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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, 2023

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, MN 55402

(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. Yes x 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). Yes x 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 o No x

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at October 19, 2023 was 36,697,608 shares.

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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			6
			Notes to Condensed Consolidated Financial Statements			7
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.			Controls and Procedures			27
PART II. OTHER INFORMATION
Item 1.			Legal Proceedings			28
Item 1A.			Risk Factors			28
Item 2.			Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities			28
Item 3.			Defaults Upon Senior Securities			28
Item 4.			Mine Safety Disclosures			28
Item 5.			Other Information			29
Item 6.			Exhibits			29
SIGNATURES						30

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, 2023

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Table of Contents

PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares)			September 30, 2023						December 31, 2022
ASSETS			(unaudited)
Current assets
Cash and cash equivalents			$	178,702					$	162,893
Short-term investments			60,628						51,412
Accounts receivable			48,218						42,501
Allowance for credit losses			(3,077)						(3,066)
Accounts receivable, net			45,141						39,435
Deferred costs			59,525						52,755
Other assets			15,743						16,319
Total current assets			359,739						322,814
Property and equipment, net			36,209						35,458
Operating lease right-of-use assets			8,315						9,170
Goodwill			252,045						197,284
Intangible assets, net			103,597						88,352
Other assets
Deferred costs, non-current			19,521						17,424
Deferred income tax assets			6,805						227
Other assets, non-current			1,177						2,185
Total assets			$	787,408					$	672,914
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable			$	6,195					$	11,256
Accrued compensation			41,474						30,235
Accrued expenses			8,900						7,451
Deferred revenue			71,853						57,423
Operating lease liabilities			4,449						4,277
Total current liabilities			132,871						110,642
Other liabilities
Deferred revenue, non-current			6,849						4,771
Operating lease liabilities, non-current			10,563						13,009
Deferred income tax liabilities			10,281						7,419
Total liabilities			160,564						135,841
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; 38,847,028 and 38,309,144 shares issued; and 36,695,930 and 36,158,046 shares outstanding, respectively			39						38
Treasury Stock, at cost; 2,151,098 shares			(128,892)						(128,892)
Additional paid-in capital			520,313						476,117
Retained earnings			240,034						193,221
Accumulated other comprehensive loss			(4,650)						(3,411)
Total stockholders’ equity			626,844						537,073
Total liabilities and stockholders’ equity			$	787,408					$	672,914

See accompanying notes to these condensed consolidated financial statements.

SPS COMMERCE, INC.			3			Form 10-Q for the Quarterly Period ended September 30, 2023

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Table of Contents

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except per share amounts) (unaudited)			2023						2022						2023						2022
Revenues			$	135,661					$	114,486					$	391,945					$	328,857
Cost of revenues			45,521						38,605						133,029						111,524
Gross profit			90,140						75,881						258,916						217,333
Operating expenses
Sales and marketing			30,289						25,334						89,722						74,571
Research and development			13,558						11,135						39,438						33,268
General and administrative			21,906						16,724						64,275						49,390
Amortization of intangible assets			3,788						2,998						11,118						7,936
Total operating expenses			69,541						56,191						204,553						165,165
Income from operations			20,599						19,690						54,363						52,168
Other income (expense), net			1,702						(695)						4,859						(1,610)
Income before income taxes			22,301						18,995						59,222						50,558
Income tax expense			5,459						3,132						12,409						11,339
Net income			$	16,842					$	15,863					$	46,813					$	39,219
Other comprehensive income (expense)
Foreign currency translation adjustments			(2,966)						(2,296)						(1,446)						(3,309)
Unrealized gain on investments, net of tax of $190, $53, $459 and $49, respectively			570						158						1,376						147
Reclassification of gain on investments into earnings, net of tax of $(137), $(13), $(390), and $(17), respectively			(412)						(39)						(1,169)						(51)
Total other comprehensive expense			(2,808)						(2,177)						(1,239)						(3,213)
Comprehensive income			$	14,034					$	13,686					$	45,574					$	36,006
Net income per share
Basic			$	0.46					$	0.44					$	1.28					$	1.09
Diluted			$	0.45					$	0.43					$	1.25					$	1.06
Weighted average common shares used to compute net income per share
Basic			36,728						36,093						36,584						36,104
Diluted			37,584						36,915						37,417						36,942

See accompanying notes to these condensed consolidated financial statements.

SPS COMMERCE, INC.			4			Form 10-Q for the Quarterly Period ended September 30, 2023

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SPS COMMERCE, INC. AND SUBSIDIARIES

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, 2022			36,029,477						$	38					2,044,549						$	(115,900)					$	453,922					$	161,443					$	(2,483)					$	497,020
Stock-based compensation			—						—						—						—						7,429						—						—						7,429
Shares issued pursuant to stock awards			108,240						—						—						—						1,767						—						—						1,767
Employee stock purchase plan activity			2,481						—						—						—						238						—						—						238
Repurchases of common stock			(102,234)						—						102,234						(12,477)						—						—						—						(12,477)
Net income			—						—						—						—						—						15,863						—						15,863
Foreign currency translation adjustments			—						—						—						—						—						—						(2,296)						(2,296)
Unrealized gain on investments, net of tax			—						—						—						—						—						—						158						158
Reclassification of gain on investments into earnings, net of tax			—						—						—						—						—						—						(39)						(39)
Balances, September 30, 2022			36,037,964						$	38					2,146,783						$	(128,377)					$	463,356					$	177,306					$	(4,660)					$	507,663
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

			Common Stock												Treasury Stock												Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Loss						Total Stockholders' Equity
			Shares						Amount						Shares						Amount
Balances, December 31, 2021			36,009,257						$	38					1,789,353						$	(85,677)					$	433,258					$	138,087					$	(1,447)					$	484,259
Stock-based compensation			—						—						—						—						24,053						—						—						24,053
Shares issued pursuant to stock awards			348,621						—						—						—						2,457						—						—						2,457
Employee stock purchase plan activity			37,516						—						—						—						3,588						—						—						3,588
Repurchases of common stock			(357,430)						—						357,430						(42,700)						—						—						—						(42,700)
Net income			—						—						—						—						—						39,219						—						39,219
Foreign currency translation adjustments			—						—						—						—						—						—						(3,309)						(3,309)
Unrealized gain on investments, net of tax			—						—						—						—						—						—						147						147
Reclassification of gain on investments into earnings, net of tax			—						—						—						—						—						—						(51)						(51)
Balances, September 30, 2022			36,037,964						$	38					2,146,783						$	(128,377)					$	463,356					$	177,306					$	(4,660)					$	507,663
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

See accompanying notes to these condensed consolidated financial statements..

SPS COMMERCE, INC.			5			Form 10-Q for the Quarterly Period ended September 30, 2023

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SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

			Nine Months Ended September 30,
(in thousands) (unaudited)			2023						2022
Cash flows from operating activities
Net income			$	46,813					$	39,219
Reconciliation of net income to net cash provided by operating activities
Deferred income taxes			(11,906)						(2,092)
Depreciation and amortization of property and equipment			13,964						11,983
Amortization of intangible assets			11,118						7,936
Provision for credit losses			4,004						2,889
Stock-based compensation			36,097						25,636
Other, net			1,711						43
Changes in assets and liabilities
Accounts receivable			(8,800)						(3,999)
Deferred costs			(7,543)						(7,174)
Other current and non-current assets			2,814						2,202
Accounts payable			(5,289)						129
Accrued compensation			8,073						(4,388)
Accrued expenses			(169)						(3,035)
Deferred revenue			10,042						8,261
Operating leases			(1,417)						(1,127)
Net cash provided by operating activities			99,512						76,483
Cash flows from investing activities
Purchases of property and equipment			(15,467)						(13,894)
Purchases of investments			(102,763)						(134,276)
Maturities of investments			95,000						132,500
Acquisition of business, net			(70,218)						(44,923)
Net cash used in investing activities			(93,448)						(60,593)
Cash flows from financing activities
Repurchases of common stock			—						(42,700)
Net proceeds from exercise of options to purchase common stock			5,524						2,457
Net proceeds from employee stock purchase plan activity			4,481						3,588
Net cash provided by (used in) financing activities			10,005						(36,655)
Effect of foreign currency exchange rate changes			(260)						(557)
Net increase (decrease) in cash and cash equivalents			15,809						(21,322)
Cash and cash equivalents at beginning of period			162,893						207,552
Cash and cash equivalents at end of period			$	178,702					$	186,230

See accompanying notes to these condensed consolidated financial statements.

SPS COMMERCE, INC.			6			Form 10-Q for the Quarterly Period ended September 30, 2023

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SPS COMMERCE, INC. AND SUBSIDIARIES

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, 2022, as filed with the Securities and Exchange Commission (“SEC”). We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations, stockholders’ equity, and cash flows for the interim periods presented. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

Preparing financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Significant Accounting Policies

There were no material changes in our significant accounting policies during the nine months ended September 30, 2023. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC, for additional information regarding our significant accounting policies.

Accounting Pronouncements Recently Adopted

Standard

Date of Issuance

Description

Date of Adoption

Effect on the Financial Statements

ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

October 2021

This amendment requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, effective for all business combinations in the year of adoption and thereafter.

January 2023

The adoption of this standard has not had a material impact on the purchase accounting for business combinations.

SPS COMMERCE, INC.			7			Form 10-Q for the Quarterly Period ended September 30, 2023

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NOTE B – Business Acquisitions

InterTrade

Effective October 4, 2022, we acquired all of the outstanding equity ownership interests of Canadian based InterTrade Systems Inc. ("InterTrade"), a leading EDI provider within the apparel and general merchandising markets. Pursuant to the definitive agreement, the purchase price was $49.1 million, including estimated post-closing adjustments. During the quarter ended June 30, 2023, provisional amounts were adjusted by $3.1 million, primarily relating to a $3.9 million decrease in estimated value of intangible assets and the corresponding $1.0 million change to the deferred tax position, with the offsets to goodwill. During the quarter ended September 30, 2023, there were no significant adjustments made to provisional amounts. The purchase accounting has been finalized as of September 30, 2023.

TIE Kinetix

Effective September 13, 2023, we acquired all of the outstanding equity ownership interests of TIE Kinetix Holding B.V. ("TIE Kinetix"), a leading provider of supply chain digitalization including EDI and e-invoicing in Europe. Pursuant to the definitive agreement, the purchase price was €63.9 million ($68.7 million at the September 13, 2023 exchange rate), net of cash acquired. The purchase accounting for the acquisition has not been finalized as of September 30, 2023; provisional amounts are primarily related to intangible assets and tax components. We expect to finalize the allocation of the purchase price within the one-year measurement period following the acquisition.

Purchase Price Allocations

We accounted for the acquisitions as business combinations. 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 summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition dates:

			InterTrade																		TIE Kinetix
(in thousands)			Acquisition Date Estimated Fair Value as of December 31, 2022						Adjustment						Acquisition Date Estimated Fair Value as of September 30, 2023						Acquisition Date Estimated Fair Value as of September 30, 2023
Cash paid at transaction date			$	47,165					$	—					$	47,165					$	73,558
Contingent consideration			2,000						—						2,000
Post-closing adjustments			(93)						116						23
Total consideration			$	49,072					$	116					$	49,188					$	73,558
Estimated fair value of assets and liabilities acquired:
Cash			$	668					$	—					$	668					$	4,859
Accounts receivable			1,302						(94)						1,208						1,347
Other assets			1,903						—						1,903						2,981
Intangible assets
Subscriber relationships			17,640						(3,960)						13,680						18,183
Developed technology			4,410						(501)						3,909						12,122
Current liabilities			(2,337)						(35)						(2,372)						(3,606)
Deferred revenue			(397)						202						(195)						(6,421)
Deferred income tax liabilities, net			(6,127)						1,030						(5,097)						(6,112)
Total fair value of assets and liabilities acquired			$	17,062					$	(3,358)					$	13,704					$	23,354
Goodwill			$	32,010					$	3,475					$	35,485					$	50,205

SPS COMMERCE, INC.			8			Form 10-Q for the Quarterly Period ended September 30, 2023

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The following table summarizes the estimated useful lives for each acquired intangible asset:

			Estimated Useful Life
			InterTrade						TIE Kinetix
Subscriber relationships			8.0 years						8.0 years
Developed technology			6.0 years						6.0 years

Other Acquisition Activity

During the third quarter of 2023, the Company had other acquisition activity resulting in a total purchase price of $1.5 million, paid in cash. Assets acquired were primarily comprised of developed technology and customer relationships, totaling $0.9 million of estimated fair value. The remainder of the consideration transferred, $0.6 million, was allocated to goodwill.

NOTE C – Revenue

We derive our revenues from the following revenue streams:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Recurring revenues:
Fulfillment			$	110,900					$	92,952					$	318,069					$	265,570
Analytics			13,098						11,902						38,177						34,846
Other			3,373						1,699						9,949						4,867
Recurring revenues			127,371						106,553						366,195						305,283
One-time revenues			8,290						7,933						25,750						23,574
Total revenue			$	135,661					$	114,486					$	391,945					$	328,857

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.

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.

Given that the recurring revenue contracts are 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 over two years which is the estimated period for which a material right is present for our customers.

SPS COMMERCE, INC.			9			Form 10-Q for the Quarterly Period ended September 30, 2023

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The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Balance, beginning of period			$	16,978					$	15,309					$	14,999					$	14,459
Invoiced set-up fees			4,496						3,715						14,493						11,776
Recognized set-up fees			(4,225)						(3,805)						(12,243)						(11,016)
Balance, end of period			$	17,249					$	15,219					$	17,249					$	15,219

The entire balance of deferred set-up fees will be recognized within two years. Those that will be recognized within the next year are classified as current, whereas the remainder are classified as non-current.

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.

NOTE D – Deferred Costs

The deferred costs activity was as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Balance, beginning of period			$	75,255					$	64,665					$	70,179					$	59,720
Incurred deferred costs			20,094						17,442						57,632						52,860
Amortized deferred costs			(16,303)						(15,551)						(48,765)						(46,024)
Balance, end of period			$	79,046					$	66,556					$	79,046					$	66,556

NOTE E – Fair Value Measurements

Cash Equivalents and Investments

Cash equivalents and investments, as measured at fair value on a recurring basis, consisted of the following:

												September 30, 2023																		December 31, 2022
						Fair Value Level						Amortized Cost						Unrealized Gains (Losses), net						Fair Value						Amortized Cost						Unrealized Gains (Losses), net						Fair Value
(in thousands)
Cash equivalents:
Money market funds						Level 1						$	120,100					$	—					$	120,100					$	73,368					$	—					$	73,368
Investments:
Certificates of deposit						Level 1						6,431						—						6,431						6,813						—						6,813
Marketable securities:
Commercial paper						Level 2						53,546						651						54,197						44,224						375						44,599
												$	180,077					$	651					$	180,728					$	124,405					$	375					$	124,780

SPS COMMERCE, INC.			10			Form 10-Q for the Quarterly Period ended September 30, 2023

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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)			2023						2022
Balance, beginning of period			$	3,066					$	4,249
Provision for credit losses			4,004						2,889
Write-offs, net of recoveries			(3,993)						(3,480)
Balance, end of period			$	3,077					$	3,658

NOTE G – Property and Equipment, Net

Property and equipment, net consisted of the following:

(in thousands)						September 30, 2023						December 31, 2022
Internally developed software						$	57,933					$	49,994
Computer equipment						34,048						30,310
Leasehold improvements						15,361						16,531
Office equipment and furniture						10,993						10,981
Property and equipment, cost						118,335						107,816
Less: accumulated depreciation and amortization						(82,126)						(72,358)
Total property and equipment, net						$	36,209					$	35,458

NOTE H – Goodwill and Intangible Assets, Net

Goodwill

The activity in goodwill was as follows:

			Nine Months Ended September 30,
(in thousands)			2023
Balance, beginning of period			$	197,284
Foreign currency translation			(1,162)
Addition from business acquisition(s)			50,842
Remeasurement from provisional purchase accounting amount			5,081
Balance, end of period			$	252,045

Intangible Assets

Intangible assets, net consisted of the following:

			September 30, 2023
($ in thousands)			Gross Carrying Amount						Accumulated Amortization						Foreign Currency Translation						Net						Weighted Average Remaining Amortization Period
Subscriber relationships			$	97,734					$	(28,771)					$	(4,173)					$	64,790					6.7 years
Acquired technology			53,505						(13,995)						(703)						38,807						5.3 years
			$	151,239					$	(42,766)					$	(4,876)					$	103,597					6.1 years

SPS COMMERCE, INC.			11			Form 10-Q for the Quarterly Period ended September 30, 2023

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			December 31, 2022
($ in thousands)			Gross Carrying Amount						Accumulated Amortization						Foreign Currency Translation						Net						Weighted Average Remaining Amortization Period
Subscriber relationships			$	80,101					$	(22,255)					$	(171)					$	57,675					6.8 years
Acquired technology			40,610						(9,934)						1						30,677						5.7 years
			$	120,711					$	(32,189)					$	(170)					$	88,352					6.4 years

The estimated future annual amortization expense related to intangible assets is as follows:

(in thousands)
Remainder of 2023			$	4,718
2024			17,899
2025			17,761
2026			16,757
2027			16,294
Thereafter			30,168
Total future amortization			$	103,597

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)			2023						2022						2023						2022
Operating lease cost			$	729					$	788					$	2,306					$	2,287
Variable lease cost			909						963						2,787						2,612
			$	1,638					$	1,751					$	5,093					$	4,899

Supplemental cash flow information related to leases was as follows:

			Nine Months Ended September 30,
(in thousands)			2023						2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases			$	3,835					$	3,399
Right-of-use assets obtained in exchange for operating lease liabilities			1,072						934

Supplemental balance sheet information related to operating leases was as follows:

			September 30, 2023						December 31, 2022
Weighted-average remaining lease term			3.3 years						3.9 years
Weighted-average discount rate			3.7		%				4.0		%

SPS COMMERCE, INC.			12			Form 10-Q for the Quarterly Period ended September 30, 2023

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At September 30, 2023, our future minimum payments under operating leases were as follows:

(in thousands)
Remainder of 2023			$	767
2024			5,415
2025			4,589
2026			3,942
2027			1,297
Thereafter			97
Total future gross payments			$	16,107
Less: imputed interest			(1,095)
Total operating lease liabilities			$	15,012

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, 2023, our remaining purchase commitments and estimated purchase timing were as follows:

(in thousands)
Remainder of 2023			$	2,129
2024			11,527
2025			11,178
2026			4,264
Total estimated future purchases			$	29,098

NOTE J – Stockholders’ Equity

Share Repurchase Programs

Our board of directors has authorized multiple non-concurrent programs to repurchase our common stock. Details of the programs and activity thereunder through September 30, 2023 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
2021 Program			November 2021			August 2022						$	50,000					$	49,992					$	8					N/A
2022 Program			August 2022			July 2024						50,000						2,992						N/A						$	47,008

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)			2023						2022						2023						2022
Number of shares repurchased			—						102,234						—						357,430
Shares repurchased cost			$	—					$	12,477					$	—					$	42,700
Average price per repurchased share			$	—					$	122.04					$	—					$	119.46

SPS COMMERCE, INC.			13			Form 10-Q for the Quarterly Period ended September 30, 2023

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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 that have not given their required notice, which is recognized on a pro-rata basis over the notice period prior to retirement. At September 30, 2023, there were 12.8 million shares available for grant under approved equity compensation plans.

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)			2023						2022						2023						2022
Cost of revenues			$	2,506					$	2,146					$	7,595					$	6,477
Operating expenses
Sales and marketing			2,428						1,845						7,379						5,835
Research and development			1,798						1,396						5,387						4,250
General and administrative			4,704						2,573						15,736						9,074
			$	11,436					$	7,960					$	36,097					$	25,636

Stock-based compensation expense by grant type or plan was as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Stock options			$	487					$	461					$	1,472					$	1,401
PSUs			2,812						1,541						10,236						6,244
RSUs & DSUs			6,722						4,735						20,165						14,467
RSAs			122						110						345						328
ESPP			637						577						1,974						1,609
401(k) stock match			656						536						1,905						1,587
			$	11,436					$	7,960					$	36,097					$	25,636

As of September 30, 2023, there was $50.3 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 2.4 years.

SPS COMMERCE, INC.			14			Form 10-Q for the Quarterly Period ended September 30, 2023

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Stock Options

Our stock option activity was as follows:

			Nine Months Ended September 30, 2023
			Options (#)						Weighted Average Exercise Price ($/share)
Outstanding, beginning of period			562,697						$	56.24
Granted			39,949						152.08
Exercised			(154,279)						35.80
Forfeited			(2,236)						127.39
Outstanding, end of period			446,131						$	71.54

Of the total outstanding options at September 30, 2023, 0.4 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $59.61 per share and a weighted average remaining contractual life of 2.9 years.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2023 was $56.29 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)			4.2
Volatility			39.3		%
Dividend yield			—
Risk-free interest rate			4.0		%

Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units

In each of the quarters ended March 31, 2023, 2022, 2021, and 2020 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, 2023, PSU awards granted in 2020 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, 2023
			#						Weighted Average Grant Date Fair Value ($/share)
Outstanding, beginning of period			712,158						$	103.93
Granted			352,457						163.26
Vested and common stock issued			(341,570)						77.06
Forfeited			(7,607)						118.37
Outstanding, end of period			715,438						$	145.83

The number of PSUs, RSUs, RSAs, and DSUs outstanding at September 30, 2023 included 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.

SPS COMMERCE, INC.			15			Form 10-Q for the Quarterly Period ended September 30, 2023

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Employee Stock Purchase Plan

Our ESPP activity was as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except shares)			2023						2022						2023						2022
Amounts for shares purchased			$	344					$	238					$	4,481					$	3,588
Shares purchased			3,159						2,481						41,384						37,516

A total of 1.7 million shares of common stock are reserved for issuance under the ESPP as of September 30, 2023.

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			40.1		%
Dividend yield			—
Risk-free interest rate			4.6		%

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 (expense), net included the following:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Investment income			$	2,635					$	586					$	5,372					$	806
Realized gain (loss) from foreign currency on cash and investments held			98						(1,151)						525						(2,010)
Other expense, net			(1,031)						(130)						(1,038)						(406)
Total other income (expense), net			$	1,702					$	(695)					$	4,859					$	(1,610)

SPS COMMERCE, INC.			16			Form 10-Q for the Quarterly Period ended September 30, 2023

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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)			2023						2022						2023						2022
Numerator
Net income			$	16,842					$	15,863					$	46,813					$	39,219
Denominator
Weighted average common shares outstanding, basic			36,728						36,093						36,584						36,104
Options to purchase common stock			256						379						279						396
PSUs, RSUs, RSAs, and DSUs			600						443						554						442
Weighted average common shares outstanding, diluted			37,584						36,915						37,417						36,942
Net income per share
Basic			$	0.46					$	0.44					$	1.28					$	1.09
Diluted			$	0.45					$	0.43					$	1.25					$	1.06

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)			2023						2022						2023						2022
Anti-dilutive shares			40						107						43						222

NOTE O – Geographic Information

Revenue

Domestic revenue, which we define as revenue that was attributable to customers based within the U.S., was as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Domestic revenue			84		%				85		%				84		%				84		%

No single jurisdiction outside of the U.S. had revenues in excess of 10%.

Property and Equipment

Property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows:

			September 30, 2023						December 31, 2022
International property and equipment			14		%				13		%

SPS COMMERCE, INC.			17			Form 10-Q for the Quarterly Period ended September 30, 2023

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2022, 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, 2022, as filed with the SEC, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

To supplement our 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.

    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 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.”

SPS COMMERCE, INC.			18			Form 10-Q for the Quarterly Period ended September 30, 2023

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Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

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

			Three Months Ended September 30,
			2023												2022												Change
($ in thousands)			$						% of revenue(1)						$						% of revenue(1)						$						%
Revenues			$	135,661					100.0		%				$	114,486					100.0		%				$	21,175					18.5		%
Cost of revenues			45,521						33.6						38,605						33.7						6,916						17.9