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: March 31, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 001-34702
SPS COMMERCE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
41-2015127
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
333 South Seventh Street, Suite 1000, Minneapolis, MN 55402
(Address of principal executive offices, including Zip Code)
(612) 435-9400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock, par value $0.001 per share
SPSC
The Nasdaq Stock Market LLC (Nasdaq Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at April 21, 2022 was 36,095,129 shares.
Table of Contents
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
3
Condensed Consolidated Balance Sheets
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
17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
23
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
24
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
25
SIGNATURES
26
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.
2
Form 10-Q for the Quarterly Period ended March 31, 2022
PART I. – FINANCIAL INFORMATION
Item 1.Financial Statements
SPS COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
December 31,
(in thousands, except shares)
2022
2021
ASSETS
(unaudited)
Current assets
Cash and cash equivalents
$
203,088
207,552
Short-term investments
39,968
49,758
Accounts receivable
43,065
38,811
Allowance for credit losses
(4,287
)
(4,249
Accounts receivable, net
38,778
34,562
Deferred costs
46,710
44,529
Other assets
22,923
16,042
Total current assets
351,467
352,443
Property and equipment, net
32,261
31,901
Operating lease right-of-use assets
10,248
10,851
Goodwill
144,162
143,663
Intangible assets, net
56,158
58,587
Deferred costs, non-current
15,900
15,191
Deferred income tax assets
199
182
Other assets, non-current
2,913
3,028
Total assets
613,308
615,846
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
4,731
8,330
Accrued compensation
21,930
31,661
Accrued expenses
6,632
8,345
Deferred revenue
56,798
50,428
Operating lease liabilities
4,337
4,108
Total current liabilities
94,428
102,872
Other liabilities
Deferred revenue, non-current
5,123
5,144
Operating lease liabilities, non-current
15,338
16,426
Deferred income tax liabilities
6,898
7,145
Total liabilities
121,787
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; 38,031,415 and 37,798,610 shares issued; and 36,120,518 and 36,009,257 shares outstanding, respectively
38
Treasury Stock, at cost; 1,910,897 and 1,789,353 shares, respectively
(100,903
(85,677
Additional paid-in capital
442,405
433,258
Retained earnings
150,690
138,087
Accumulated other comprehensive loss
(709
(1,447
Total stockholders’ equity
491,521
484,259
Total liabilities and stockholders’ equity
See accompanying notes to these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
(in thousands, except per share amounts) (unaudited)
Revenues
105,193
90,094
Cost of revenues
35,389
29,970
Gross profit
69,804
60,124
Operating expenses
Sales and marketing
24,655
21,355
Research and development
10,701
8,706
General and administrative
15,468
14,737
Amortization of intangible assets
2,470
2,664
Total operating expenses
53,294
47,462
Income from operations
16,510
12,662
Other income (expense), net
423
(325
Income before income taxes
16,933
12,337
Income tax expense
4,330
2,137
Net income
12,603
10,200
Other comprehensive income
Foreign currency translation adjustments
730
192
Unrealized loss on investments, net of tax of ($1) and ($15)
(3
(45
Reclassification of loss on investments into earnings, net of tax of $4 and $19
11
57
Total other comprehensive income
738
204
Comprehensive income
13,341
10,404
Net income per share
Basic
0.35
0.29
Diluted
0.34
0.28
Weighted average common shares used to compute net income per share
36,136
35,751
36,989
36,722
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
Capital
Earnings
Loss
Equity
Balances, December 31, 2020
35,487,217
37
1,613,250
(65,247
393,462
93,490
(1,021
420,721
Stock-based compensation
6,491
Shares issued pursuant to stock awards
372,746
2,802
Employee stock purchase plan activity
1,621
105
Unrealized loss on investments, net of tax
Reclassification of loss on investments into earnings, net of tax
Balances, March 31, 2021
35,861,584
402,860
103,690
(817
440,523
Balances, December 31, 2021
36,009,257
1,789,353
8,496
231,107
504
1,698
147
Repurchases of common stock
(121,544
121,544
(15,226
Balances, March 31, 2022
36,120,518
1,910,897
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
Cash flows from operating activities
Reconciliation of net income to net cash provided by operating activities
Deferred income taxes
(269
163
Depreciation and amortization of property and equipment
3,864
3,765
Provision for credit losses
1,144
1,205
9,015
6,925
Other, net
(7
76
Changes in assets and liabilities
(5,563
(2,828
(2,797
(986
Other current and non-current assets
(6,736
(2,257
(3,229
(828
(10,495
(2,988
(1,746
(1,052
6,349
7,565
Operating leases
(256
(19
Net cash provided by operating activities
4,347
21,605
Cash flows from investing activities
Purchases of property and equipment
(4,355
(3,263
Purchases of investments
(54,977
(14,039
Maturities of investments
65,000
12,500
Net cash provided by (used in) investing activities
5,668
(4,802
Cash flows from financing activities
Net proceeds from exercise of options to purchase common stock
Net proceeds from employee stock purchase plan activity
Payment for contingent consideration
(164
Net cash provided by (used in) financing activities
(14,575
2,743
Effect of foreign currency exchange rate changes
96
36
Net increase (decrease) in cash and cash equivalents
(4,464
19,582
Cash and cash equivalents at beginning of period
149,692
Cash and cash equivalents at end of period
169,274
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 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 three months ended March 31, 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
Standard
Date of Issuance
Description
Date of Required
Adoption
Effect on the Financial Statements
ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
October 2021
This amendment requires that an acquirer recognize and
measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, effective for all business combinations in the year of adoption and thereafter.
January 2023
The adoption of this standard may have a material impact on the purchase accounting for business combinations depending on the specific amount of contract assets and liabilities being acquired.
NOTE B – Revenue
We derive our revenues from the following revenue streams:
(in thousands)
Recurring revenues:
Fulfillment
84,731
71,404
Analytics
11,296
10,144
1,540
1,253
Recurring revenues
97,567
82,801
One-time revenues
7,626
7,293
Total revenue
Revenues are the amount that reflects the consideration we are contractually and legally entitled to, as well as 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:
Balance, beginning of period
14,459
11,118
Invoiced set-up fees
4,003
3,867
Recognized set-up fees
(3,524
(2,883
Balance, end of period
14,938
12,102
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.
8
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 C – Deferred Costs
The deferred costs activity was as follows:
59,720
50,595
Incurred deferred costs
17,781
13,427
Amortized deferred costs
(14,891
(12,482
62,610
51,540
NOTE D – Financial Instruments
Cash equivalents and investments
Cash equivalents and investments consisted of the following:
March 31, 2022
December 31, 2021
Amortized Cost
Unrealized Losses, net
Fair Value
Unrealized Gains (Losses), net
Cash equivalents:
Money market funds
135,238
138,205
Certificates of deposit
7,497
7,268
Marketable securities:
Commercial paper
29,976
29,973
34,984
34,991
U.S. treasury securities
2,500
(2
2,498
7,500
(1
7,499
175,211
(5
175,206
187,957
187,963
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:
Level 1
Level 2
Level 3
Assets:
142,735
32,471
145,473
42,490
9
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 E – Allowance for Credit Losses
The allowance for credit losses activity, included in accounts receivable, net, was as follows:
4,249
4,233
Write-offs, net of recoveries
(1,106
(1,437
4,287
4,001
NOTE F – Property and Equipment, Net
Property and equipment, net consisted of the following:
Internally developed software
48,013
44,981
Computer equipment
30,609
29,329
Leasehold improvements
16,693
16,685
Office equipment and furniture
10,963
10,972
Property and equipment, cost
106,278
101,967
Less: accumulated depreciation and amortization
(74,017
(70,066
Total property and equipment, net
NOTE G – Goodwill and Intangible Assets, Net
The activity in goodwill was as follows:
134,853
Foreign currency translation
499
142
Remeasurement from provisional purchase accounting amount
268
135,263
Intangible Assets
Intangible assets, net consisted of the following:
Weighted Average
Gross
Foreign
Remaining
Carrying
Currency
Amortization
(in thousands, except weighted average amortization period)
Translation
Net
Period
Subscriber relationships
45,162
(16,569
41
28,634
6 years
Acquired technology
33,900
(6,376
27,524
7 years
79,062
(22,945
10
61,270
(29,866
(1,395
30,009
35,316
(6,738
28,578
96,586
(36,604
The estimated future annual amortization expense related to intangible assets is as follows:
Remainder of 2022
7,431
2023
9,831
2024
8,535
2025
8,396
2026
7,392
Thereafter
14,573
Total future amortization
NOTE H – Commitments and Contingencies
Leases
The components of lease expense were as follows:
Operating lease cost
759
540
Variable lease cost
793
768
1,552
1,308
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
1,095
521
Supplemental balance sheet information related to leases was as follows:
Weighted-average remaining lease term - operating leases
4.6 years
4.8 years
Weighted-average discount rate - operating leases
4.0
%
At March 31, 2022, our future minimum payments under operating leases were as follows:
3,780
4,698
4,265
3,861
3,774
1,270
Total future gross payments
21,648
Less: imputed interest
(1,973
Total operating lease liabilities
19,675
Purchase Commitments
We have entered into separate noncancelable agreements with computing infrastructure and customer relationship management vendors for services through 2023. At March 31, 2022, the total remaining purchase commitments were $8.0 million.
NOTE I – Stockholders’ Equity
Stock Repurchase Programs
Our board of directors has authorized multiple non-concurrent programs to repurchase our common stock. Details of the plans and activity thereunder were as follows:
Effective Date
Expiration Date
Share Value Authorized for Repurchase
Share Value Repurchased
Unused & Expired Share Repurchase Value
Share Value Available for Future Repurchase
2019 Program
November 2019
November 2021
50,000,000
29,611,000
20,389,000
N/A
2021 Program
November 2023
24,995,000
25,005,000
The stock repurchase activity by period was as follows:
Shares repurchased cost
15,226,000
-
Number of shares repurchased
Average price per repurchased share
125.27
12
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”), 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 March 31, 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:
2,179
1,503
2,032
1,482
1,474
911
3,330
3,029
Stock-based compensation expense by grant type or plan was as follows:
Stock options
477
551
PSUs
2,699
2,084
RSUs
4,638
3,423
RSAs & DSUs
108
106
ESPP
574
326
401(k) stock match
519
435
As of March 31, 2022, there was $50.9 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted average period of 2.8 years.
Stock Options
Our stock option activity was as follows:
Options
(#)
Exercise Price
($/share)
Outstanding, beginning of period
678,650
44.76
Granted
31,829
130.16
Exercised
(13,320
37.86
Forfeited
(2,634
84.06
Outstanding, end of period
694,525
48.66
13
Of the total outstanding options at March 31, 2022, 0.6 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $40.46 per share and a weighted average remaining contractual life of 3.2 years.
The weighted average grant date fair value of options granted during the three months ended March 31, 2022 was $41.59 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Volatility
Dividend yield
Life (in years)
Risk-free interest rate
1.82
Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units
In each of the quarters ended March 31, 2022, 2021, 2020 and 2019 we granted PSU awards with a target performance level. These awards are earned based upon our Company’s total shareholder return as compared to an indexed total shareholder return over the course of a fiscal based three-year performance period, starting in the year of grant. Earned awards vest in the quarter following the conclusion of the performance period. In the three months ended March 31, 2022, PSU awards granted in 2019 vested at the maximum performance level and less than 0.1 million shares of common stock were issued.
Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows:
Grant Date Fair
Value ($/share)
702,160
78.03
233,255
127.18
Vested and common stock issued
(218,957
62.29
(8,239
96.74
708,219
98.87
The number of PSUs, RSUs, RSAs, and DSUs outstanding at March 31, 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:
(in thousands, except share data)
Amounts for shares purchased
Shares purchased
A total of 1.8 million shares of common stock are reserved for issuance under the ESPP as of March 31, 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:
32.3
0.5
0.05
14
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.
NOTE L – Other Income and Expense
Other income (expense), net included the following:
Investment income
48
97
Realized gain (loss) from foreign currency on cash and investments held
468
(289
Other expense, net
(93
(133
Total other income (expense), net
NOTE M – Net Income Per Share
The components and computation of basic and diluted net income per share were as follows:
(in thousands, except per share amounts)
Numerator
Denominator
Weighted average common shares outstanding, basic
Options to purchase common stock
419
568
PSUs, RSUs, RSAs, and DSUs
434
403
Weighted average common shares outstanding, diluted
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:
Antidilutive shares
151
56
15
NOTE N – 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:
Domestic revenue
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 in subsidiary and office locations outside of the U.S. was as follows:
International property and equipment
16
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 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.
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.
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.”
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 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 three months ended March 31, 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.
Results of Operations
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
The following table presents our results of operations for the periods indicated:
Three Months Ended March 31,
Change
(dollars in thousands)
% of revenue(1)
100.0
15,099
16.8
33.6
33.3
5,419
18.1
66.4
66.7
9,680
16.1
23.4
23.7
3,300
15.5
10.2
9.7
1,995
22.9
14.7
16.3
731
5.0
2.3
2.9
(194
(7.3
50.7
52.6
5,832
12.3
15.7
14.1
3,848
30.4
0.4
(0.4
748
230.2
13.7
4,596
37.3
4.1
2.4
2,193
102.6
12.0
11.3
2,403
23.6
(1)
Amounts in column may not foot due to rounding.
Revenues – Revenues increased for the 85th consecutive quarter. The increase 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 37,900 at March 31, 2022 from 33,850 at March 31, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions.
Wallet share increased 5% to $10,350 for the three months ended March 31, 2022 from $9,900 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 $97.6 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Recurring revenues from recurring revenue customers accounted for 93% and 92% of our total revenues for the three months ended March 31, 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.
18
Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in an increase of $3.8 million in personnel-related costs and an increase of $0.7 million in stock-based compensation.
Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in an increase of $1.8 million in personnel-related costs, an increase of $0.6 million in stock-based compensation, and an increase of $0.6 million in variable compensation earned by sales personnel and referral partners.
Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in an increase of personnel costs of $1.2 million and an increase in stock-based compensation of $0.6 million.
General and Administrative Expenses - The increase in general and administrative expense was primarily related to supporting continued business growth, including an increase in headcount which resulted in an increase in personnel-related costs of $0.8 million.
Amortization of Intangible Assets - The decrease in amortization of intangible assets was driven by the full amortization of previously acquired intangible assets as partially offset by acquired intangible assets related to recent business combinations.
Other Income (Expense), Net - The change was primarily due to favorable foreign currency exchange rate changes.
Income Tax Expense - The increase in income tax expense was driven by a decrease in the excess tax deductions due to the current quarter equity award settlements, partially offset by a decrease in nondeductible executive compensation. Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.
Adjusted EBITDA - Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for income tax expense, depreciation and amortization expense, stock-based compensation expense, realized gain or loss from foreign currency on cash and investments held, investment income or loss, and other adjustments as necessary for a fair presentation. For the three months ended March 31, 2021, other adjustments included 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:
Stock-based compensation expense
Realized (gain) loss from foreign currency on cash and investments held
(468
289
(48
(97
(426
Adjusted EBITDA
31,766
25,457
19
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:
(in thousands, except Margin and Adjusted EBITDA Margin)
Margin
Adjusted EBITDA Margin
30
28
Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP measure of financial performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets, realized gain or loss from foreign currency on cash and investments held, other adjustments as necessary for a fair presentation, and the corresponding tax impacts of the adjustments to net income, divided by the weighted average number of shares of common and diluted stock outstanding during each period. For the three months ended March 31, 2021, other adjustments included accelerated tenant improvement benefit, which was 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:
Income tax effects of adjustments
(3,219
(3,975
Non-GAAP income
20,401
15,677
Shares used to compute non-GAAP income per share
Non-GAAP income per share
0.56
0.44
0.55
0.43
20
Liquidity and Capital Resources
As of March 31, 2022, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $243.1 million and net accounts receivable of $38.8 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, commercial paper, and U.S. treasury securities.
The summary of activity within the condensed consolidated statements of cash flows was as follows:
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.
Net Cash Flows from Investing Activities
The change in net cash flows from investing activities was primarily due to the increased maturities of investments, partially offset by the increased purchases of investments.
Net Cash Flows from Financing Activities
The change in net cash flows from financing activities was primarily due to the increases in cash used for share repurchases and lower net proceeds from stock option exercises.
Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of March 31, 2022 are summarized below:
Payments Due by Period
Less Than
More Than
1 Year
1-3 Years
3-5 Years
5 Years
Operating lease obligations, including imputed interest
5,051
8,702
7,577
318
Purchase commitments
6,512
1,466
7,978
11,563
10,168
29,626
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, if any.
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.
21
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.
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 three months ended March 31, 2022 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
22
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 March 31, 2022. Therefore, we do not have any material risk to interest rate fluctuations.
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 condensed 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 March 31, 2022, we maintained approximately 6% 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.
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 March 31, 2022.
Changes in Internal Control over Financial Reporting
In November 2021, we acquired the Genius Central 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 Genius Central. We are currently in the process of incorporating internal controls specific to Genius Central 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, 2022 will include Genius Central. As of and for the three months ended March 31, 2022, excluding net intangible assets and goodwill, Genius Central represented less than 1% of our consolidated assets and approximately 1% of our consolidated revenues.
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. – OTHER INFORMATION
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.
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.
(c) Share Repurchases
Total Number
of Shares
Purchased
Average Price
Paid per Share
Purchased as
Part of Publicly
Announced
Program(1)
Approximate
Dollar Value of
Shares that
May Yet be
Under the
Program
January 1 - 31, 2022
36,500
121.51
35,796,000
February 1 - 28, 2022
38,000
125.24
31,037,000
March 1 - 31, 2022
47,044
128.22
Under our share repurchase program announced by our board of directors on October 28, 2021, we can repurchase up to $50.0 million of our common stock in the open market or in privately negotiated purchases, or both, through November 28, 2023. Our stock repurchase activity under this program during the three months ended March 31, 2022 is included in this column. Our prior stock repurchase program expired on November 2021. For more information regarding our stock repurchase programs, refer to Note I to our condensed consolidated financial statements, included in Part I of this Quarterly Report on Form 10-Q.
Not Applicable.
Number
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 March 31, 2022, formatted in Inline XBRL.
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: April 28, 2022
/s/ KIMBERLY K. NELSON
Kimberly K. Nelson
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)