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, grocers, distributors, suppliers, and logistics firms to communicate and collaborate by simplifying how they manage and share item, inventory, order and sales data across omnichannel retail channels. We deliver our products using a full-service model, which includes industry-leading technology and a team of experts that optimize, update, and operate the technology on customers' behalf.
Our products enable customers to increase supply chain performance, optimize inventory levels and sell-through, reduce operational costs, improve order visibility, and satisfy consumer demands for a seamless omnichannel experience.
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, 2022, 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 three months ended March 31, 2023. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC, for additional information regarding our significant accounting policies.
Accounting Pronouncements Recently Adopted | | | | | | | | | | | | | | |
Standard | Date of Issuance | Description | Date of 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 future business combinations depending on the specific amount of contract assets and liabilities being acquired. |
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SPS COMMERCE, INC. | 7 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
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 was $45.1 million, including post-closing adjustments. The purchase accounting for the acquisition has not been finalized as of March 31, 2023 due primarily to provisional tax components and corresponding impacts to other items, including intangible assets. We expect to finalize the allocation of the purchase price within the one-year measurement period following the acquisition. During the quarter ended March 31, 2023, provisional amounts were adjusted by $1.6 million, primarily relating to a $1.5 million decrease in the estimated value of deferred income tax assets, with the corresponding offset to goodwill.
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 was $49.1 million, including estimated post-closing adjustments. The purchase accounting for the acquisition has not been finalized as of March 31, 2023 due to various items including valuation modeling completion; provisional amounts are primarily related to intangible assets. We expect to finalize the allocation of the purchase price within the one-year measurement period following the acquisition. During the quarter ended March 31, 2023, there were no material changes to the provisional amounts.
NOTE C – Revenue
We derive our revenues from the following revenue streams:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Recurring revenues: | | | | | | | |
Fulfillment | $ | 101,668 | | | $ | 84,731 | | | | | |
Analytics | 12,370 | | | 11,296 | | | | | |
Other | 3,263 | | | 1,540 | | | | | |
Recurring revenues | 117,301 | | | 97,567 | | | | | |
One-time revenues | 8,567 | | | 7,626 | | | | | |
Total revenue | $ | 125,868 | | | $ | 105,193 | | | | | |
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.
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SPS COMMERCE, INC. | 8 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
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 March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Balance, beginning of period | $ | 14,999 | | | $ | 14,459 | | | | | |
Invoiced set-up fees | 4,251 | | | 4,003 | | | | | |
Recognized set-up fees | (3,963) | | | (3,524) | | | | | |
Balance, end of period | $ | 15,287 | | | $ | 14,938 | | | | | |
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.
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 March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Balance, beginning of period | $ | 70,179 | | | $ | 59,720 | | | | | |
Incurred deferred costs | 18,234 | | | 17,781 | | | | | |
Amortized deferred costs | (16,604) | | | (14,891) | | | | | |
Balance, end of period | $ | 71,809 | | | $ | 62,610 | | | | | |
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SPS COMMERCE, INC. | 9 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
NOTE E – Fair Value Measurements
Cash Equivalents and Investments
Cash equivalents and investments, as measured at fair value on a recurring basis, consisted of the following:
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| | | | March 31, 2023 | | December 31, 2022 |
| | Fair Value Level | | Amortized Cost | | Unrealized Gains (Losses), net | | Fair Value | | Amortized Cost | | Unrealized Gains (Losses), net | | Fair Value |
(in thousands) | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | |
Money market funds | | Level 1 | | $ | 94,284 | | | $ | — | | | $ | 94,284 | | | $ | 73,368 | | | $ | — | | | $ | 73,368 | |
Investments: | | | | | | | | | | | | | | |
Certificates of deposit | | Level 1 | | 6,687 | | | — | | | 6,687 | | | 6,813 | | | — | | | 6,813 | |
Marketable securities: | | | | | | | | | | | | | | |
Commercial paper | | Level 2 | | 34,228 | | | 353 | | | 34,581 | | | 44,224 | | | 375 | | | 44,599 | |
U.S. treasury securities | | Level 2 | | 9,827 | | | 51 | | | 9,878 | | | — | | | — | | | — | |
| | | | $ | 145,026 | | | $ | 404 | | | $ | 145,430 | | | $ | 124,405 | | | $ | 375 | | | $ | 124,780 | |
NOTE F – Allowance for Credit Losses
The allowance for credit losses activity, included in accounts receivable, net, was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2023 | | 2022 |
Balance, beginning of period | $ | 3,066 | | | $ | 4,249 | |
Provision for credit losses | 1,206 | | | 1,144 | |
Write-offs, net of recoveries | (1,055) | | | (1,106) | |
Balance, end of period | $ | 3,217 | | | $ | 4,287 | |
NOTE G – Property and Equipment, Net
Property and equipment, net consisted of the following: | | | | | | | | | | | | | | |
(in thousands) | | March 31, 2023 | | December 31, 2022 |
Internally developed software | | $ | 53,530 | | | $ | 49,994 | |
Computer equipment | | 30,601 | | | 30,310 | |
Leasehold improvements | | 16,603 | | | 16,531 | |
Office equipment and furniture | | 11,113 | | | 10,981 | |
Property and equipment, cost | | 111,847 | | | 107,816 | |
Less: accumulated depreciation and amortization | | (76,769) | | | (72,358) | |
Total property and equipment, net | | $ | 35,078 | | | $ | 35,458 | |
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SPS COMMERCE, INC. | 10 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
NOTE H – Goodwill and Intangible Assets, Net
Goodwill
The activity in goodwill was as follows: | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2023 | | |
Balance, beginning of period | $ | 197,284 | | | |
Foreign currency translation | (71) | | | |
| | | |
Remeasurement from provisional purchase accounting amount | 1,788 | | | |
Balance, end of period | $ | 199,001 | | | |
Intangible Assets
Intangible assets, net consisted of the following:
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| March 31, 2023 |
($ in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Foreign Currency Translation | | Net | | Weighted Average Remaining Amortization Period |
Subscriber relationships | $ | 79,385 | | | $ | (24,205) | | | $ | 29 | | | $ | 55,209 | | | 6.6 years |
Acquired technology | 40,612 | | | (11,292) | | | 7 | | | 29,327 | | | 5.5 years |
| $ | 119,997 | | | $ | (35,497) | | | $ | 36 | | | $ | 84,536 | | | 6.2 years |
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| December 31, 2022 |
($ in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Foreign Currency Translation | | Net | | Weighted Average Remaining Amortization Period |
Subscriber relationships | $ | 80,101 | | | $ | (22,255) | | | $ | (171) | | | $ | 57,675 | | | 6.8 years |
Acquired technology | 40,610 | | | (9,934) | | | 1 | | | 30,677 | | | 5.7 years |
| $ | 120,711 | | | $ | (32,189) | | | $ | (170) | | | $ | 88,352 | | | 6.4 years |
The estimated future annual amortization expense related to intangible assets is as follows:
| | | | | |
(in thousands) | |
Remainder of 2023 | $ | 11,450 | |
2024 | 14,102 | |
2025 | 13,964 | |
2026 | 12,960 | |
2027 | 12,497 | |
Thereafter | 19,563 | |
Total future amortization | $ | 84,536 | |
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SPS COMMERCE, INC. | 11 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
NOTE I – Commitments and Contingencies
Leases
The components of lease expense were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Operating lease cost | $ | 798 | | | $ | 759 | | | | | |
Variable lease cost | 928 | | | 793 | | | | | |
| $ | 1,726 | | | $ | 1,552 | | | | | |
Supplemental cash flow information related to leases was as follows:
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| Three Months Ended March 31, |
(in thousands) | 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | $ | 1,247 | | | $ | 1,095 | |
| | | |
Supplemental balance sheet information related to operating leases was as follows:
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| March 31, 2023 | | December 31, 2022 |
Weighted-average remaining lease term | 3.8 years | | 3.9 years |
Weighted-average discount rate | 4.0 | % | | 4.0 | % |
At March 31, 2023, our future minimum payments under operating leases were as follows:
| | | | | |
(in thousands) | |
Remainder of 2023 | $ | 3,847 | |
2024 | 4,471 | |
2025 | 4,081 | |
2026 | 3,763 | |
2027 | 1,266 | |
| |
Total future gross payments | $ | 17,428 | |
Less: imputed interest | (1,313) | |
Total operating lease liabilities | $ | 16,115 | |
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 March 31, 2023, the total remaining purchase commitments were $4.3 million.
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SPS COMMERCE, INC. | 12 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
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 March 31, 2023 were as follows:
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(in thousands) | Effective Date | Expiration Date | | Share Value Authorized for Repurchase | | Share Value Repurchased | | Unused & Expired Share Repurchase Value | | Share Value Available for Future Repurchase |
| | | | | | | | | | |
2021 Program | November 2021 | August 2022 | | 50,000 | | 49,992 | | | 8 | | | N/A |
2022 Program | August 2022 | July 2024 | | 50,000 | | 2,992 | | | N/A | | $ | 47,008 | |
The share repurchase activity by period was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands, except shares and per share amounts) | 2023 | | 2022 | | | | |
Number of shares repurchased | — | | | 121,544 | | | | | |
Shares repurchased cost | $ | — | | | $ | 15,226 | | | | | |
Average price per repurchased share | $ | — | | | $ | 125.27 | | | | | |
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 March 31, 2023, there were 12.8 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:
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| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Cost of revenues | $ | 2,503 | | | $ | 2,179 | | | | | |
Operating expenses | | | | | | | |
Sales and marketing | 2,423 | | | 2,032 | | | | | |
Research and development | 1,777 | | | 1,474 | | | | | |
General and administrative | 5,077 | | | 3,330 | | | | | |
| $ | 11,780 | | | $ | 9,015 | | | | | |
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SPS COMMERCE, INC. | 13 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
Stock-based compensation expense by grant type or plan was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Stock options | $ | 490 | | | $ | 477 | | | | | |
PSUs | 3,926 | | | 2,699 | | | | | |
RSUs | 6,062 | | | 4,638 | | | | | |
RSAs & DSUs | 108 | | | 108 | | | | | |
ESPP | 589 | | | 574 | | | | | |
401(k) stock match | 605 | | | 519 | | | | | |
| $ | 11,780 | | | $ | 9,015 | | | | | |
As of March 31, 2023, there was $63.8 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a primarily straight-line basis over a weighted average period of 2.6 years.
Stock Options
Our stock option activity was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Options (#) | | Weighted Average Exercise Price ($/share) |
Outstanding, beginning of period | 562,697 | | | $ | 56.24 | |
Granted | 30,148 | | | 150.76 | |
Exercised | (68,088) | | | 32.06 | |
Forfeited | (1,916) | | | 123.49 | |
Outstanding, end of period | 522,841 | | | $ | 64.60 | |
Of the total outstanding options at March 31, 2023, 0.4 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $53.22 per share and a weighted average remaining contractual life of 3.0 years.
The weighted average grant date fair value of options granted during the three months ended March 31, 2023 was $54.53 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
| | | | | |
Life (in years) | 3.9 |
Volatility | 39.7 | % |
Dividend yield | — | |
Risk-free interest rate | 4.2 | % |
Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units
In each of the quarters ended March 31, 2023, 2022, 2021, and 2020 we granted PSU awards with a target performance level. These awards are earned based upon our Company’s total shareholder return as compared to an indexed total shareholder return over the course of a fiscal based three-year performance period, starting in the year of grant. Earned awards vest in the quarter following the conclusion of the performance period. In the three months ended March 31, 2023, PSU awards granted in 2019 vested at the maximum performance level and 0.1 million shares of common stock were issued.
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SPS COMMERCE, INC. | 14 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
Activity for our PSUs, RSUs, RSAs, and DSUs in aggregate was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| # | | Weighted Average Grant Date Fair Value ($/share) |
Outstanding, beginning of period | 712,158 | | | $ | 103.93 | |
Granted | 304,635 | | | 163.06 | |
Vested and common stock issued | (305,123) | | | 74.70 | |
Forfeited | (3,798) | | | 112.93 | |
Outstanding, end of period | 707,872 | | | $ | 141.92 | |
The number of PSUs, RSUs, RSAs, and DSUs outstanding at March 31, 2023 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 March 31, | | |
(in thousands, except shares) | 2023 | | 2022 | | | | |
Amounts for shares purchased | $ | 241 | | | $ | 147 | | | | | |
Shares purchased | 2,549 | | | 1,698 | | | | | |
A total of 1.7 million shares of common stock are reserved for issuance under the ESPP as of March 31, 2023.
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 |
Volatility | 46.4 | % |
Dividend yield | — | |
Risk-free interest rate | 2.5 | % |
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. Our provisions for income taxes includes current federal, state, and foreign income tax expense, as well as deferred tax expense.
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.
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SPS COMMERCE, INC. | 15 | Form 10-Q for the Quarterly Period ended March 31, 2023 |
NOTE M – Other Income and Expense
Other income, net included the following:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Investment income | $ | 1,127 | | | $ | 48 | | | | | |
Realized gain from foreign currency on cash and investments held | 137 | | | 468 | | | | | |
Other income (expense), net | 12 | | | (93) | | | | | |
Total other income, net | $ | 1,276 | | | $ | 423 | | | | | |
NOTE N – Net Income Per Share
The components and computation of basic and diluted net income per share were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands, except per share amounts) | 2023 | | 2022 | | | | |
Numerator | | | | | | | |
Net income | $ | 15,289 | | | $ | 12,603 | | | | | |
Denominator | | | | | | | |
Weighted average common shares outstanding, basic | 36,427 | | | 36,136 | | | | | |
Options to purchase common stock | 307 | | | 419 | | | | | |
PSUs, RSUs, RSAs, and DSUs | 421 | | | 434 | | | | | |
Weighted average common shares outstanding, diluted | 37,155 | | | 36,989 | | | | | |
Net income per share | | | | | | | |
Basic | $ | 0.42 | | | $ | 0.35 | | | | | |
Diluted | $ | 0.41 | | | $ | 0.34 | | | | | |
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 March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Anti-dilutive shares | 108 | | | 151 | | | | | |
NOTE O – Geographic Information
Revenue
Domestic revenue, which we define as revenue that was attributable to customers based within the U.S., was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Domestic revenue | 84 | % | | 84 | % | | | | |
No single jurisdiction outside of the U.S. had revenues in excess of 10%.
Property and Equipment
Property and equipment, net located at subsidiary and office locations outside of the U.S. was as follows:
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| March 31, 2023 | | December 31, 2022 |
International property and equipment | 14 | % | | 13 | % |
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SPS COMMERCE, INC. | 16 | Form 10-Q for the Quarterly Period ended March 31, 2023 |