SPS COMMERCE, INC.
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Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
Item 5. Other Information
Insider Adoption or Termination of Trading Arrangements
During the three months ended September 30, 2024, the following directors and officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted written plans for the sale of our securities that are intended to satisfy the affirmative defense of Rule 10b5-1(c) of the Exchange Act:
Name Title Adoption Date Earliest Sale Date Expiration or Termination Date
Aggregate Number of Shares of the Company's Common Stock to be Sold(1)
Marty Reaume Director August 22, 2024 January 2, 2025 May 14, 2025 7,558
Jamie Thingelstad Chief Technology Officer September 5, 2024 December 31, 2024 May 23, 2025 18,537
(1) The number of shares is the maximum number of shares to be sold but the actual activity may be lower. Transaction(s) may be contingent upon future events such as performance factors, tax withholding obligations, and/or future market price(s).
There were no other Rule 10b5-1(c) trading arrangements or non-Rule 10b5-1(c) trading arrangements adopted, modified or terminated by the Company's officers and directors during the three months ended September 30, 2024.
Item 6. Exhibits
Number Description
3.1
3.2
10.1
31.1
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
31.2
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101
Interactive Data Files Pursuant to Rule 405 of Regulation S-T (filed herewith). The XBRL instance document does not appear in the Interactive Data File because its tags are embedded within the Inline XBRL document.
104
The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL.
SPS COMMERCE, INC.
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Form 10-Q for the Quarterly Period ended September 30, 2024
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 24, 2024 SPS COMMERCE, INC.
/s/ KIMBERLY NELSON
Kimberly Nelson
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
SPS COMMERCE, INC.
31
Form 10-Q for the Quarterly Period ended September 30, 2024