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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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.

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.

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.

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

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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.

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.

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

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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.

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

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SPS COMMERCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE A – General

Business Description

SPS Commerce is a leading provider of cloud-based supply chain management 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.

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

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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.

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

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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.

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

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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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

	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.

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.

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	)%

•

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.

SPS COMMERCE, INC.

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

	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.

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.

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.

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.

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

Table of Contents

PART II. – OTHER INFORMATION

Item 1.

Legal Proceedings

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

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.

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.

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.

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