This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of theU.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 endedDecember 31, 2021 , 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 theSEC that advise interested parties of the risks and factors that may affect our business. OverviewSPS Commerce is a leading provider of cloud-based supply chain management services across our global retail network. Our products make it easier for retailers, suppliers, grocers, distributors, and logistics firms to orchestrate the management of item data, order fulfillment, inventory control, and sales analytics across omnichannel retail channels.SPS Commerce delivers our products using a full-service model whereby our internal experts monitor, update, and boost network performance on our customers' behalf. The services offered bySPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer's behalf. The services we provide enable our customers to increase their supply cycle agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into customer orders, to help ensure that suppliers, grocers, distributors, and logistics firms can satisfy exacting retailer requirements. 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, Measures and Non-GAAP Measures
We have several key financial terms and metrics, as discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSEC , under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." To supplement our 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 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 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. These non-GAAP 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 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." Form 10-Q for the Quarterly Period [[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 18 ended June 30, 2022 --------------------------------------------------------------------------------
Table of Contents Results of Operations
Three months completed
The following table presents our results of operations for the periods
indicated:
Three Months Ended June 30,
2022 2021 Change
(dollars in thousands) $ % of revenue(1) $ % of revenue(1) $ %
Revenues $ 109,178 100.0 % $ 94,539 100.0 % $ 14,639 15.5 %
Cost of revenues 37,530 34.4 31,730 33.6 5,800 18.3
Gross profit 71,648 65.6 62,809 66.4 8,839 14.1
Operating expenses
Sales and marketing 24,582 22.5 21,952 23.2 2,630 12.0
Research and development 11,432 10.5 8,899 9.4 2,533 28.5
General and administrative 17,198 15.8 15,758 16.7 1,440 9.1
Amortization of intangible
assets 2,468 2.3 2,671 2.8 (203) (7.6)
Total operating expenses 55,680 51.0 49,280 52.1 6,400 13.0
Income from operations 15,968 14.6 13,529 14.3 2,439 18.0
Other expense, net (1,338) (1.2) (383) (0.4) (955) 249.4
Income before income taxes 14,630 13.4 13,146 13.9 1,484 11.3
Income tax expense 3,877 3.6 2,963 3.1 914 30.8
Net income $ 10,753 9.8 % $ 10,183 10.8 % $ 570 5.6 %
(1) Amounts in column may not match due to rounding
Revenues - Revenues increased for the 86th consecutive quarter. The increase in revenue resulted from two primary factors: the increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions, and the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share. •The number of recurring revenue customers increased 12% to 38,650 atJune 30, 2022 from 34,550 atJune 30, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions. •Wallet share increased 4% to$10,550 for the three months endedJune 30, 2022 from$10,150 for the same period in 2021. This was primarily attributable to increased usage of our products by our recurring revenue customers. Recurring revenues increased 16% to$101.2 million for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the three months endedJune 30, 2022 and 2021, respectively. 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 penetrations of our market.
Revenue cost – The increase in revenue cost is mainly due to the increase in headcount, which resulted in an increase in
Sales and marketing expenses – The increase in sales and marketing expenses is mainly explained by the increase in headcount, which resulted in an increase in
Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of$2.1 million in personnel-related costs. Form 10-Q for the Quarterly Period [[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 19 ended June 30, 2022 -------------------------------------------------------------------------------- Table of
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General and Administrative Expenses - The increase in general and administrative expense was primarily related to supporting continued business growth, including an increase in headcount which resulted in an increase in personnel-related costs of$0.8 million . Additionally, there was an increase in professional fees of$0.8 million , which was offset by a decrease of$0.8 million in charitable contributions. Amortization of Intangible Assets - The decrease in amortization of intangible assets was driven by the full amortization of previously acquired intangible assets as partially offset by acquired intangible assets related to recent business combinations.
Other expenses, net – The increase in other expenses, net is mainly due to unfavorable fluctuations in exchange rates.
Income Tax Expense - The increase in income tax expense was primarily driven by a decrease in the excess tax deductions due to the current quarter equity award settlements. 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, which is a non-GAAP measure of financial performance, consists of net income adjusted for income tax expense, amortization and depreciation expense, expense stock-based compensation, realized foreign exchange gain or loss on cash and investments held, investment income or loss and other adjustments necessary for fair presentation.
For the three months ended
The following table provides a reconciliation of net income to Adjusted EBITDA:
Three Months Ended
June 30,
(in thousands) 2022 2021
Net income $ 10,753 $ 10,183
Income tax expense 3,877 2,963
Depreciation and amortization of property and equipment 3,950 3,529
Amortization of intangible assets 2,468 2,671
Stock-based compensation expense 8,661 7,499
Realized loss from foreign currency on cash and investments held 1,327 349
Investment income (172) (79)
Other - 213
Adjusted EBITDA $ 30,864 $ 27,328
Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 20 ended June 30, 2022
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Adjusted EBITDA Margin - Adjusted EBITDA Margin, which is a non-GAAP measure of
financial performance, 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
June 30,
(in thousands, except Margin and Adjusted EBITDA Margin) 2022 2021
Revenue $ 109,178 $ 94,539
Net income 10,753 10,183
Margin 10 % 11 %
Adjusted EBITDA 30,864 27,328
Adjusted EBITDA Margin 28 % 29 %
Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP
measure of financial performance, consists of net income plus 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, 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.
For the three months ended
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 to non-GAAP income
per share:
Three Months Ended
June 30,
(in thousands, except per share amounts) 2022 2021
Net income $ 10,753 $ 10,183
Stock-based compensation expense 8,661 7,499
Amortization of intangible assets 2,468 2,671
Realized foreign exchange loss on cash and investments held 1,327
349 Other - 213 Income tax effects of adjustments (3,491) (3,999) Non-GAAP income$ 19,718 $ 16,916 Shares used to compute non-GAAP income per share Basic 36,085 35,903 Diluted 36,862 36,753 Non-GAAP income per share Basic$ 0.55 $ 0.47 Diluted$ 0.53 $ 0.46 Form 10-Q for the Quarterly Period [[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 21 ended June 30, 2022 -------------------------------------------------------------------------------- Table of
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Semester completed
The following table presents our results of operations for the periods
indicated:
Six Months Ended June 30,
2022 2021 Change
(dollars in thousands) $ % of revenue(1) $ % of revenue(1) $ %
Revenues $ 214,371 100.0 % $ 184,633 100.0 % $ 29,738 16.1 %
Cost of revenues 72,919 34.0 61,700 33.4 11,219 18.2
Gross profit 141,452 66.0 122,933 66.6 18,519 15.1
Operating expenses
Sales and marketing 49,237 23.0 43,307 23.5 5,930 13.7
Research and development 22,133 10.3 17,605 9.5 4,528 25.7
General and administrative 32,666 15.2 30,495 16.5 2,171 7.1
Amortization of intangible
assets 4,938 2.3 5,335 2.9 (397) (7.4)
Total operating expenses 108,974 50.8 96,742 52.4 12,232 12.6
Income from operations 32,478 15.2 26,191 14.2 6,287 24.0
Other expense, net (915) (0.4) (708) (0.4) (207) 29.2
Income before income taxes 31,563 14.7 25,483 13.8 6,080 23.9
Income tax expense 8,207 3.8 5,100 2.8 3,107 60.9
Net income $ 23,356 10.9 % $ 20,383 11.0 % $ 2,973 14.6 %
(1) Amounts in column may not match due to rounding
Revenues - The increase in revenue resulted from two primary factors: the increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions, and the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share.
• The number of recurring revenue customers increased by 12% to 38,650 at
• The share of wallet increased by 4% for
of
Recurring revenues increased 17% to$198.7 million for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the six months endedJune 30, 2022 and 2021, respectively. 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 penetrations of our market.
Revenue cost – The increase in revenue cost is mainly due to the increase in headcount, which resulted in an increase in
Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of$3.7 million in personnel-related costs, an increase of$0.8 million in stock-based compensation, and an increase of$0.7 million in variable compensation earned by sales personnel. Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of$3.2 million in personnel-related costs, an increase of$0.8 million in stock-based compensation, and an increase of$0.6 million in software subscriptions. Form 10-Q for the Quarterly Period [[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 22 ended June 30, 2022 -------------------------------------------------------------------------------- Table of
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General and Administrative Expenses - The increase in general and administrative expense was primarily related to supporting continued business growth, including an increase in headcount, which resulted in an increase in personnel-related costs of$1.6 million and an increase in stock-based compensation of$0.6 million . This was partially offset by a decrease of$1.3 million in charitable contributions. Amortization of Intangible Assets - The decrease in amortization of intangible assets was driven by the full amortization of previously acquired intangible assets as partially offset by acquired intangible assets related to recent business combinations.
Other expenses, net – The increase in other expenses, net is mainly due to unfavorable fluctuations in exchange rates.
Income Tax Expense - The increase in income tax expense was primarily driven by a decrease in the excess tax deductions due to the current period equity award settlements, partially offset by a decrease in nondeductible executive compensation. Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.
Adjusted EBITDA – Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for income tax expense, amortization and depreciation expense, expense stock-based compensation, realized foreign exchange gain or loss on cash and investments held, investment income or loss and other adjustments necessary for fair presentation.
For the six months endedJune 30, 2021 , other adjustments included disposals of cloud hosting arrangement implementation costs and accelerated tenant improvement benefit, which was incurred as part of executing a lease agreement. This tenant improvement adjustment was partially offset by accelerated depreciation, which is included within Depreciation and amortization of property and equipment and was also incurred as part of executing a lease agreement. The following table provides a reconciliation of net income to Adjusted EBITDA: Six Months Ended June 30, (in thousands) 2022 2021 Net income$ 23,356 $ 20,383 Income tax expense 8,207 5,100 Depreciation and amortization of property and equipment 7,814 7,294 Amortization of intangible assets 4,938 5,335 Stock-based compensation expense 17,676 14,424
Realized exchange loss on cash and investments held 859
638 Investment income (220) (176) Other - (213) Adjusted EBITDA$ 62,630 $ 52,785 Adjusted EBITDA Margin - Adjusted EBITDA Margin, which is a non-GAAP measure of financial performance, 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 margin to margin comparison of Adjusted EBITDA:
Form 10-Q for the Quarterly Period [[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 23 ended June 30, 2022 --------------------------------------------------------------------------------
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Six Months Ended
June 30,
(in thousands, except Margin and Adjusted EBITDA Margin) 2022 2021
Revenue $ 214,371 $ 184,633
Net income 23,356 20,383
Margin 11 % 11 %
Adjusted EBITDA 62,630 52,785
Adjusted EBITDA Margin 29 % 29 %
Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP
measure of financial performance, consists of net income plus 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, 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.
For the six months ended June 30, 2021 , other adjustments included disposals of
cloud hosting arrangement implementation costs and accelerated tenant
improvement benefit, which was incurred as part of executing a lease agreement.
This tenant improvement adjustment was partially offset by accelerated
depreciation, which is included within Depreciation and amortization of property
and equipment and was also incurred as part of executing a lease agreement.
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 to non-GAAP income
per share:
Six Months Ended
June 30,
(in thousands, except per share amounts) 2022 2021
Net income $ 23,356 $ 20,383
Stock-based compensation expense 17,676 14,424
Amortization of intangible assets 4,938 5,335
Realized exchange loss on cash and investments held 859
638 Other - (213) Income tax effects of adjustments (6,710) (7,974) Non-GAAP income$ 40,119 $ 32,593 Shares used to compute non-GAAP income per share Basic 36,110 35,828 Diluted 36,897 36,741 Non-GAAP income per share Basic$ 1.11 $ 0.91 Diluted$ 1.09 $ 0.89
Significant 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 financial statements requires us to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses and related disclosures. On an
ongoing basis,
Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 24 ended June 30, 2022
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we evaluate our estimates 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, internal-use software, and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations. During the six months endedJune 30, 2022 , 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 endedDecember 31, 2021 , as filed with theSEC .
Cash and capital resources
As ofJune 30, 2022 , our principal sources of liquidity were cash and cash equivalents and short-term investments totaling$259.2 million and net accounts receivable of$40.1 million . Our investments are selected in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation. Our cash equivalents and short-term investments are held in highly liquid money market funds, certificates of deposits, and commercial paper. The summary of activity within the condensed consolidated statements of cash flows was as follows: Six Months Ended June 30, (in thousands) 2022 2021
Net cash flow generated by operating activities
Net cash used in investing activities (5,294) (17,772) Net cash used in financing activities (26,183) (2,276)
Net cash flow from operating activities
The decrease in cash flow from operating activities is mainly due to changes in the amount and timing of settlement of operating assets and liabilities, mainly the change in compensation payable.
Net cash flow from investing activities
The decrease in cash used in investing activities is mainly attributable to the increase in maturities of investments, partially offset by the increase in purchases of investments.
Net cash flow from financing activities
The increase in cash flow used in financing activities is mainly due to the increase in cash flow used for share buybacks.
Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC. 25 ended June 30, 2022
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Summary of contractual and commercial commitments
Our contractual obligations and commercial commitments as ofJune 30, 2022 are summarized below: Payments Due by Period Less Than More Than (in thousands) 1 Year 1-3 Years 3-5 Years 5 Years Total Operating lease obligations, including imputed interest$ 5,012 $ 8,459 $ 6,887 $ -$ 20,358 Purchase commitments 5,516 515 - - 6,031 Total$ 10,528 $ 8,974 $ 6,887 $ -$ 26,389 Future Capital Requirements
Our future capital requirements may differ significantly from those currently anticipated and will depend on many factors, including:
•costs of developing and implementing new products and applications, if any;
•the sales and marketing resources needed to further penetrate our market and gain acceptance for new products and applications that we may develop;
•the expansion of our operations in the
•response of competitors to our products and applications; and
•the use of capital for acquisitions, if any.
Historically, we have experienced increases in our expenses in line with the growth of our operations and our workforce, and we expect our expenses to continue to increase as we expand our business.
We believe that our cash, cash equivalents, investments and cash flow from 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 have no off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debts. In addition, we are not a party to any derivative contracts or synthetic leases.
Exchange rate and inflation rate
For information regarding the effect of foreign currency exchange rate changes, refer to the section entitled "Foreign Currency Exchange Risk," included in Part I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk" of this Quarterly Report on Form 10-Q. Inflation and changing prices did not have a material effect on our business during the six months endedJune 30, 2022 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
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