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SPS COMMERCE INC - Quarter Report: 2022 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2022
oTRANSITION 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.
spsc-20220930_g1.jpg
(Exact Name of Registrant as Specified in its Charter)
Delaware41-2015127
(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 classTrading SymbolName of exchange on which registered
Common Stock, par value $0.001 per shareSPSC
The Nasdaq Stock Market LLC (Nasdaq Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filero
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at October 20, 2022 was 36,041,714 shares.


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SPS COMMERCE, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
Item 1.
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.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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PART I. – FINANCIAL INFORMATION
Item 1. Financial Statements
SPS COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)September 30,
2022
December 31,
2021
ASSETS(unaudited)
Current assets
Cash and cash equivalents$186,230 $207,552 
Short-term investments50,928 49,758 
Accounts receivable40,445 38,811 
Allowance for credit losses(3,658)(4,249)
Accounts receivable, net36,787 34,562 
Deferred costs50,082 44,529 
Other assets15,246 16,042 
Total current assets339,273 352,443 
Property and equipment, net32,923 31,901 
Operating lease right-of-use assets9,760 10,851 
Goodwill165,908 143,663 
Intangible assets, net70,742 58,587 
Other assets 
Deferred costs, non-current16,474 15,191 
Deferred income tax assets223 182 
Other assets, non-current1,787 3,028 
Total assets$637,090 $615,846 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current liabilities  
Accounts payable$8,200 $8,330 
Accrued compensation28,779 31,661 
Accrued expenses5,202 8,345 
Deferred revenue58,949 50,428 
Operating lease liabilities4,336 4,108 
Total current liabilities105,466 102,872 
Other liabilities  
Deferred revenue, non-current5,146 5,144 
Operating lease liabilities, non-current13,974 16,426 
Deferred income tax liabilities4,841 7,145 
Total liabilities129,427 131,587 
Commitments and contingencies
Stockholders' equity  
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding
— — 
Common stock, $0.001 par value; 110,000,000 shares authorized; 38,184,747 and 37,798,610 shares issued; and 36,037,964 and 36,009,257 shares outstanding, respectively
38 38 
Treasury Stock, at cost; 2,146,783 and 1,789,353 shares, respectively
(128,377)(85,677)
Additional paid-in capital463,356 433,258 
Retained earnings177,306 138,087 
Accumulated other comprehensive loss(4,660)(1,447)
Total stockholders’ equity507,663 484,259 
Total liabilities and stockholders’ equity$637,090 $615,846 
See accompanying notes to these condensed consolidated financial statements.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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SPS COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except per share amounts) (unaudited)2022202120222021
Revenues$114,486 $97,887 $328,857 $282,520 
Cost of revenues38,605 34,343 111,524 96,043 
Gross profit75,881 63,544 217,333 186,477 
Operating expenses
Sales and marketing25,334 22,079 74,571 65,386 
Research and development11,135 10,854 33,268 28,459 
General and administrative16,724 14,691 49,390 45,186 
Amortization of intangible assets2,998 2,399 7,936 7,734 
Total operating expenses56,191 50,023 165,165 146,765 
Income from operations19,690 13,521 52,168 39,712 
Other expense, net(695)(716)(1,610)(1,424)
Income before income taxes18,995 12,805 50,558 38,288 
Income tax expense3,132 1,356 11,339 6,456 
Net income$15,863 $11,449 $39,219 $31,832 
Other comprehensive income (expense)
Foreign currency translation adjustments(2,296)(968)(3,309)(604)
Unrealized gain (loss) on investments, net of tax of $53, ($9), $49 and ($36), respectively
158 (27)147 (107)
Reclassification of (gain) loss on investments into earnings, net of tax of ($13), $16, ($17) and $46, respectively
(39)48 (51)138 
Total other comprehensive expense(2,177)(947)(3,213)(573)
Comprehensive income$13,686 $10,502 $36,006 $31,259 
Net income per share
Basic$0.44 $0.32 $1.09 $0.89 
Diluted$0.43 $0.31 $1.06 $0.86 
Weighted average common shares used to compute net income per share
Basic36,093 35,961 36,104 35,873 
Diluted36,915 37,015 36,942 36,898 
See accompanying notes to these condensed consolidated financial statements.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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SPS COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common StockTreasury Stock Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive LossTotal
Stockholders'
Equity
(in thousands, except shares) (unaudited)Shares AmountSharesAmount
Balances, June 30, 202135,859,353 $38 1,676,765 $(71,697)$413,182 $113,873 $(647)$454,749 
Stock-based compensation— — — — 6,361 — — 6,361 
Shares issued pursuant to stock awards145,658 — — — 2,997 — — 2,997 
Employee stock purchase plan activity1,526 — — — 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, 202135,964,238 $38 1,719,064 $(75,908)$422,670 $125,322 $(1,594)$470,528 
Balances, June 30, 202236,029,477 $38 2,044,549 $(115,900)$453,922 $161,443 $(2,483)$497,020 
Stock-based compensation— — — — 7,429 — — 7,429 
Shares issued pursuant to stock awards108,240 — — — 1,767 — — 1,767 
Employee stock purchase plan activity2,481 — — — 238 — — 238 
Repurchases of common stock(102,234)— 102,234 (12,477)— — — (12,477)
Net income— — — — — 15,863 — 15,863 
Foreign currency translation adjustments— — — — — — (2,296)(2,296)
Unrealized gain on investments, net of tax— — — — — — 158 158 
Reclassification of gain on investments into earnings, net of tax— — — — — — (39)(39)
Balances, September 30, 202236,037,964 $38 2,146,783 $(128,377)$463,356 $177,306 $(4,660)$507,663 
Common StockTreasury Stock Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive LossTotal
Stockholders'
Equity
Shares AmountSharesAmount
Balances, December 31, 202035,487,217 $37 1,613,250 $(65,247)$393,462 $93,490 $(1,021)$420,721 
Stock-based compensation— — — — 19,866 — — 19,866 
Shares issued pursuant to stock awards555,160 — — 7,026 — — 7,027 
Employee stock purchase plan activity27,675 — — — 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, 202135,964,238 $38 1,719,064 $(75,908)$422,670 $125,322 $(1,594)$470,528 
        
Balances, December 31, 202136,009,257 $38 1,789,353 $(85,677)$433,258 $138,087 $(1,447)$484,259 
Stock-based compensation— — — — 24,053 — — 24,053 
Shares issued pursuant to stock awards348,621 — — — 2,457 — — 2,457 
Employee stock purchase plan activity37,516 — — — 3,588 — — 3,588 
Repurchases of common stock(357,430)— 357,430 (42,700)— — — (42,700)
Net income— — — — — 39,219 — 39,219 
Foreign currency translation adjustments— — — — — — (3,309)(3,309)
Unrealized gain on investments, net of tax— — — — — — 147 147 
Reclassification of gain on investments into earnings, net of tax— — — — — — (51)(51)
Balances, September 30, 202236,037,964 $38 2,146,783 $(128,377)$463,356 $177,306 $(4,660)$507,663 
See accompanying notes to these condensed consolidated financial statements..
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Form 10-Q for the Quarterly Period ended September 30, 2022

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SPS COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(in thousands) (unaudited)20222021
Cash flows from operating activities
Net income$39,219 $31,832 
Reconciliation of net income to net cash provided by operating activities
Deferred income taxes(2,092)1,013 
Depreciation and amortization of property and equipment11,983 10,989 
Amortization of intangible assets7,936 7,734 
Provision for credit losses2,889 4,037 
Stock-based compensation25,636 21,273 
Other, net43 234 
Changes in assets and liabilities, net of effects of acquisition
Accounts receivable(3,999)(5,327)
Deferred costs(7,174)(5,686)
Other current and non-current assets2,202 (3,893)
Accounts payable129 (1,518)
Accrued compensation(4,388)6,617 
Accrued expenses(3,035)(174)
Deferred revenue8,261 13,401 
Operating leases(1,127)1,036 
Net cash provided by operating activities76,483 81,568 
Cash flows from investing activities
Purchases of property and equipment(13,894)(15,567)
Purchases of investments(134,276)(84,020)
Maturities of investments132,500 67,500 
Acquisition of business, net(44,923)— 
Net cash used in investing activities(60,593)(32,087)
Cash flows from financing activities
Repurchases of common stock(42,700)(10,661)
Net proceeds from exercise of options to purchase common stock2,457 7,027 
Net proceeds from employee stock purchase plan activity3,588 2,316 
Payments for contingent consideration— (2,042)
Net cash used in financing activities(36,655)(3,360)
Effect of foreign currency exchange rate changes(557)(10)
Net increase (decrease) in cash and cash equivalents(21,322)46,111 
Cash and cash equivalents at beginning of period207,552 149,692 
Cash and cash equivalents at end of period$186,230 $195,803 
See accompanying notes to these condensed consolidated financial statements.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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SPS COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A – General
Business Description
SPS Commerce is a leading provider of cloud-based supply chain management services across our global retail network. Our products make it easier for retailers, suppliers, grocers, distributors, and logistics firms to orchestrate the management of item data, order fulfillment, inventory control, and sales analytics across omnichannel retail channels. SPS Commerce delivers our products using a full-service model whereby our internal experts monitor, update, and boost network performance on our customers’ behalf.
The services offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. The services we provide enable our customers to increase their supply cycle agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into customer orders, to help ensure that suppliers, grocers, distributors, and logistics firms can satisfy exacting retailer requirements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of SPS Commerce, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.
This interim financial information has been prepared under the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”). We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations, stockholders’ equity, and cash flows for the interim periods presented. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year.
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant Accounting Policies
There were no material changes in our significant accounting policies during the nine months ended September 30, 2022. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC, for additional information regarding our significant accounting policies.
Accounting Pronouncements Not Yet Adopted
StandardDate of IssuanceDescriptionDate of Required AdoptionEffect on the Financial Statements
ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
October 2021This amendment requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, effective for all business combinations in the year of adoption and thereafter.
January 2023The adoption of this standard may have a material impact on the purchase accounting for business combinations depending on the specific amount of contract assets and liabilities being acquired.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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NOTE B – Business Acquisitions
GCommerce
Effective July 19, 2022, we acquired all of the outstanding equity ownership interests of GCommerce, Inc. ("GCommerce"), a leading EDI provider within the automotive aftermarket industry. Pursuant to the definitive agreement, the purchase price of $45 million was paid in cash at closing, and is subject to customary post-closing adjustments. The purchase accounting for the acquisition has not been finalized as of September 30, 2022. Provisional amounts are primarily related to intangible assets, net working capital, and tax positions. We expect to finalize the allocation of the purchase price within the one-year measurement period following the acquisition.
Purchase Price Allocation
We accounted for the acquisition as a business combination. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. Goodwill is attributed to a trained workforce and other buyer-specific value resulting from expected synergies, including long-term cost savings, which are not included in the fair values of identifiable assets.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
(in thousands)Estimated Fair Value
Cash$230 
Accounts receivable467 
Other current assets288 
Operating lease right-of-use asset934 
Goodwill24,556 
Intangible assets20,250 
Deferred income tax assets5,291 
Accounts payable(266)
Accrued compensation(321)
Deferred revenue(262)
Operating lease liability(934)
Deferred income tax liabilities(5,144)
$45,089 
Purchased Intangible Assets
The following table summarizes the estimated fair value of the purchased intangible assets and their estimated useful lives, each of which are subject to finalization:
($ in thousands)Estimated
Fair Value
Weighted Average
Estimated
Useful Life
Subscriber relationships$18,225 8.0 years
Acquired technology2,025 5.0 years
Total$20,250 
InterTrade
Effective October 4, 2022, we acquired all of the outstanding equity ownership interests of Canadian based InterTrade Systems Inc. ("InterTrade"), a leading EDI provider within the apparel and general merchandising markets. Pursuant to the definitive agreement, the purchase price of $49 million was paid in cash at closing, and is subject to customary post-closing adjustments.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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NOTE C – Revenue
We derive our revenues from the following revenue streams:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Recurring revenues:
Fulfillment$92,952 $78,106 $265,570 $224,738 
Analytics11,902 10,858 34,846 31,383 
Other1,699 1,435 4,867 4,019 
Recurring revenues106,553 90,399 305,283 260,140 
One-time revenues7,933 7,488 23,574 22,380 
Total revenue$114,486 $97,887 $328,857 $282,520 
Revenues are the amount that reflects the consideration we are contractually and legally entitled to, as well as the amount we expect to collect, in exchange for those services.
Recurring Revenues
Recurring revenues consist of recurring subscriptions from customers that utilize our Fulfillment, Analytics, and Other supply chain management products. Revenue for these products is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our contracts with our recurring revenue customers are recurring in nature, generally ranging from monthly to annual, and generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice. Timing of billings varies by customer and by contract type and generally are either in advance or within 30 days of the service being performed.
Given that the recurring revenue contracts are for one year or less, we have applied the optional exemption to not disclose information about the remaining performance obligations for recurring revenue contracts.
One-time Revenues
One-time revenues consist of set-up fees and miscellaneous fees from customers.
Set-up revenues
Set-up fees are specific for each connection a customer has with a trading partner. These nonrefundable fees are necessary for our customers to utilize our services and do not provide any standalone value. Many of our customers have connections with numerous trading partners.
Set-up fees constitute a material renewal option right that provide customers a significant future incentive that would not be otherwise available to that customer unless they entered into the contract, as the set-up fees will not be incurred again upon contract renewal. As such, set-up fees and related costs are deferred and recognized ratably over two years which is the estimated period for which a material right is present for our customers.
The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Balance, beginning of period$15,309 $13,344 $14,459 $11,118 
Invoiced set-up fees3,715 3,622 11,776 11,832 
Recognized set-up fees(3,805)(3,245)(11,016)(9,229)
Balance, end of period$15,219 $13,721 $15,219 $13,721 
The entire balance of deferred set-up fees will be recognized within two years. Those that will be recognized within the next year are classified as current, whereas the remainder are classified as non-current.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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Miscellaneous one-time revenues
Miscellaneous one-time fees consist of professional services and testing and certification.
The contract period for these one-time fees is for one year or less and recognized at the time service is provided. We have applied the optional exemption to not disclose information about the remaining performance obligations for miscellaneous one-time fee contracts since they have original durations of one year or less.
NOTE D – Deferred Costs
The deferred costs activity was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Balance, beginning of period$64,665 $53,841 $59,720 $50,595 
Incurred deferred costs17,442 16,459 52,860 45,922 
Amortized deferred costs(15,551)(14,207)(46,024)(40,424)
Balance, end of period$66,556 $56,093 $66,556 $56,093 
NOTE E – Financial Instruments
Cash Equivalents and Investments
Cash equivalents and investments consisted of the following:
September 30, 2022December 31, 2021
(in thousands)Amortized CostUnrealized Gains, netFair ValueAmortized CostUnrealized Gains (Losses), netFair Value
Cash equivalents:
Money market funds$111,498 $— $111,498 $138,205 $— $138,205 
Certificates of deposit6,437 — 6,437 7,268 — 7,268 
Marketable securities:
Commercial paper44,358 133 44,491 34,984 34,991 
U.S. treasury securities— — — 7,500 (1)7,499 
$162,293 $133 $162,426 $187,957 $$187,963 
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Form 10-Q for the Quarterly Period ended September 30, 2022

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Recurring Fair Value Measurements
The following table details the fair value hierarchy of our assets and liabilities measured at a fair value on a recurring basis:
September 30, 2022December 31, 2021
(in thousands)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$111,498 $— $— $111,498 $138,205 $— $— $138,205 
Certificates of deposit6,437 — — 6,437 7,268 — — 7,268 
Marketable securities:
Commercial paper— 44,491 — 44,491 — 34,991 — 34,991 
U.S. treasury securities— — — — — 7,499 — 7,499 
$117,935 $44,491 $— $162,426 $145,473 $42,490 $— $187,963 
See Note E to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC, for additional information regarding the three levels of inputs that may be used to measure fair value.
NOTE F – Allowance for Credit Losses
The allowance for credit losses activity, included in accounts receivable, net, was as follows:
Nine Months Ended
September 30,
(in thousands)20222021
Balance, beginning of period$4,249 $4,233 
Provision for credit losses2,889 4,037 
Write-offs, net of recoveries(3,480)(3,666)
Balance, end of period$3,658 $4,604 
NOTE G – Property and Equipment, Net
Property and equipment, net consisted of the following:
(in thousands)September 30,
2022
December 31, 2021
Internally developed software$50,311 $44,981 
Computer equipment32,520 29,329 
Leasehold improvements16,871 16,685 
Office equipment and furniture11,157 10,972 
Property and equipment, cost110,859 101,967 
Less: accumulated depreciation and amortization(77,936)(70,066)
Total property and equipment, net$32,923 $31,901 
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Form 10-Q for the Quarterly Period ended September 30, 2022

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NOTE H – Goodwill and Intangible Assets, Net
Goodwill
The activity in goodwill was as follows:
Nine Months Ended
September 30,
(in thousands)20222021
Balance, beginning of period$143,663 $134,853 
Addition from business acquisition24,556 — 
Foreign currency translation(2,311)(441)
Remeasurement from provisional purchase accounting amount— 268 
Balance, end of period$165,908 $134,680 
Intangible Assets
Intangible assets, net consisted of the following:
September 30, 2022
($ in thousands)Gross
Carrying
Amount
Accumulated
Amortization
Foreign
Currency
Translation
NetWeighted Average Remaining Amortization Period
Subscriber relationships$79,365 $(35,823)$(159)$43,383 6.6 years
Acquired technology37,351 (9,992)— 27,359 6.0 years
$116,716 $(45,815)$(159)$70,742 6.4 years
December 31, 2021
($ in thousands)Gross
Carrying
Amount
Accumulated
Amortization
Foreign
Currency
Translation
NetWeighted Average Remaining Amortization Period
Subscriber relationships$61,270 $(29,866)$(1,395)$30,009 6.4 years
Acquired technology35,316 (6,738)— 28,578 6.8 years
$96,586 $(36,604)$(1,395)$58,587 6.6 years
The estimated future annual amortization expense related to intangible assets is as follows:
(in thousands) 
Remainder of 2022$3,112 
202312,379 
202411,217 
202511,079 
202610,075 
Thereafter22,880 
Total future amortization$70,742 
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12
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
NOTE I – Commitments and Contingencies
Leases
The components of lease expense were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Operating lease cost$788 $873 $2,287 $2,309 
Variable lease cost963 976 2,612 2,694 
$1,751 $1,849 $4,899 $5,003 
Supplemental cash flow information related to leases was as follows:
Nine Months Ended
September 30,
(in thousands)20222021
Cash paid for amounts included in the measurement of lease liabilities  
Operating cash flows from operating leases$3,399 $2,488 
Right-of-use assets obtained in exchange for operating lease liabilities934 — 
Supplemental balance sheet information related to operating leases was as follows:
September 30,
2022
December 31, 2021
Weighted-average remaining lease term4.2 years4.8 years
Weighted-average discount rate4.0 %4.0 %
At September 30, 2022, our future minimum payments under operating leases were as follows:
(in thousands)
Remainder of 2022$1,515 
20234,871 
20244,474 
20254,088 
20263,760 
Thereafter1,266 
Total future gross payments$19,974 
Less: imputed interest(1,664)
Total operating lease liabilities$18,310 
Purchase Commitments
We have entered into separate noncancelable agreements with computing infrastructure, customer relationship management, and performance and security data analytics vendors for services through 2025. At September 30, 2022, the total remaining purchase commitments were $7.4 million.


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13
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
NOTE J – Stockholders’ Equity
Share Repurchase Programs
Our board of directors has authorized multiple non-concurrent programs to repurchase our common stock. Details of the programs and activity thereunder through September 30, 2022 were as follows:
(in thousands)Effective DateExpiration DateShare Value Authorized for RepurchaseShare Value RepurchasedUnused & Expired Share Repurchase ValueShare Value Available for Future Repurchase
2019 ProgramNovember 2019November 2021$50,000$29,611 $20,389  N/A
2021 ProgramNovember 2021August 202250,00049,992 N/A
2022 ProgramAugust 2022July 202450,0002,477 N/A$47,523 
The share repurchase activity by period was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except shares and per share amounts)2022202120222021
Number of shares repurchased102,234 42,299 357,430 105,814 
Shares repurchased cost$12,477 $4,211 $42,700 $10,661 
Average price per repurchased share$122.04 $99.55 $119.46 $100.75 
NOTE K – Stock-Based Compensation
Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as other stock-based awards including performance share units (“PSUs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and deferred stock units (“DSUs”), to employees, non-employee directors and other consultants who provide services to us. We also provide an employee stock purchase plan (“ESPP”) and 401(k) match to eligible participants.
We recognize stock-based compensation expense based on grant date award fair value. This cost is recognized over the period for which the employee is required to provide service in exchange for the award or the award performance period, except for expenses relating to retirement-eligible employees that have not given their required notice, which is recognized on a pro-rata basis over the notice period prior to retirement. At September 30, 2022, there were 13.2 million shares available for grant under approved equity compensation plans.
Stock-based compensation expense was allocated in the condensed consolidated statements of comprehensive income as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Cost of revenues$2,146 $1,696 $6,477 $4,945 
Operating expenses   
Sales and marketing1,845 1,634 5,835 4,854 
Research and development1,396 1,195 4,250 3,212 
General and administrative2,573 2,324 9,074 8,262 
$7,960 $6,849 $25,636 $21,273 
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14
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Stock-based compensation expense by grant type or plan was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Stock options$461 $496 $1,401 $1,569 
PSUs1,541 1,342 6,244 5,357 
RSUs4,735 4,039 14,467 11,577 
RSAs & DSUs110 109 328 325 
ESPP577 376 1,609 1,038 
401(k) stock match536 487 1,587 1,407 
$7,960 $6,849 $25,636 $21,273 
As of September 30, 2022, there was $42.1 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a primarily straight-line basis over a weighted average period of 2.5 years.
Stock Options
Our stock option activity was as follows:
Nine Months Ended
September 30, 2022
Options (#) Weighted Average
Exercise Price
($/share)
Outstanding, beginning of period678,650 $44.76 
Granted49,085 122.64 
Exercised(79,089)31.07 
Forfeited(6,711)89.21 
Outstanding, end of period641,935 $51.94 
Of the total outstanding options at September 30, 2022, 0.5 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $43.96 per share and a weighted average remaining contractual life of 2.9 years.
The weighted average grant date fair value of options granted during the nine months ended September 30, 2022 was $40.95 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Life (in years)4.3
Volatility37.5 %
Dividend yield— 
Risk-free interest rate2.2 %
Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units
In each of the quarters ended March 31, 2022, 2021, 2020, and 2019 we granted PSU awards with a target performance level. These awards are earned based upon our Company’s total shareholder return as compared to an indexed total shareholder return over the course of a fiscal based three-year performance period, starting in the year of grant. Earned awards vest in the quarter following the conclusion of the performance period. In the three months ended March 31, 2022, PSU awards granted in 2019 vested at the maximum performance level and less than 0.1 million shares of common stock were issued.
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15
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows:
Nine Months Ended
September 30, 2022
#Weighted Average Grant
Date Fair Value
($/share)
Outstanding, beginning of period702,160 $78.03 
Granted284,739 126.88 
Vested and common stock issued(268,607)63.04 
Forfeited(21,114)96.81 
Outstanding, end of period697,178 $103.19 
The number of PSUs, RSUs, RSAs, and DSUs outstanding at September 30, 2022 included less than 0.1 million units that have vested, but the shares of common stock have not yet been issued, pursuant to the terms of the underlying agreements.
Employee Stock Purchase Plan
Our ESPP activity was as follows:

Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except shares)2022202120222021
Amounts for shares purchased$238 $130 $3,588 $2,316 
Shares purchased2,481 1,526 37,516 27,675 
A total of 1.8 million shares of common stock are reserved for issuance under the ESPP as of September 30, 2022.
The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the following assumptions:
Life (in years)0.5
Volatility37.4 %
Dividend yield— 
Risk-free interest rate0.2 %
NOTE L – Income Taxes
We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust the provision for discrete tax items recorded in the period. 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.
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16
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
NOTE M – Other Income and Expense
Other expense, net included the following:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Investment income$586 $66 $806 $242 
Realized loss from foreign currency on cash and investments held(1,151)(854)(2,010)(1,492)
Other income (expense), net(130)72 (406)(174)
Total other expense, net$(695)$(716)$(1,610)$(1,424)
NOTE N – Net Income Per Share
The components and computation of basic and diluted net income per share were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except per share amounts)2022202120222021
Numerator
Net income$15,863 $11,449 $39,219 $31,832 
Denominator    
Weighted average common shares outstanding, basic36,093 35,961 36,104 35,873 
Options to purchase common stock379 520 396 533 
PSUs, RSUs, RSAs, and DSUs443 534 442 492 
Weighted average common shares outstanding, diluted36,915 37,015 36,942 36,898 
Net income per share    
Basic$0.44 $0.32 $1.09 $0.89 
Diluted$0.43 $0.31 $1.06 $0.86 
The number of outstanding potential common shares that were excluded from the calculation of diluted net income per share as they were anti-dilutive was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2022202120222021
Anti-dilutive shares107 34 222 46 
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17
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
NOTE O – Geographic Information
Revenue
The percentage of domestic revenue, which we define as the percentage of consolidated revenue that was attributable to customers based within the U.S., was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Domestic revenue85 %84 %84 %84 %
No single jurisdiction outside of the U.S. had revenues in excess of 10%.
Property and Equipment
The percentage of property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows:
September 30,
2022
December 31, 2021
International property and equipment13 %12 %
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18
Form 10-Q for the Quarterly Period ended September 30, 2022

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 that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Similarly, statements that describe our future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public. Shareholders, potential investors, and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report, including the risks and uncertainties described under the heading “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 2021, as may be updated in our subsequent Quarterly Reports on Form 10-Q from time to time. We expressly disclaim any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”) that advise interested parties of the risks and factors that may affect our business.
Overview
SPS Commerce is a leading provider of cloud-based supply chain management services across our global retail network. Our products make it easier for retailers, suppliers, grocers, distributors, and logistics firms to orchestrate the management of item data, order fulfillment, inventory control, and sales analytics across omnichannel retail channels. SPS Commerce delivers our products using a full-service model whereby our internal experts monitor, update, and boost network performance on our customers’ behalf.
The services offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. The services we provide enable our customers to increase their supply cycle agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into customer orders, to help ensure that suppliers, grocers, distributors, and logistics firms can satisfy exacting retailer requirements.
We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new products and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions, or allow us to offer new functionalities.
Key Financial Terms, Metrics and Non-GAAP Measures
We have several key financial terms and metrics, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.
To supplement our financial statements, we provide investors with Adjusted EBITDA, Adjusted EBITDA Margin, and non-GAAP income per share, all of which are non-GAAP financial measures. We believe that these non-GAAP measures provide useful information to our management, board of directors, and investors regarding certain financial and business trends relating to our financial condition and results of operations.
Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses and planning purposes. Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation. We believe these non-GAAP financial measures are useful to an investor as they are widely used in evaluating operating performance. Adjusted EBITDA and Adjusted EBITDA Margin are used to measure operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of capital structure and the method by which assets were acquired.
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19
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
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.
Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table presents our results of operations for the periods indicated:
Three Months Ended September 30,
20222021Change
($ in thousands)$
% of revenue(1)
$
% of revenue(1)
$%
Revenues$114,486 100.0 %$97,887 100.0 %$16,599 17.0 %
Cost of revenues38,605 33.7 34,343 35.1 4,262 12.4 
Gross profit75,881 66.3 63,544 64.9 12,337 19.4 
Operating expenses
Sales and marketing25,334 22.1 22,079 22.5 3,255 14.7 
Research and development11,135 9.7 10,854 11.1 281 2.6 
General and administrative16,724 14.6 14,691 15.0 2,033 13.8 
Amortization of intangible assets2,998 2.6 2,399 2.5 599 25.0 
Total operating expenses56,191 49.1 50,023 51.1 6,168 12.3 
Income from operations19,690 17.2 13,521 13.8 6,169 45.6 
Other expense, net(695)(0.6)(716)(0.7)21 (2.9)
Income before income taxes18,995 16.6 12,805 13.1 6,190 48.3 
Income tax expense3,132 2.7 1,356 1.4 1,776 131.0 
Net income$15,863 13.9 %$11,449 11.7 %$4,414 38.6 %
(1) Amounts in column may not foot due to rounding
Revenues - Revenues increased for the 87th consecutive quarter. The increase in revenue resulted from two primary factors: the increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions, and the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share.
The number of recurring revenue customers increased 12% to 39,550 at September 30, 2022 from 35,400 at September 30, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.
Wallet share increased 5% to $10,900 for the three months ended September 30, 2022 from $10,350 for the same period in 2021. This was primarily attributable to increased usage of our products by our recurring revenue customers.
Recurring revenues increased 18% to $106.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the three months ended September 30, 2022 and 2021, respectively. We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we execute our growth strategy focused on further penetrations of our market.
Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $2.8 million in personnel-related costs, and an increase of $0.6 million in software subscriptions.
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20
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $2.6 million in personnel-related costs.
Research and Development Expenses - No significant changes.
General and Administrative Expenses - The increase in general and administrative expense was primarily due to an increase in professional fees of $0.7 million and an increase of $1.0 million in charitable contributions. This was partially offset by a decrease of $1.0 million in bad debt expense given favorable accounts receivable collection rates.
Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by acquired intangible assets related to recent business combinations.
Other Expense, Net - The decrease in net other expenses consisted of increased investment income partially offset by unfavorable currency exchange rates.
Income Tax Expense - The increase in income tax expense was primarily driven by an increase in pre-tax income and a decrease in the excess tax deductions due to the current period equity award settlements. This was partially offset by a decrease in nondeductible executive compensation. Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.
Adjusted EBITDA - Adjusted EBITDA 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.
The following table provides a reconciliation of net income to Adjusted EBITDA:
Three Months Ended
September 30,
(in thousands)20222021
Net income$15,863 $11,449 
Income tax expense3,132 1,356 
Depreciation and amortization of property and equipment4,169 3,695 
Amortization of intangible assets2,998 2,399 
Stock-based compensation expense7,960 6,849 
Realized loss from foreign currency on cash and investments held1,151 854 
Investment income(586)(66)
Adjusted EBITDA$34,687 $26,536 
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21
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Adjusted EBITDA Margin - Adjusted EBITDA Margin consists of Adjusted EBITDA divided by revenue. Margin, the comparable GAAP measure of financial performance, consists of net income divided by revenue.
The following table provides a comparison of Margin to Adjusted EBITDA Margin:
Three Months Ended
September 30,
(in thousands, except Margin and Adjusted EBITDA Margin)20222021
Revenue$114,486$97,887
Net income15,86311,449
Margin14 %12 %
Adjusted EBITDA34,68726,536
Adjusted EBITDA Margin30 %27 %
Non-GAAP Income per Share - Non-GAAP income per share consists of net income adjusted for stock-based compensation expense, amortization expense related to intangible assets, realized gain or loss from foreign currency on cash and investments held, other adjustments as necessary for a fair presentation, and the corresponding tax impacts of the adjustments to net income, divided by the weighted average number of shares of common and diluted stock outstanding during each period.
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)20222021
Net income$15,863 $11,449 
Stock-based compensation expense7,960 6,849 
Amortization of intangible assets2,998 2,399 
Realized loss from foreign currency on cash and investments held1,151 854 
Income tax effects of adjustments(4,866)(4,178)
Non-GAAP income$23,106 $17,373 
Shares used to compute non-GAAP income per share
Basic36,093 35,961 
Diluted36,915 37,015 
Non-GAAP income per share
Basic$0.64 $0.48 
Diluted$0.63 $0.47 

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22
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following table presents our results of operations for the periods indicated:
Nine Months Ended September 30,
20222021Change
($ in thousands)$
% of revenue(1)
$
% of revenue(1)
$%
Revenues$328,857 100.0 %$282,520 100.0 %$46,337 16.4 %
Cost of revenues111,524 33.9 96,043 34.0 15,481 16.1 
Gross profit217,333 66.1 186,477 66.0 30,856 16.5 
Operating expenses
Sales and marketing74,571 22.7 65,386 23.1 9,185 14.0 
Research and development33,268 10.1 28,459 10.1 4,809 16.9 
General and administrative49,390 15.0 45,186 16.0 4,204 9.3 
Amortization of intangible assets7,936 2.4 7,734 2.7 202 2.6 
Total operating expenses165,165 50.2 146,765 51.9 18,400 12.5 
Income from operations52,168 15.9 39,712 14.1 12,456 31.4 
Other expense, net(1,610)(0.5)(1,424)(0.5)(186)13.1 
Income before income taxes50,558 15.4 38,288 13.6 12,270 32.0 
Income tax expense11,339 3.4 6,456 2.3 4,883 75.6 
Net income$39,219 11.9 %$31,832 11.3 %$7,387 23.2 %
(1) Amounts in column may not foot due to rounding
Revenues - The increase in revenue resulted from two primary factors: the increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions, and the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share.
The number of recurring revenue customers increased 12% to 39,550 at September 30, 2022 from 35,400 at September 30, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.
Wallet share increased 4% to $10,550 for the nine months ended September 30, 2022 from $10,100 for the same period in 2021. The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.
Recurring revenues increased 17% to $305.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the nine months ended September 30, 2022 and 2021, respectively. We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we execute our growth strategy focused on further penetrations of our market.
Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $11.2 million in personnel-related costs, an increase of $1.6 million of software subscriptions, and an increase of $1.5 million in stock-based compensation. Additionally, as we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $1.1 million.
Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $6.3 million in personnel-related costs, an increase of $1.0 million in stock-based compensation, and an increase of $0.9 million in variable compensation earned by sales personnel and referral partners.
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23
Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of $3.0 million in personnel-related costs, an increase of $1.0 million in stock-based compensation, and an increase of $0.9 million in software subscriptions.
General and Administrative Expenses - The increase in general and administrative expense was primarily related to supporting continued business growth, including an increase in headcount. The increase in headcount resulted in an increase in personnel-related costs of $2.0 million, an increase of $0.8 million of software subscriptions, and an increase of $0.8 million in stock-based compensation. Additionally, there was an increase in professional fees of $1.3 million partially offset by a decrease of $1.1 million in bad debt expense.
Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by acquired intangible assets related to recent business combinations.
Other Expense, Net - The increase in net other expenses was primarily due to unfavorable foreign currency exchange rate changes.
Income Tax Expense - The increase in income tax expense was primarily driven by an increase in pre-tax income and a decrease in the excess tax deductions due to the current period equity award settlements. This was partially offset by a decrease in nondeductible executive compensation. Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.
Adjusted EBITDA - Adjusted EBITDA 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 included disposals of cloud hosting arrangement implementation costs and accelerated tenant improvement benefit, which was incurred as part of executing a lease agreement. This tenant improvement adjustment was partially offset by accelerated depreciation, which is included within Depreciation and amortization of property and equipment and was also incurred as part of executing a lease agreement.
The following table provides a reconciliation of net income to Adjusted EBITDA:
Nine Months Ended
September 30,
(in thousands)20222021
Net income$39,219 $31,832 
Income tax expense11,339 6,456 
Depreciation and amortization of property and equipment11,983 10,989 
Amortization of intangible assets7,936 7,734 
Stock-based compensation expense25,636 21,273 
Realized loss from foreign currency on cash and investments held2,010 1,492 
Investment income(806)(242)
Other— (213)
Adjusted EBITDA$97,317 $79,321 
Adjusted EBITDA Margin - Adjusted EBITDA Margin consists of Adjusted EBITDA divided by revenue. Margin, the comparable GAAP measure of financial performance, consists of net income divided by revenue.





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Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
The following table provides a comparison of Margin to Adjusted EBITDA Margin:
Nine Months Ended
September 30,
(in thousands, except Margin and Adjusted EBITDA Margin)20222021
Revenue$328,857$282,520
Net income39,21931,832
Margin12 %11 %
Adjusted EBITDA97,31779,321
Adjusted EBITDA Margin30 %28 %
Non-GAAP Income per Share - Non-GAAP income per share consists of net income adjusted for stock-based compensation expense, amortization expense related to intangible assets, realized gain or loss from foreign currency on cash and investments held, other adjustments as necessary for a fair presentation, and the corresponding tax impacts of the adjustments to net income, divided by the weighted average number of shares of common and diluted stock outstanding during each period.
For the nine months ended September 30, 2021, other adjustments included disposals of cloud hosting arrangement implementation costs and accelerated tenant improvement benefit, which was incurred as part of executing a lease agreement. This tenant improvement adjustment was partially offset by accelerated depreciation, which is included within Depreciation and amortization of property and equipment and was also incurred as part of executing a lease agreement.
To quantify the tax effects, we recalculated income tax expense excluding the direct book and tax effects of the specific items constituting the non-GAAP adjustments. The difference between this recalculated income tax expense and GAAP income tax expense is presented as the income tax effect of the non-GAAP adjustments.
The following table provides a reconciliation of net income to non-GAAP income per share:
Nine Months Ended
September 30,
(in thousands, except per share amounts)20222021
Net income$39,219 $31,832 
Stock-based compensation expense25,636 21,273 
Amortization of intangible assets7,936 7,734 
Realized loss from foreign currency on cash and investments held2,010 1,492 
Other— (213)
Income tax effects of adjustments(11,576)(12,152)
Non-GAAP income$63,225 $49,966 
Shares used to compute non-GAAP income per share
Basic36,104 35,873 
Diluted36,942 36,898 
Non-GAAP income per share
Basic$1.75 $1.39 
Diluted$1.71 $1.35 
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Form 10-Q for the Quarterly Period ended September 30, 2022

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, judgments and assumptions. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Our actual results may differ from these estimates under different assumptions or conditions.
A critical accounting policy or estimate is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective, or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, we believe that our policies for revenue recognition, 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, 2022, there were no changes in our critical accounting policies or estimates. For additional information regarding our critical accounting policies and estimates, see the discussion under "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.
Liquidity and Capital Resources
As of September 30, 2022, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $237.2 million and net accounts receivable of $36.8 million. Our investments are selected in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation. Our cash equivalents and short-term investments are held in highly liquid money market funds, certificates of deposits, and commercial paper.
The summary of activity within the condensed consolidated statements of cash flows was as follows:
Nine Months Ended
September 30,
(in thousands)20222021
Net cash provided by operating activities$76,483 $81,568 
Net cash used in investing activities(60,593)(32,087)
Net cash used in financing activities(36,655)(3,360)
Net Cash Flows from Operating Activities
The decrease in cash provided by operating activities was primarily driven by changes in the amount and timing of settlement of operating assets and liabilities, primarily the change in accrued compensation.
Net Cash Flows from Investing Activities
The increase in cash used in investing activities was primarily due to an acquisition of a business along with the net investment activity.
Net Cash Flows from Financing Activities
The increase in cash used in financing activities was primarily due to the increase in cash used for share repurchases.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of September 30, 2022 are summarized below:
Payments Due by Period
(in thousands)Less Than
1 Year
1-3 Years3-5 YearsMore Than
5 Years
Total
Operating lease obligations, including imputed interest$4,990 $8,701 $6,283 $— $19,974 
Purchase commitments5,528 1,918 — — 7,446 
Total$10,518 $10,619 $6,283 $— $27,420 
Future Capital Requirements
Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:
costs to develop and implement new products and applications, if any;
sales and marketing resources needed to further penetrate our market and gain acceptance of new products and applications that we may develop;
expansion of our operations in the U.S. and internationally;
response of competitors to our products and applications; and
use of capital for acquisitions, including the $49 million InterTrade acquisition in October 2022.
Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
We believe our cash, cash equivalents, investments, and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
Foreign Currency Exchange and Inflation Rate Changes
For information regarding the effect of foreign currency exchange rate changes, refer to the section entitled “Foreign Currency Exchange Risk,” included in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q.
Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2022 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity Risk
The principal objectives of our investment activities are to preserve principal, provide liquidity, and maximize income consistent with minimizing risk of material loss. We are exposed to market risk related to changes in interest rates. However, based on the nature and current level of our cash, cash equivalents, and investments, we believe there is no material risk exposure. We do not enter into investments for trading or speculative purposes.
We did not have any variable interest rate outstanding debt as of September 30, 2022. Therefore, we do not have any material risk to interest rate fluctuations.
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Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Foreign Currency Exchange Risk
Due to international operations, we have revenue, expenses, assets, and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian and Canadian dollars. Our consolidated balance sheet, results of operations, and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates.
Our sales are primarily denominated in U.S. dollars. Our expenses are generally denominated in the local currencies in which our operations are located. As of September 30, 2022, we maintained 8% of our total cash and cash equivalents and investments in foreign currencies.
We believe that a hypothetical 10% change in foreign currency exchange rates or an inability to access foreign funds would not materially affect our ability to meet our operational needs, result in a material foreign currency loss or have a material impact on our consolidated financials.
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, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In November 2021, we acquired the Genius Central business and in July 2022, we acquired the GCommerce business. Pursuant to the SEC’s general guidance that the assessment of a recently acquired business' internal control over financial reporting may be omitted in the year of acquisition, the scope of our most recent assessment did not include Genius Central or GCommerce. We are currently in the process of incorporating internal controls specific to Genius Central and GCommerce that we believe are appropriate and necessary to consolidate and report upon our financial results.
As of September 30, 2022, excluding net intangible assets and goodwill, Genius Central and GCommerce combined represented 2.7% of our consolidated assets. For the three and nine months ended September 30, 2022, Genius Central and GCommerce combined represented 2.2% and 1.4% of our consolidated revenues, respectively.

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Form 10-Q for the Quarterly Period ended September 30, 2022

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, 2021, as filed with the SEC.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
(c) Share Repurchases
PeriodTotal Number
of Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program(1)(2)
Approximate
Dollar Value of
Shares that
May Yet be
Purchased
Under the
Program (1)(2)
July 1 - 31, 202229,988 $113.35 29,988 $6,609,000 
August 1 - 31, 202251,299 128.68 51,299 50,000,000 
September 1 - 30, 202220,947 118.25 20,947 47,523,000 
Total102,234 $122.04 102,234 $47,523,000 
For more information regarding our share repurchase programs, refer to Note J to our condensed consolidated financial statements, included in Part I of this Quarterly Report on Form 10-Q.
(1)On October 28, 2021, our board of directors announced and authorized a program to repurchase up to $50.0 million of our common stock. Under the program, purchases could be made from time to time in the open market or in privately negotiated purchases, or both. At the program's expiration, August 26, 2022, less than $0.1 million of unused share repurchase value expired from the program.
(2)On July 26, 2022 (announced July 27, 2022), our board of directors authorized a program to repurchase up to $50.0 million of our common stock. 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 became effective August 26, 2022 and expires on July 26, 2024.
Item 3.    Defaults Upon Senior Securities
Not Applicable.
Item 4.    Mine Safety Disclosures
Not Applicable.
Item 5.    Other Information
Not Applicable.
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Form 10-Q for the Quarterly Period ended September 30, 2022

Table of Contents
Item 6.    Exhibits
NumberDescription
3.1
3.2
31.1
31.2
32.1
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, 2022, formatted in Inline XBRL.
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Form 10-Q for the Quarterly Period ended September 30, 2022

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 27, 2022
SPS COMMERCE, INC.
/s/ KIMBERLY NELSON
Kimberly Nelson
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
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Form 10-Q for the Quarterly Period ended September 30, 2022