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SPS COMMERCE INC - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: September 30, 2021

 

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 ☒  No 

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  ☒    No  

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

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at October 21, 2021 was 35,964,238 shares.

 


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

 

26

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

27

 

 

 

 

 

Item 1A.

 

Risk Factors

 

27

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

27

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

27

 

 

 

 

 

Item 5.

 

Other Information

 

27

 

 

 

 

 

Item 6.

 

Exhibits

 

28

 

 

 

 

 

Signatures

 

29

 

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, 2021

 


Table of Contents

 

 

PART I. – FINANCIAL INFORMATION

Item 1.Financial Statements

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

(in thousands, except shares)

 

2021

 

 

2020

 

ASSETS

 

(unaudited)

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

195,803

 

 

$

149,692

 

Short-term investments

 

 

56,183

 

 

 

37,786

 

Accounts receivable

 

 

39,934

 

 

 

37,811

 

Allowance for credit losses

 

 

(4,604

)

 

 

(4,233

)

Accounts receivable, net

 

 

35,330

 

 

 

33,578

 

Deferred costs

 

 

41,593

 

 

 

37,988

 

Other assets

 

 

14,346

 

 

 

12,312

 

Total current assets

 

 

343,255

 

 

 

271,356

 

PROPERTY AND EQUIPMENT, less accumulated depreciation of $70,663 and $59,152, respectively

 

 

31,036

 

 

 

26,432

 

OPERATING LEASE RIGHT-OF-USE ASSETS

 

 

12,665

 

 

 

15,581

 

GOODWILL

 

 

134,680

 

 

 

134,853

 

INTANGIBLE ASSETS, net

 

 

52,471

 

 

 

60,230

 

INVESTMENTS

 

 

 

 

 

2,500

 

OTHER ASSETS

 

 

 

 

 

 

 

 

Deferred costs, non-current

 

 

14,500

 

 

 

12,607

 

Deferred income tax assets

 

 

189

 

 

 

194

 

Other assets, non-current

 

 

2,487

 

 

 

2,705

 

Total assets

 

$

591,283

 

 

$

526,458

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,752

 

 

$

5,354

 

Accrued compensation

 

 

30,986

 

 

 

22,872

 

Accrued expenses

 

 

7,110

 

 

 

11,161

 

Deferred revenue

 

 

49,185

 

 

 

37,947

 

Operating lease liabilities

 

 

3,895

 

 

 

2,798

 

Total current liabilities

 

 

94,928

 

 

 

80,132

 

OTHER LIABILITIES

 

 

 

 

 

 

 

 

Deferred revenue, non-current

 

 

5,159

 

 

 

2,996

 

Operating lease liabilities, non-current

 

 

16,697

 

 

 

19,672

 

Deferred income tax liabilities

 

 

3,971

 

 

 

2,937

 

Total liabilities

 

 

120,755

 

 

 

105,737

 

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; 37,683,302 and 37,100,467 shares issued; and 35,964,238 and 35,487,217 shares outstanding, respectively

 

 

38

 

 

 

37

 

Treasury Stock, at cost; 1,719,064 and 1,613,250 shares, respectively

 

 

(75,908

)

 

 

(65,247

)

Additional paid-in capital

 

 

422,670

 

 

 

393,462

 

Retained earnings

 

 

125,322

 

 

 

93,490

 

Accumulated other comprehensive loss

 

 

(1,594

)

 

 

(1,021

)

Total stockholders’ equity

 

 

470,528

 

 

 

420,721

 

Total liabilities and stockholders’ equity

 

$

591,283

 

 

$

526,458

 

See accompanying notes to these condensed consolidated financial statements.

 

    SPS COMMERCE, INC.

3

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands, except per share amounts) (unaudited)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenues

 

$

97,887

 

 

$

79,557

 

 

$

282,520

 

 

$

229,322

 

Cost of revenues

 

 

34,343

 

 

 

25,045

 

 

 

96,043

 

 

 

72,915

 

Gross profit

 

 

63,544

 

 

 

54,512

 

 

 

186,477

 

 

 

156,407

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

22,079

 

 

 

19,233

 

 

 

65,386

 

 

 

56,143

 

Research and development

 

 

10,854

 

 

 

8,053

 

 

 

28,459

 

 

 

23,087

 

General and administrative

 

 

14,691

 

 

 

11,939

 

 

 

45,186

 

 

 

36,591

 

Amortization of intangible assets

 

 

2,399

 

 

 

1,333

 

 

 

7,734

 

 

 

3,985

 

Total operating expenses

 

 

50,023

 

 

 

40,558

 

 

 

146,765

 

 

 

119,806

 

Income from operations

 

 

13,521

 

 

 

13,954

 

 

 

39,712

 

 

 

36,601

 

Other income (expense), net

 

 

(716

)

 

 

423

 

 

 

(1,424

)

 

 

1,218

 

Income before income taxes

 

 

12,805

 

 

 

14,377

 

 

 

38,288

 

 

 

37,819

 

Income tax expense

 

 

1,356

 

 

 

2,970

 

 

 

6,456

 

 

 

5,703

 

Net income

 

$

11,449

 

 

$

11,407

 

 

$

31,832

 

 

$

32,116

 

Other comprehensive income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(968

)

 

 

969

 

 

 

(604

)

 

 

(779

)

Unrealized gain (loss) on investments, net of tax of ($9), ($21), ($36) and $6, respectively

 

 

(27

)

 

 

(59

)

 

 

(107

)

 

 

19

 

Reclassification of (gain) loss on investments into earnings, net of tax of $16, $2, $46 and ($51), respectively

 

 

48

 

 

 

7

 

 

 

138

 

 

 

(151

)

Total other comprehensive income (expense)

 

 

(947

)

 

 

917

 

 

 

(573

)

 

 

(911

)

Comprehensive income

 

$

10,502

 

 

$

12,324

 

 

$

31,259

 

 

$

31,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

 

$

0.32

 

 

$

0.89

 

 

$

0.91

 

Diluted

 

$

0.31

 

 

$

0.31

 

 

$

0.86

 

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,961

 

 

 

35,295

 

 

 

35,873

 

 

 

35,133

 

Diluted

 

 

37,015

 

 

 

36,366

 

 

 

36,898

 

 

 

36,137

 

 

 See accompanying notes to these condensed consolidated financial statements.

 

    SPS COMMERCE, INC.

4

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

(in thousands, except shares) (unaudited)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balances, June 30, 2020

 

 

35,126,118

 

 

$

37

 

 

 

1,613,250

 

 

$

(65,247

)

 

$

373,686

 

 

$

68,613

 

 

$

(3,779

)

 

$

373,310

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,494

 

 

 

 

 

 

 

 

 

4,494

 

Exercise of stock options and issuance of restricted stock

 

 

163,478

 

 

 

 

 

 

 

 

 

 

 

 

4,717

 

 

 

 

 

 

 

 

 

4,717

 

Employee stock purchase plan

 

 

2,010

 

 

 

 

 

 

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,407

 

 

 

 

 

 

11,407

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

969

 

 

 

969

 

Unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59

)

 

 

(59

)

Reclassification of loss on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

7

 

Balances, September 30, 2020

 

 

35,291,606

 

 

$

37

 

 

 

1,613,250

 

 

$

(65,247

)

 

$

382,992

 

 

$

80,020

 

 

$

(2,862

)

 

$

394,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, June 30, 2021

 

 

35,859,353

 

 

$

38

 

 

 

1,676,765

 

 

$

(71,697

)

 

$

413,182

 

 

$

113,873

 

 

$

(647

)

 

$

454,749

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,361

 

 

 

 

 

 

 

 

 

6,361

 

Exercise of stock options and issuance of restricted stock

 

 

145,658

 

 

 

 

 

 

 

 

 

 

 

 

2,997

 

 

 

 

 

 

 

 

 

2,997

 

Employee stock purchase plan

 

 

1,526

 

 

 

 

 

 

 

 

 

 

 

 

130

 

 

 

 

 

 

 

 

 

130

 

Repurchases of common stock

 

 

(42,299

)

 

 

 

 

 

42,299

 

 

 

(4,211

)

 

 

 

 

 

 

 

 

 

 

 

(4,211

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,449

 

 

 

 

 

 

11,449

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(968

)

 

 

(968

)

Unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

(27

)

Reclassification of loss on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48

 

 

 

48

 

Balances, September 30, 2021

 

 

35,964,238

 

 

$

38

 

 

 

1,719,064

 

 

$

(75,908

)

 

$

422,670

 

 

$

125,322

 

 

$

(1,594

)

 

$

470,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balances, December 31, 2019

 

 

34,863,271

 

 

$

36

 

 

 

1,241,348

 

 

$

(46,297

)

 

$

354,115

 

 

$

48,973

 

 

$

(1,951

)

 

$

354,876

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,090

 

 

 

 

 

 

 

 

 

13,090

 

Exercise of stock options and issuance of restricted stock

 

 

765,144

 

 

 

1

 

 

 

 

 

 

 

 

 

14,142

 

 

 

 

 

 

 

 

 

14,143

 

Employee stock purchase plan

 

 

35,093

 

 

 

 

 

 

 

 

 

 

 

 

1,645

 

 

 

 

 

 

 

 

 

1,645

 

Repurchases of common stock

 

 

(371,902

)

 

 

 

 

 

371,902

 

 

 

(18,950

)

 

 

 

 

 

 

 

 

 

 

 

(18,950

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,116

 

 

 

 

 

 

32,116

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(779

)

 

 

(779

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

19

 

Reclassification of gain on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(151

)

 

 

(151

)

Adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,069

)

 

 

 

 

 

(1,069

)

Balances, September 30, 2020

 

 

35,291,606

 

 

$

37

 

 

 

1,613,250

 

 

$

(65,247

)

 

$

382,992

 

 

$

80,020

 

 

$

(2,862

)

 

$

394,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2020

 

 

35,487,217

 

 

$

37

 

 

 

1,613,250

 

 

$

(65,247

)

 

$

393,462

 

 

$

93,490

 

 

$

(1,021

)

 

$

420,721

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,866

 

 

 

 

 

 

 

 

 

19,866

 

Exercise of stock options and issuance of restricted stock

 

 

555,160

 

 

 

1

 

 

 

 

 

 

 

 

 

7,026

 

 

 

 

 

 

 

 

 

7,027

 

Employee stock purchase plan

 

 

27,675

 

 

 

 

 

 

 

 

 

 

 

 

2,316

 

 

 

 

 

 

 

 

 

2,316

 

Repurchases of common stock

 

 

(105,814

)

 

 

 

 

 

105,814

 

 

 

(10,661

)

 

 

 

 

 

 

 

 

 

 

 

(10,661

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,832

 

 

 

 

 

 

31,832

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(604

)

 

 

(604

)

Unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(107

)

 

 

(107

)

Reclassification of loss on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

138

 

 

 

138

 

Balances, September 30, 2021

 

 

35,964,238

 

 

$

38

 

 

 

1,719,064

 

 

$

(75,908

)

 

$

422,670

 

 

$

125,322

 

 

$

(1,594

)

 

$

470,528

 

  

See accompanying notes to these condensed consolidated financial statements.

 

    SPS COMMERCE, INC.

5

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands) (unaudited)

 

2021

 

 

2020

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

31,832

 

 

$

32,116

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,013

 

 

 

4,324

 

Change in earn-out liability

 

 

 

 

 

72

 

Depreciation and amortization of property and equipment

 

 

10,989

 

 

 

9,474

 

Amortization of intangible assets

 

 

7,734

 

 

 

3,985

 

Provision for credit losses

 

 

4,037

 

 

 

4,198

 

Stock-based compensation

 

 

21,273

 

 

 

14,246

 

Other, net

 

 

234

 

 

 

(16

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,327

)

 

 

(4,551

)

Deferred costs

 

 

(5,686

)

 

 

(1,129

)

Other current and non-current assets

 

 

(3,893

)

 

 

2,612

 

Accounts payable

 

 

(1,518

)

 

 

1,357

 

Accrued compensation

 

 

6,617

 

 

 

(3,989

)

Accrued expenses

 

 

(174

)

 

 

(3

)

Deferred revenue

 

 

13,401

 

 

 

3,961

 

Operating leases

 

 

1,036

 

 

 

(1,128

)

Net cash provided by operating activities

 

 

81,568

 

 

 

65,529

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(15,567

)

 

 

(11,639

)

Purchases of investments

 

 

(84,020

)

 

 

(67,636

)

Maturities of investments

 

 

67,500

 

 

 

47,300

 

Net cash used in investing activities

 

 

(32,087

)

 

 

(31,975

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(10,661

)

 

 

(18,950

)

Net proceeds from exercise of options to purchase common stock

 

 

7,027

 

 

 

14,143

 

Net proceeds from employee stock purchase plan

 

 

2,316

 

 

 

1,645

 

Payments for contingent consideration

 

 

(2,042

)

 

 

(688

)

Net cash used in financing activities

 

 

(3,360

)

 

 

(3,850

)

Effect of foreign currency exchange rate changes

 

 

(10

)

 

 

(26

)

Net increase in cash and cash equivalents

 

 

46,111

 

 

 

29,678

 

Cash and cash equivalents at beginning of period

 

 

149,692

 

 

 

179,252

 

Cash and cash equivalents at end of period

 

$

195,803

 

 

$

208,930

 

See accompanying notes to these condensed consolidated financial statements.

 

 

    SPS COMMERCE, INC.

6

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

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 solutions that 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 all channels. For many businesses, implementing and maintaining a suite of supply chain management capabilities is resource-intensive and not a core competency. The solutions offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. These solutions also 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, helping ensure that suppliers, grocers, distributors, and logistics firms can satisfy retailer requirements.

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. 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 shown. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (“SEC”).

Business Combinations

In December 2020, we acquired all of the outstanding equity ownership interests of D Masons Software, LLC (“Data Masons”). As of December 31, 2020, the purchase accounting for the acquisition was not finalized. During the three months ended March 31, 2021, the only change in the purchase accounting was a $0.3 million reduction of amounts due from the seller as part of the initial net working capital adjustment and a corresponding increase to goodwill. As of September 30, 2021, the purchase accounting for the acquisition was finalized, without any change from that recorded at March 31, 2021.

Use of Estimates

Preparing financial statements in conformity with GAAP requires management to make estimates 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.

Recently Issued and Adopted Accounting Pronouncements

For the nine months ended September 30, 2021, there were no newly adopted accounting pronouncements. As of September 30, 2021, there are no recently issued but not yet adopted accounting pronouncements that are expected to materially impact our consolidated financial statements.

 

Significant Accounting Policies

There were no material changes in our significant accounting policies during the nine months ended September 30, 2021. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC, for additional information regarding our significant accounting policies.

 

    SPS COMMERCE, INC.

7

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

NOTE B – Revenue

 

We derive our revenues from the following revenue streams:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Recurring revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment

 

$

78,106

 

 

$

64,115

 

 

$

224,738

 

 

$

183,963

 

Analytics

 

 

10,858

 

 

 

9,826

 

 

 

31,383

 

 

 

28,809

 

Other

 

 

1,435

 

 

 

1,244

 

 

 

4,019

 

 

 

3,664

 

Recurring Revenues

 

 

90,399

 

 

 

75,185

 

 

 

260,140

 

 

 

216,436

 

One-time revenues

 

 

7,488

 

 

 

4,372

 

 

 

22,380

 

 

 

12,886

 

 

 

$

97,887

 

 

$

79,557

 

 

$

282,520

 

 

$

229,322

 

 

Revenues are recognized when our services are made available to our customers, in an amount that reflects the consideration we are contractually and legally entitled to in exchange for those services.

We determine revenue recognition through the following steps:

 

-

Identification of the contract, or contracts, with a customer

 

-

Identification of the performance obligations in the contract

 

-

Determination of the transaction price

 

-

Allocation of the transaction price to the performance obligations in the contract

 

-

Recognition of revenue when, or as, we satisfy a performance obligation

Recurring Revenues

Recurring revenues consist of recurring subscriptions from customers that utilize our Fulfillment, Analytics, and Other cloud-based supply chain management solutions. Revenue for these solutions 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, 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 are either in advance or within 30 days of the service being performed.

The deferred revenue liability for recurring revenue contracts are for one year or less and recognized on a ratable basis over the contract term. We have applied the optional exemption to not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.

One-time Revenues

One-time revenues consist of set-up fees from customers and miscellaneous one-time fees.

Set-up fees are specific for each connection a customer has with a trading partner and many of our customers have connections with numerous trading partners. Set-up fees related to our cloud-based supply chain management solutions are nonrefundable upfront fees that are necessary for our customers to utilize our cloud-based services. These set-up fees do not provide any standalone value to our customers.

Certain contracts contain set-up fees that constitute a material renewal option right. This material right provides customers a significant future incentive that would not otherwise be available to them unless they entered into the contract, as the set-up fees will not be incurred again upon contract renewal.

 

    SPS COMMERCE, INC.

8

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

For our Fulfillment solution, we have determined that the set-up fees and related costs represent a material renewal option right to our customers as they will not be incurred again upon renewal. These 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.

For our Analytics solution, we have determined that the set-up fees do not represent a material customer renewal right and, as such, are deferred and recognized ratably over the estimated initial contract term, which is generally one year.

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance, beginning of period

 

$

13,344

 

 

$

10,633

 

 

$

11,118

 

 

$

10,518

 

Invoiced set-up fees

 

 

3,622

 

 

 

2,757

 

 

 

11,832

 

 

 

8,224

 

Amortized set-up fees

 

 

(3,245

)

 

 

(2,698

)

 

 

(9,229

)

 

 

(8,050

)

Balance, end of period

 

$

13,721

 

 

$

10,692

 

 

$

13,721

 

 

$

10,692

 

 

The entire balance of set-up fees will be recognized within two years and, as such, current amounts will be recognized in the next 1-12 months and long-term amounts will be recognized in the next 13-24 months.

Miscellaneous one-time fees consist of professional services and testing and certification. The deferred revenue liability for these one-time fees are 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 contracts which have original durations of one year or less.

 

NOTE C – Deferred Costs

The deferred costs and amortization of deferred costs activity was as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance, beginning of period

 

$

53,841

 

 

$

46,649

 

 

$

50,595

 

 

$

46,941

 

Incurred deferred costs

 

 

16,459

 

 

 

14,258

 

 

 

45,922

 

 

 

39,329

 

Amortized deferred costs

 

 

(14,207

)

 

 

(12,774

)

 

 

(40,424

)

 

 

(38,137

)

Balance, end of period

 

$

56,093

 

 

$

48,133

 

 

$

56,093

 

 

$

48,133

 

 

NOTE D – Financial Instruments

We invest primarily in money market funds, certificates of deposit, highly liquid debt instruments of the United States (“U.S.”) government and U.S. corporate debt securities. All investments with remaining maturities of less than one year from the balance sheet date are classified as short-term investments. Investments with remaining maturities of more than one year from the balance sheet date are classified as long-term investments. Our short-term marketable securities are classified as available-for-sale. We intend to hold marketable securities until maturity; however, we may sell these securities at any time for use in current operations or for other purposes.

Our marketable securities are carried at fair value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive loss in the condensed consolidated balance sheets. Realized gains or losses are included in other income (expense), net in the condensed consolidated statements of comprehensive income. Certain securities accrue interest that is included in other income (expense), net. The unrealized gains (losses) noted below are exclusive of previously recognized interest income. When a determination has been made that the fair value of a marketable security is below its amortized cost basis, the portion of the unrealized loss that corresponds to a credit-related factor is realized through a credit allowance on the marketable security and the equivalent expense is realized in other income (expense), net in the condensed consolidated statements of comprehensive income.

 

    SPS COMMERCE, INC.

9

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

Cash equivalents and investments consisted of the following:

 

 

 

September 30, 2021

 

 

December 31, 2020

 

(in thousands)

 

Amortized Cost

 

 

Unrealized Gains (Losses), net

 

 

Fair Value

 

 

Amortized Cost

 

 

Unrealized Losses, net

 

 

Fair Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

151,661

 

 

$

 

 

$

151,661

 

 

$

112,907

 

 

$

 

 

$

112,907

 

Certificates of deposit

 

 

7,229

 

 

 

 

 

 

7,229

 

 

 

7,708

 

 

 

 

 

 

7,708

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. corporate bonds

 

 

4,996

 

 

 

4

 

 

 

5,000

 

 

 

5,069

 

 

 

(29

)

 

 

5,040

 

Commercial paper

 

 

32,485

 

 

 

1

 

 

 

32,486

 

 

 

7,569

 

 

 

(55

)

 

 

7,514

 

U.S. treasury securities

 

 

11,543

 

 

 

(75

)

 

 

11,468

 

 

 

20,051

 

 

 

(27

)

 

 

20,024

 

 

 

$

207,914

 

 

$

(70

)

 

$

207,844

 

 

$

153,304

 

 

$

(111

)

 

$

153,193

 

Maturing within one year

 

 

 

 

 

 

 

 

 

$

207,844

 

 

 

 

 

 

 

 

 

 

$

150,693

 

Maturing within one to two years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,500

 

Total

 

 

 

 

 

 

 

 

 

$

207,844

 

 

 

 

 

 

 

 

 

 

$

153,193

 

 

 

Recurring Fair Value Measurements

The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

 

 

September 30, 2021

 

 

December 31, 2020

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

151,661

 

 

$

 

 

$

 

 

$

151,661

 

 

$

112,907

 

 

$

 

 

$

 

 

$

112,907

 

Certificates of deposit

 

 

7,229

 

 

 

 

 

 

 

 

 

7,229

 

 

 

7,708

 

 

 

 

 

 

 

 

 

7,708

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. corporate bonds

 

 

 

 

 

5,000

 

 

 

 

 

 

5,000

 

 

 

 

 

 

5,040

 

 

 

 

 

 

5,040

 

Commercial paper

 

 

 

 

 

32,486

 

 

 

 

 

 

32,486

 

 

 

 

 

 

7,514

 

 

 

 

 

 

7,514

 

U.S. treasury securities

 

 

 

 

 

11,468

 

 

 

 

 

 

11,468

 

 

 

 

 

 

20,024

 

 

 

 

 

 

20,024

 

 

 

$

158,890

 

 

$

48,954

 

 

$

 

 

$

207,844

 

 

$

120,615

 

 

$

32,578

 

 

$

 

 

$

153,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,878

 

 

$

1,878

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,878

 

 

$

1,878

 

 

See Note E to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC, for additional information regarding the three levels of inputs that may be used to measure fair value.

For the contingent consideration liability, related to the Data Masons acquisition, we were required to pay the former owners of Data Masons $1.9 million in the event the Paycheck Protection Program Loan (“PPP Loan”) acquired in the acquisition was forgiven in full. In the three months ended June 30, 2021, the Small Business Administration approved the full forgiveness of the PPP Loan and, accordingly, the payment of the $1.9 million contingent liability was made.

 

    SPS COMMERCE, INC.

10

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

NOTE E – 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)

 

2021

 

 

2020

 

Balance, beginning of period

 

$

4,233

 

 

$

1,469

 

Adoption of ASU 2016-13

 

 

 

 

 

1,069

 

Provision for credit losses

 

 

4,037

 

 

 

4,198

 

Write-offs, net of recoveries

 

 

(3,666

)

 

 

(2,977

)

Balance, end of period

 

$

4,604

 

 

$

3,759

 

 

NOTE F – Goodwill and Intangible Assets, net

Goodwill

The changes in the net carrying amount of goodwill were as follows:

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

Balance, beginning of period

 

$

134,853

 

 

$

76,845

 

Remeasurement from provisional purchase accounting amount

 

 

268

 

 

 

 

Foreign currency translation adjustments

 

 

(441

)

 

 

(302

)

Balance, end of period

 

$

134,680

 

 

$

76,543

 

 

Intangible Assets

Intangible assets subject to amortization are amortized over their respective useful lives (ranging from three to ten years). Intangible assets, net included the following:

 

 

 

September 30, 2021

 

 

 

Gross

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

(in thousands)

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

Subscriber relationships

 

$

54,870

 

 

$

(28,851

)

 

$

(1,062

)

 

$

24,957

 

Non-competition agreements

 

 

708

 

 

 

(708

)

 

 

 

 

$

 

Acquired technology

 

 

33,216

 

 

 

(5,702

)

 

 

 

 

 

27,514

 

 

 

$

88,794

 

 

$

(35,261

)

 

$

(1,062

)

 

$

52,471

 

 

 

 

December 31, 2020

 

 

 

Gross

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

(in thousands)

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

Subscriber relationships

 

$

54,447

 

 

$

(24,792

)

 

$

101

 

 

$

29,756

 

Non-competition agreements

 

 

698

 

 

 

(691

)

 

 

(4

)

 

 

3

 

Acquired technology

 

 

33,195

 

 

 

(2,724

)

 

 

 

 

 

30,471

 

 

 

$

88,340

 

 

$

(28,207

)

 

$

97

 

 

$

60,230

 

 

 

    SPS COMMERCE, INC.

11

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

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

 

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

2,214

 

2022

 

 

8,822

 

2023

 

 

8,746

 

2024

 

 

7,476

 

2025

 

 

7,337

 

Thereafter

 

 

17,876

 

Total future amortization

 

$

52,471

 

 

NOTE G – Other Assets

 

The changes in the net amount of capitalized implementation costs for software hosting arrangements was as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance, beginning of period

 

$

943

 

 

$

1,188

 

 

$

1,181

 

 

$

1,166

 

Capitalized implementation fees

 

 

32

 

 

 

7

 

 

 

130

 

 

 

87

 

Amortization of implementation fees

 

 

(172

)

 

 

(65

)

 

 

(508

)

 

 

(123

)

Balance, end of period

 

$

803

 

 

$

1,130

 

 

$

803

 

 

$

1,130

 

 

NOTE H – Commitments and Contingencies

Leases

We are obligated under non-cancellable operating leases, primarily for office space, as follows:

 

 

 

September 30, 2021

 

 

December 31, 2020

 

(in thousands, except remaining term)

 

Remaining Term (years)

 

 

Right-of-Use Asset

 

 

Remaining Term (years)

 

 

Right-of-Use Asset

 

Minneapolis, MN lease

 

 

6

 

 

$

9,268

 

 

 

6

 

 

$

10,992

 

Kyiv, Ukraine lease

 

 

4

 

 

 

1,632

 

 

 

4

 

 

 

1,930

 

Other leases

 

<1 - 4

 

 

 

1,765

 

 

<1 - 5

 

 

 

2,659

 

 

 

 

 

 

 

$

12,665

 

 

 

 

 

 

$

15,581

 

 

 

The components of lease expense were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating lease cost

 

$

873

 

 

$

857

 

 

$

2,309

 

 

$

2,225

 

Variable lease cost

 

 

976

 

 

 

886

 

 

 

2,694

 

 

 

2,687

 

 

 

$

1,849

 

 

$

1,743

 

 

$

5,003

 

 

$

4,912

 

 

 

    SPS COMMERCE, INC.

12

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

2,488

 

 

$

3,190

 

Right-of-use assets obtained in exchange for operating lease liabilities

 

 

 

 

 

342

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

September 30, 2021

 

 

December 31, 2020

 

Weighted-average remaining lease term - operating leases

 

5.1 years

 

 

5.6 years

 

Weighted-average discount rate - operating leases

 

 

4.1

%

 

 

4.1

%

 

At September 30, 2021, our future minimum payments under operating leases were as follows:

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

1,175

 

2022

 

 

4,676

 

2023

 

 

4,412

 

2024

 

 

4,057

 

2025

 

 

3,715

 

Thereafter

 

 

4,850

 

Total future gross payments

 

 

22,885

 

Less: imputed interest

 

 

(2,293

)

Total operating lease liabilities

 

$

20,592

 

Purchase Commitments

We have entered into separate noncancelable agreements with computing infrastructure and customer relationship management vendors for services through 2023. At September 30, 2021, the total remaining purchase commitments were $11.9 million.

 

NOTE I – Stockholders’ Equity

Stock Repurchase Program

On November 2, 2019, our board of directors authorized a program to repurchase up to $50.0 million of common stock. Under the program, purchases may be made from time to time in the open market or in privately negotiated purchases, or both over two years. For the three months ended September 30, 2021, we repurchased 42,299 shares at a cost of $4.2 million. As of September 30, 2021, $20.4 million of the share repurchase program was available for future share repurchases.

 

In October 2021, our board of directors authorized a new program to repurchase up to $50.0 million of our common stock. Under the program, purchases may be made from time to time in the open market or in privately negotiated purchases, or both. The new share repurchase program becomes effective on November 28, 2021 and expires on November 28, 2023.

 

 

    SPS COMMERCE, INC.

13

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

NOTE J – 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”). We also have an employee stock purchase plan (“ESPP”). 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 expense 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, 2021, there were 13.5 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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Cost of revenues

 

$

1,696

 

 

$

1,003

 

 

$

4,945

 

 

$

2,767

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

1,634

 

 

 

1,123

 

 

 

4,854

 

 

 

2,979

 

Research and development

 

 

1,195

 

 

 

983

 

 

 

3,212

 

 

 

2,789

 

General and administrative

 

 

2,324

 

 

 

1,784

 

 

 

8,262

 

 

 

5,711

 

 

 

$

6,849

 

 

$

4,893

 

 

$

21,273

 

 

$

14,246

 

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Stock options

 

$

496

 

 

$

541

 

 

$

1,569

 

 

$

1,675

 

PSUs

 

 

1,342

 

 

 

804

 

 

 

5,357

 

 

 

2,596

 

RSUs

 

 

4,039

 

 

 

2,729

 

 

 

11,577

 

 

 

7,730

 

RSAs & DSUs

 

 

109

 

 

 

106

 

 

 

325

 

 

 

340

 

ESPP

 

 

376

 

 

 

314

 

 

 

1,038

 

 

 

749

 

401(k) stock match

 

 

487

 

 

 

399

 

 

 

1,407

 

 

 

1,156

 

 

 

$

6,849

 

 

$

4,893

 

 

$

21,273

 

 

$

14,246

 

 

As of September 30, 2021, there was $35.7 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a 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, 2021

 

 

 

 

 

 

 

Weighted Average

 

 

 

Options (#)

 

 

Exercise Price (per share)

 

Outstanding, beginning of period

 

 

944,886

 

 

$

36.71

 

Granted

 

 

52,184

 

 

 

104.81

 

Exercised

 

 

(231,590

)

 

 

30.34

 

Forfeited

 

 

(4,902

)

 

 

64.81

 

Outstanding, end of period

 

 

760,578

 

 

 

43.14

 

 

 

    SPS COMMERCE, INC.

14

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

Of the total outstanding options at September 30, 2021, 0.6 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $36.83 per share and a weighted average remaining contractual life of 3.3 years.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2021 was $30.98 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

Volatility

 

 

35.4

%

Dividend yield

 

 

0

%

Life (in years)

 

 

4.4

 

Risk-free interest rate

 

 

0.6

%

 

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

In each of the quarters ended March 31, 2021, 2020, 2019, and 2018 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. Awards vest in the quarter following the conclusion of the performance period. In the three months ended March 31, 2021, PSU awards granted in 2018 vested at the maximum performance level and 0.1 million shares of common stock were issued.

 

Our PSU, RSU, RSA, and DSU activity was as follows:

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

Weighted Average Grant

 

 

 

#

 

 

Date Fair Value (per unit)

 

Outstanding, beginning of period

 

 

738,422

 

 

$

52.37

 

Granted

 

 

310,984

 

 

 

101.36

 

Vested and common stock issued

 

 

(323,030

)

 

 

42.67

 

Forfeited

 

 

(14,867

)

 

 

64.15

 

Outstanding, end of period

 

 

711,509

 

 

 

77.94

 

 

Employee Stock Purchase Plan

Our ESPP activity was as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands, except share data)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Amounts for shares purchased

 

$

130

 

 

$

95

 

 

$

2,316

 

 

$

1,645

 

Shares purchased

 

 

1,526

 

 

 

2,010

 

 

 

27,675

 

 

 

35,093

 

A total of 1.8 million shares of common stock are reserved for issuance under the ESPP as of September 30, 2021.

 

The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the Black-Scholes option pricing model with the following assumptions:

 

Volatility

 

 

31.6

%

Dividend yield

 

 

0

%

Life (in years)

 

 

0.5

 

Risk-free interest rate

 

 

0.1

%

 

 

    SPS COMMERCE, INC.

15

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

NOTE K – Income Taxes

We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pretax income and adjust the provision for discrete tax items recorded in the period. 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. Our provisions for income taxes includes current federal, state, and foreign income tax expense, as well as deferred tax expense.

As of September 30, 2021, we did not have any unrecognized tax benefits, accrued interest, or tax penalties.

NOTE L – Other Income and Expense

Other income (expense), net included the following:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Investment income

 

$

66

 

 

$

107

 

 

$

242

 

 

$

1,079

 

Realized gain (loss) from foreign currency on cash and investments held

 

 

(854

)

 

 

559

 

 

 

(1,492

)

 

 

686

 

Other income (expense), net

 

 

72

 

 

 

(243

)

 

 

(174

)

 

 

(475

)

Change in earn-out liability

 

 

 

 

 

 

 

 

 

 

 

(72

)

 

 

$

(716

)

 

$

423

 

 

$

(1,424

)

 

$

1,218

 

Effective January 1, 2021, all realized gains or losses and interest income on our investments are included in investment income. Previously, realized gains and losses were included in other income (expense), net and interest income was included in interest income, net. Additionally, realized gains or losses from foreign currency on cash and investments held were previously included in other income (expense), net. Amounts for the three and nine months ended September 30, 2020 have been reclassified to be consistent with the classifications for the three and nine months ended September 30, 2021.

NOTE M – Net Income Per Share

Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share also includes the impact of our outstanding potential common shares, including options, PSUs, RSUs, RSAs, and DSUs. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.

The components and computation of basic and diluted net income per share were as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands, except per share amounts)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,449

 

 

$

11,407

 

 

$

31,832

 

 

$

32,116

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

35,961

 

 

 

35,295

 

 

 

35,873

 

 

 

35,133

 

Options to purchase common stock

 

 

520

 

 

 

578

 

 

 

533

 

 

 

596

 

PSUs, RSUs, RSAs, and DSUs

 

 

534

 

 

 

493

 

 

 

492

 

 

 

408

 

Weighted average common shares outstanding, diluted

 

 

37,015

 

 

 

36,366

 

 

 

36,898

 

 

 

36,137

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

 

$

0.32

 

 

$

0.89

 

 

$

0.91

 

Diluted

 

$

0.31

 

 

$

0.31

 

 

$

0.86

 

 

$

0.89

 

 

 

    SPS COMMERCE, INC.

16

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

The following table presents the number of outstanding potential common shares that were excluded from the calculation of diluted net income per share as they were anti-dilutive:   

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in thousands)

 

2021

 

2020

 

2021

 

2020

Antidilutive shares

 

34

 

8

 

46

 

203

 

NOTE N – Geographic Information

The following table presents domestic revenue, which we define as the percentage of revenue that was attributable to customers based within the U.S. No single jurisdiction outside of the U.S. had revenues in excess of 10%.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Domestic revenue

 

 

84

%

 

 

85

%

 

 

84

%

 

 

85

%

 

 

At September 30, 2021 and December 31, 2020, 13% and 15%, respectively, of property and equipment, net was located at subsidiary and office locations outside of the U.S.

 

 

 

    SPS COMMERCE, INC.

17

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

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, many of which may be amplified by the coronavirus (COVID-19) pandemic, 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,” “assumes,” “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, 2020, 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 solutions that 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 all channels. The solutions offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. We derive the majority of our revenues from numerous monthly recurring subscriptions from businesses that utilize our solutions.

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 solutions 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.

For the three months ended September 30, 2021, our revenues were $97.9 million, an increase of 23% from the comparable period in 2020, and represented our 83rd consecutive quarter of increased revenues. Total operating expenses increased 23% for the same period in 2021 from 2020.

Key Financial Terms and Metrics

We have several key financial terms and metrics, including annualized average recurring revenues per recurring revenue customer. Beginning in 2021, we added Adjusted EBITDA Margin as a financial metric. There were no additional changes in the definitions of our key financial terms and metrics, which are discussed in more detail under the heading “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, 2020, as filed with the SEC.

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.

 

    SPS COMMERCE, INC.

18

Form 10-Q for the Quarterly Period ended September 30, 2021

 


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 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, 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 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 nine months ended September 30, 2021, there were no changes in our critical accounting policies or estimates. See Note A to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC, for additional information regarding our accounting policies.

Results of Operations

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

(dollars in thousands)

 

 

 

 

 

% of revenue

 

 

 

 

 

 

% of revenue

 

 

$

 

 

%

 

Revenues

 

$

97,887

 

 

 

100.0

%

 

$

79,557

 

 

 

100.0

%

 

$

18,330

 

 

 

23.0

%

Cost of revenues

 

 

34,343

 

 

 

35.1

 

 

 

25,045

 

 

 

31.5

 

 

 

9,298

 

 

 

37.1

 

Gross profit

 

 

63,544

 

 

 

64.9

 

 

 

54,512

 

 

 

68.5

 

 

 

9,032

 

 

 

16.6

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

22,079

 

 

 

22.5

 

 

 

19,233

 

 

 

24.2

 

 

 

2,846

 

 

 

14.8

 

Research and development

 

 

10,854

 

 

 

11.1

 

 

 

8,053

 

 

 

10.1

 

 

 

2,801

 

 

 

34.8

 

General and administrative

 

 

14,691

 

 

 

15.0

 

 

 

11,939

 

 

 

15.0

 

 

 

2,752

 

 

 

23.1

 

Amortization of intangible assets

 

 

2,399

 

 

 

2.5

 

 

 

1,333

 

 

 

1.7

 

 

 

1,066

 

 

 

80.0

 

Total operating expenses

 

 

50,023

 

 

 

51.1

 

 

 

40,558

 

 

 

51.0

 

 

 

9,465

 

 

 

23.3

 

Income from operations

 

 

13,521

 

 

 

13.8

 

 

 

13,954

 

 

 

17.5

 

 

 

(433

)

 

 

(3.1

)

Other income (expense), net

 

 

(716

)

 

 

(0.7

)

 

 

423

 

 

 

0.5

 

 

 

(1,139

)

 

 

(269.3

)

Income before income taxes

 

 

12,805

 

 

 

13.1

 

 

 

14,377

 

 

 

18.0

 

 

 

(1,572

)

 

 

(10.9

)

Income tax expense

 

 

1,356

 

 

 

1.4

 

 

 

2,970

 

 

 

3.7

 

 

 

(1,614

)

 

 

(54.3

)

Net income

 

$

11,449

 

 

 

11.7

%

 

$

11,407

 

 

 

14.3

%

 

$

42

 

 

 

0.4

%

 

Revenues - The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and an increase in annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

 

The number of recurring revenue customers increased 10% to 35,400 at September 30, 2021 from 32,050 at September 30, 2020.

 

Wallet share increased 10% to $10,350 for the three months ended September 30, 2021 from $9,450 for the same period in 2020. The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 92% and 95% of our total revenues for the three months ended September 30, 2021 and 2020, respectively. We anticipate that the number of recurring revenue customers and wallet share will increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.

Cost of Revenues - The increase in cost of revenues for the three months ended September 30, 2021 was primarily due to increased headcount which resulted in an increase of $7.8 million in personnel-related costs and an increase of $0.7 million in stock-based compensation. Additionally, as we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $0.4 million.

 

    SPS COMMERCE, INC.

19

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

Sales and Marketing Expenses - The increase in sales and marketing expense for the three months ended September 30, 2021 was primarily due to increased headcount which resulted in an increase of $1.7 million in personnel-related costs and an increase of $0.7 million in variable compensation earned by sales personnel and referral partners. Additionally, an increase of $0.5 million in stock-based compensation contributed to the overall increase.

Research and Development Expenses - The increase in research and development expense for the three months ended September 30, 2021 was primarily due to increased headcount, which resulted in an increase in personnel costs of $2.2 million, and an increase in software subscription expense of $0.4 million.

General and Administrative Expenses - The increase in general and administrative expense for the three months ended September 30, 2021 was primarily due to increased headcount which resulted in an increase in personnel-related costs of $1.9 million and stock-based compensation expense of $0.5 million. Additionally, continued growth of the business led to the increase in general and administrative expenses, partially offset by a decrease of $0.3 million in charitable contributions.

Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by the amortization of the acquired intangible assets related to Data Masons, which we acquired in December 2020.

Other Income (Expense), Net - The change to other expense, net of $0.7 million, compared to other income, net of $0.4 million in the same prior year period, was primarily due to unfavorable foreign currency exchange rate changes.

Income Tax Expense - The decrease in income tax expense was driven by an increase in discrete tax benefits from stock activity, partially offset by an increase 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, depreciation and amortization expense, stock-based compensation expense, realized gain or loss from foreign currency on cash and investments held, investment income or loss, and other adjustments as necessary for a fair presentation. For the three months ended September 30, 2020, other adjustments included the expense impact from the disposals of certain capitalized internally developed software, cloud hosting arrangement implementation costs and an earn-out liability fair value adjustment. The following table provides a reconciliation of net income to Adjusted EBITDA:

 

 

 

Three Months Ended

 

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

Net income

 

$

11,449

 

 

$

11,407

 

Income tax expense

 

 

1,356

 

 

 

2,970

 

Depreciation and amortization of property and equipment

 

 

3,695

 

 

 

3,198

 

Amortization of intangible assets

 

 

2,399

 

 

 

1,333

 

Stock-based compensation expense

 

 

6,849

 

 

 

4,893

 

Realized (gain) loss from foreign currency on cash and investments held

 

 

854

 

 

 

(559

)

Investment income

 

 

(66

)

 

 

(107

)

Other

 

 

 

 

 

103

 

Adjusted EBITDA

 

$

26,536

 

 

$

23,238

 

 

 

    SPS COMMERCE, INC.

20

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

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

 

 

 

September 30,

 

(in thousands, except Margin and Adjusted EBITDA Margin)

 

2021

 

 

2020

 

Revenue

 

$

97,887

 

 

$

79,557

 

 

 

 

 

 

 

 

 

 

Net income

 

 

11,449

 

 

 

11,407

 

Margin

 

 

12

%

 

 

14

%

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

26,536

 

 

 

23,238

 

Adjusted EBITDA Margin

 

 

27

%

 

 

29

%

 

Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP measure of financial performance, 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, and other adjustments as necessary for a fair presentation, divided by the weighted average number of shares of common and diluted stock outstanding during each period. For the three months ended September 30, 2020, other adjustments included the expense impact from the disposals of certain capitalized internally developed software, cloud hosting arrangement implementation costs and an earn-out liability fair value adjustment. 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

 

 

 

September 30,

 

(in thousands, except per share amounts)

 

2021

 

 

2020

 

Net income

 

$

11,449

 

 

$

11,407

 

Stock-based compensation expense

 

 

6,849

 

 

 

4,893

 

Amortization of intangible assets

 

 

2,399

 

 

 

1,333

 

Realized (gain) loss from foreign currency on cash and investments held

 

 

854

 

 

 

(559

)

Other

 

 

 

 

 

103

 

Income tax effects of adjustments

 

 

(4,178

)

 

 

(2,929

)

Non-GAAP income

 

$

17,373

 

 

$

14,248

 

Shares used to compute non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

 

35,961

 

 

 

35,295

 

Diluted

 

 

37,015

 

 

 

36,366

 

Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

$

0.40

 

Diluted

 

$

0.47

 

 

$

0.39

 

 

 

    SPS COMMERCE, INC.

21

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

(dollars in thousands)

 

 

 

 

 

% of revenue

 

 

 

 

 

 

% of revenue

 

 

$

 

 

%

 

Revenues

 

$

282,520

 

 

 

100.0

%

 

$

229,322

 

 

 

100.0

%

 

$

53,198

 

 

 

23.2

%

Cost of revenues

 

 

96,043

 

 

 

34.0

 

 

 

72,915

 

 

 

31.8

 

 

 

23,128

 

 

 

31.7

 

Gross profit

 

 

186,477

 

 

 

66.0

 

 

 

156,407

 

 

 

68.2

 

 

 

30,070

 

 

 

19.2

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

65,386

 

 

 

23.1

 

 

 

56,143

 

 

 

24.5

 

 

 

9,243

 

 

 

16.5

 

Research and development

 

 

28,459

 

 

 

10.1

 

 

 

23,087

 

 

 

10.0

 

 

 

5,372

 

 

 

23.3

 

General and administrative

 

 

45,186

 

 

 

16.0

 

 

 

36,591

 

 

 

16.0

 

 

 

8,595

 

 

 

23.5

 

Amortization of intangible assets

 

 

7,734

 

 

 

2.7

 

 

 

3,985

 

 

 

1.7

 

 

 

3,749

 

 

 

94.1

 

Total operating expenses

 

 

146,765

 

 

 

51.9

 

 

 

119,806

 

 

 

52.2

 

 

 

26,959

 

 

 

22.5

 

Income from operations

 

 

39,712

 

 

 

14.1

 

 

 

36,601

 

 

 

16.0

 

 

 

3,111

 

 

 

8.5

 

Other income (expense), net

 

 

(1,424

)

 

 

(0.5

)

 

 

1,218

 

 

 

0.5

 

 

 

(2,642

)

 

 

(216.9

)

Income before income taxes

 

 

38,288

 

 

 

13.6

 

 

 

37,819

 

 

 

16.5

 

 

 

469

 

 

 

1.2

 

Income tax expense

 

 

6,456

 

 

 

2.3

 

 

 

5,703

 

 

 

2.5

 

 

 

753

 

 

 

13.2

 

Net income

 

$

31,832

 

 

 

11.3

%

 

$

32,116

 

 

 

14.0

%

 

$

(284

)

 

 

(0.9

)%

 

Revenues - The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and an increase in annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

 

The number of recurring revenue customers increased 10% to 35,400 at September 30, 2021 from 32,050 at September 30, 2020.

 

Wallet share increased 10% to $10,100 for the nine months ended September 30, 2021 from $9,200 for the same period in 2020. The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 92% and 94% of our total revenues for the nine months ended September 30, 2021 and 2020, respectively. We anticipate that the number of recurring revenue customers and wallet share will increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.

Cost of Revenues - The increase in cost of revenues for the nine months ended September 30, 2021 was primarily due to increased headcount which resulted in an increase of $19.2 million in personnel-related costs and an increase of $2.2 million in stock-based compensation. Additionally, as we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $1.2 million. Further, software subscriptions increased by $0.4 million.

Sales and Marketing Expenses - The increase in sales and marketing expense for the nine months ended September 30, 2021 was primarily due to increased headcount which resulted in an increase of $4.1 million in personnel-related costs and an increase of $3.0 million in variable compensation earned by sales personnel and referral partners. Additionally, an increase of $1.9 million in stock-based compensation contributed to the overall increase.

Research and Development Expenses - The increase in research and development expense for the nine months ended September 30, 2021 was primarily due to increased headcount which resulted in increases of personnel costs of $4.0 million and stock-based compensation of $0.4 million. In addition, there was an increase in software subscription expense of $1.0 million.

General and Administrative Expenses - The increase in general and administrative expense for the nine months ended September 30, 2021 was primarily due to increased headcount which resulted in an increase in personnel-related costs of $3.9 million and stock-based compensation increase of $2.6 million. Additionally, there were increases of $0.6 million in software subscription fees, $0.5 million in credit card fees, and $0.4 million in professional service fees that contributed to the overall increase.

 

Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by the amortization of the acquired intangible assets related to Data Masons, which we acquired in December 2020.

 

 

    SPS COMMERCE, INC.

22

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

 

Other Income (Expense), Net - The change to other expense, net of $1.4 million, compared to other income, net of $1.2 million in the same prior year period, was primarily due to unfavorable foreign currency exchange rate changes and decreased investment income.

 

Income Tax Expense - The increase in income tax expense was due to an increase in nondeductible executive compensation and an increase in pre-tax income, partially offset by an increase in the discrete tax benefits from stock activity. 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, depreciation and amortization expense, stock-based compensation expense, realized gain or loss from foreign currency on cash and investments held, investment income or loss, and other adjustments as necessary for a fair presentation. For the nine months ended September 30, 2021, other adjustments include 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. For the nine months ended September 30, 2020, other adjustments included the expense impact from the disposals of certain capitalized internally developed software and cloud hosting arrangement implementation costs in addition to an earn-out liability fair value adjustment. The following table provides a reconciliation of net income to Adjusted EBITDA:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

Net income

 

$

31,832

 

 

$

32,116

 

Income tax expense

 

 

6,456

 

 

 

5,703

 

Depreciation and amortization of property and equipment

 

 

10,989

 

 

 

9,474

 

Amortization of intangible assets

 

 

7,734

 

 

 

3,985

 

Stock-based compensation expense

 

 

21,273

 

 

 

14,246

 

Realized (gain) loss from foreign currency on cash and investments held

 

 

1,492

 

 

 

(686

)

Investment income

 

 

(242

)

 

 

(1,079

)

Other

 

 

(213

)

 

 

257

 

Adjusted EBITDA

 

$

79,321

 

 

$

64,016

 

 

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:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands, except Margin and Adjusted EBITDA Margin)

 

2021

 

 

2020

 

Revenue

 

$

282,520

 

 

$

229,322

 

 

 

 

 

 

 

 

 

 

Net income

 

 

31,832

 

 

 

32,116

 

Margin

 

 

11

%

 

 

14

%

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

79,321

 

 

 

64,016

 

Adjusted EBITDA Margin

 

 

28

%

 

 

28

%

 

Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP measure of financial performance, 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, and other adjustments as necessary for a fair presentation, divided by the weighted average number of shares of common and diluted stock outstanding during each period. For the nine months ended September 30, 2021, other adjustments include 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. For the nine months ended September 30, 2020, other adjustments included the expense impact from the disposals of certain capitalized internally developed software and cloud hosting arrangement implementation

 

    SPS COMMERCE, INC.

23

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

costs in addition to an earn-out liability fair value adjustment. 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:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands, except per share amounts)

 

2021

 

 

2020

 

Net income

 

$

31,832

 

 

$

32,116

 

Stock-based compensation expense

 

 

21,273

 

 

 

14,246

 

Amortization of intangible assets

 

 

7,734

 

 

 

3,985

 

Realized (gain) loss from foreign currency on cash and investments held

 

 

1,492

 

 

 

(686

)

Other

 

 

(213

)

 

 

257

 

Income tax effects of adjustments

 

 

(12,152

)

 

 

(8,841

)

Non-GAAP income

 

$

49,966

 

 

$

41,077

 

Shares used to compute non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

 

35,873

 

 

 

35,133

 

Diluted

 

 

36,898

 

 

 

36,137

 

Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

$

1.39

 

 

$

1.17

 

Diluted

 

$

1.35

 

 

$

1.14

 

 

Liquidity and Capital Resources

At September 30, 2021, our principal sources of liquidity were cash and cash equivalents, certificates of deposit and short-term investments totaling $252.0 million and accounts receivable, net of provision for credit losses, of $35.3 million. Certificates of deposit and investments are invested 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, commercial paper, U.S. treasury securities and U.S. corporate bonds.

The summary of activity within the condensed consolidated statements of cash flows was as follows:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2021

 

 

2020

 

Net cash provided by operating activities

 

$

81,568

 

 

$

65,529

 

Net cash used in investing activities

 

 

(32,087

)

 

 

(31,975

)

Net cash used in financing activities

 

 

(3,360

)

 

 

(3,850

)

 

Net Cash Flows from Operating Activities

The increase in cash provided by operating activities was primarily driven by an increase in non-cash expenses and changes in operating assets and liabilities. Significant changes in non-cash items included increased stock-based compensation and amortization of intangible assets resulting from business expansion. Significant changes in operating assets and liabilities included increases in deferred revenue and accrued compensation balances.

Net Cash Flows from Investing Activities

The change in net cash used in investing activities was primarily due to increased purchases of property and equipment, partially offset by a decrease in net purchases of investments.

Net Cash Flows from Financing Activities

The change in net cash used in financing activities was primarily due to the decreases in cash used for share repurchases and net proceeds from stock option exercises.

 

    SPS COMMERCE, INC.

24

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

Effect of Foreign Currency Exchange 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.

Adequacy of Capital Resources

Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:

 

costs to develop and implement new solutions and applications, if any;

 

sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications that we may develop;

 

expansion of our operations in the U.S. and internationally;

 

response of competitors to our solutions and applications; and

 

use of capital for acquisitions, if any.

Historically, we have experienced increases in our expenditures consistent with the growth in our operations, and we anticipate that our expenditures will continue to increase as we expand our business.

We believe our cash, cash equivalents, investments and our cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2021 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

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.

Contractual and Commercial Commitment Summary

Our contractual obligations and commercial commitments as of September 30, 2021 are as follows:

 

 

 

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

 

$

4,659

 

 

$

8,687

 

 

$

7,402

 

 

$

2,137

 

 

$

22,885

 

Purchase commitments

 

 

6,412

 

 

 

5,509

 

 

 

 

 

 

 

 

 

11,921

 

Total

 

$

11,071

 

 

$

14,196

 

 

$

7,402

 

 

$

2,137

 

 

$

34,806

 

 

 

    SPS COMMERCE, INC.

25

Form 10-Q for the Quarterly Period ended September 30, 2021

 


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 of 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, 2021. Therefore, we do not have any material risk to interest rate fluctuations.

Foreign Currency Exchange Risk

We have revenue, expenses, assets, and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian dollar and Canadian dollar. As of September 30, 2021, we maintained approximately 6% of our total cash and cash equivalents outside of the U.S. in foreign currencies. We believe that a hypothetical 10% change in foreign currency exchange rates or an inability to access foreign funds would not affect our ability to meet our operational needs or result in a material foreign currency loss. Our results of operations and cash flows may be impacted by changes in foreign currency exchange rates and would be adversely impacted when the U.S. dollar appreciates relative to other foreign currencies. 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, 2021.

Changes in Internal Control over Financial Reporting

In December 2020, we acquired the Data Masons business. Pursuant to the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope for a period not to exceed one year from the date of acquisition, the scope of our most recent assessment did not include Data Masons. We are currently in the process of incorporating internal controls specific to Data Masons that we believe are appropriate and necessary to consolidate and report upon our financial results. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2021 will include Data Masons. As of and for the three and nine months ended September 30, 2021, excluding net intangible assets and goodwill, Data Masons represented approximately 3% of our consolidated assets and 6% of our consolidated revenues.

With the exception of the internal control related to integration activities associated with our acquisition of Data Masons, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

    SPS COMMERCE, INC.

26

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

PART II. – OTHER INFORMATION

Item 1.

We are not currently subject to any material legal proceedings. 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. Any such actions, even those that lack merit, could result in the expenditure of significant financial and managerial resources. We believe that we have obtained adequate insurance coverage 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, 2020, as filed with the SEC.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) Share Repurchases

 

Period

 

Total Number

of Shares

Purchased

 

 

Average Price

Paid per Share

 

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced

Program(1)

 

 

Approximate

Dollar Value of

Shares that

May Yet be

Purchased

Under the

Program

 

July 1 - 31, 2021

 

 

40,782

 

 

$

99.19

 

 

 

40,782

 

 

$

20,555,000

 

August 1 - 31, 2021

 

 

1,517

 

 

 

109.43

 

 

 

1,517

 

 

 

20,389,000

 

September 1 - 30, 2021

 

-

 

 

 

-

 

 

-

 

 

 

20,389,000

 

Total

 

 

42,299

 

 

$

99.55

 

 

 

42,299

 

 

$

20,389,000

 

 

 

(1)

Under a share repurchase program announced by our board of directors on November 2, 2019, we can repurchase up to a total of $50.0 million of our common stock in the open market or in privately negotiated purchases, or both, through November 2, 2021. Our stock repurchase activity during the three months ended September 30, 2021 is included in this column.

In October 2021, our board of directors authorized a new program to repurchase shares of our common stock in the open market or in privately negotiated purchases, or both, at an aggregate purchase price of up to $50.0 million. The new share repurchase program becomes effective on November 28, 2021 and expires on November 28, 2023.

Item 3.

Defaults Upon Senior Securities

Not Applicable.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

Not Applicable.

 

    SPS COMMERCE, INC.

27

Form 10-Q for the Quarterly Period ended September 30, 2021

 


Table of Contents

 

Item 6.

Exhibits

 

Number

 

Description

3.1

 

Ninth Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed with the SEC on May 21, 2020).

 

 

 

3.2

 

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on October 17, 2017).

 

 

 

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, 2021, formatted in Inline XBRL.

 

 

    SPS COMMERCE, INC.

28

Form 10-Q for the Quarterly Period ended September 30, 2021

 


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.

 

Dated: October 28, 2021

 

SPS COMMERCE, INC.

 

 

 

 

 

/s/ KIMBERLY K. NELSON

 

 

Kimberly K. Nelson

 

 

Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

 

 

    SPS COMMERCE, INC.

29

Form 10-Q for the Quarterly Period ended September 30, 2021