SPS COMMERCE, INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding us, our business prospects and our results of operations are subject to certain risks and uncertainties posed by many factors and events, many of which may be amplified by the coronavirus (COVID-19) pandemic, that could cause our actual business, prospects, and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. In some cases, you can identify forward-looking statements by the following words: "anticipate," "assumes," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Similarly, statements that describe our future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public. Shareholders, potential investors and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report, including the risks and uncertainties described under the heading "Risk Factors" appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as may be updated in our subsequent Quarterly Reports on Form 10-Q from time to time, including the updates in this Quarterly Report on Form 10-Q. 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 theSEC that advise interested parties of the risks and factors that may affect our business. OverviewSPS Commerce is a leading provider of cloud-based solutions that make it easier for retailers, suppliers, grocers, distributors, and logistics firms to orchestrate the management of item data, order fulfillment, inventory control and sales analytics across all channels. The solutions offered bySPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer's behalf. We derive the majority of our revenues from numerous monthly recurring subscriptions from businesses that utilize our solutions. We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new solutions and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions, or allow us to offer new functionalities. For the three months endedJune 30, 2021 , our revenues were$94.5 million , an increase of 25% from the comparable period in 2020, and represented our 82nd consecutive quarter of increased revenues. Total operating expenses increased 23% for the same period in 2021 from 2020.
Key Financial Terms and Metrics
We have several key financial terms and metrics, including annualized average recurring revenues per recurring revenue customer. Beginning in 2021, we added Adjusted EBITDA Margin as a financial metric. There were no additional changes in the definitions of our key financial terms and metrics, which are discussed in more detail under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC . 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 the Company's 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." Form 10-Q for the [[Image Removed]] SPS Quarterly Period ended COMMERCE, INC. 18 June 30, 2021
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Critical Accounting Policies and Estimates
This discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with GAAP and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Our actual results may differ from these estimates under different assumptions or conditions. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective, or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, we believe that our policies for revenue recognition, internal-use software, and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations. During the six months endedJune 30, 2020 , there were no changes in our critical accounting policies or estimates. See Note A to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC , for additional information regarding our accounting policies.
Results of Operations
Three Months Ended
The following table presents our results of operations for the periods
indicated:
Three Months Ended June 30,
2021 2020 Change
(dollars in thousands) % of revenue % of revenue $ %
Revenues $ 94,539 100.0 % $ 75,573 100.0 % $ 18,966 25.1 %
Cost of revenues 31,730 33.6 24,326 32.2 7,404 30.4
Gross profit 62,809 66.4 51,247 67.8 11,562 22.6
Operating expenses
Sales and marketing 21,952 23.2 18,611 24.6 3,341 18.0
Research and development 8,899 9.4 7,466 9.9 1,433 19.2
General and administrative 15,758 16.7 12,743 16.9 3,015 23.7
Amortization of intangible assets 2,671 2.8 1,316 1.7 1,355 103.0
Total operating expenses 49,280 52.1 40,136 53.1 9,144 22.8
Income from operations 13,529 14.3 11,111 14.7 2,418 21.8
Other income (expense), net (383 ) (0.4 ) 1,468 1.9 (1,851 ) (126.1 )
Income before income taxes 13,146 13.9 12,579 16.6 567 4.5
Income tax expense 2,963 3.1 1,385 1.8 1,578 113.9
Net income $ 10,183 10.8 % $ 11,194 14.8 % $ (1,011 ) (9.0 )%
Revenues - The increase in revenues resulted from two primary factors: the
increase in recurring revenue customers and an increase in annualized average
recurring revenues per recurring revenue customer, which we also refer to as
wallet share.
• The number of recurring revenue customers increased 10% to 34,550 at
June 30, 2021 from 31,450 at June 30, 2020 .
• Wallet share increased 12% to
2021 from
attributable to increased usage of our solutions by our recurring revenue
customers.
Recurring revenues from recurring revenue customers accounted for 92% and 94% of our total revenues for the three months endedJune 30, 2021 and 2020, respectively. We anticipate that the number of recurring revenue customers and wallet share will increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base. Cost of Revenues - The increase in cost of revenues for the three months endedJune 30, 2021 was primarily due to increased headcount which resulted in an increase of$6.1 million in personnel-related costs and an increase of$0.8 million in stock-based compensation. Additionally, as we continued to invest in the infrastructure supporting our platform, depreciation expense increased by$0.4 million . Form 10-Q for the [[Image Removed]] SPS Quarterly Period ended COMMERCE, INC. 19 June 30, 2021
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Sales and Marketing Expenses - The increase in sales and marketing expense for
the three months ended June 30, 2021 was primarily due to an increase of $1.4
million in variable compensation earned by sales personnel and referral
partners. Additionally, an increase of $1.2 million in personnel-related costs
and an increase of $0.7 million in stock-based compensation contributed to the
overall increase.
Research and Development Expenses - The increase in research and development
expense for the three months ended June 30, 2021 was primarily due to increased
headcount which resulted in an increase in personnel costs of $0.9 million and
an increase in software subscription expense of $0.3 million .
General and Administrative Expenses - The increase in general and administrative
expense for the three months ended June 30, 2021 was driven by increases in
personnel-related costs of $1.5 million and stock-based compensation of $0.7
million . Additionally, an increase of $0.4 million in software subscriptions
contributed to the overall increase.
Amortization of Intangible Assets - The increase in amortization of intangible
assets was driven by the amortization of the acquired intangible assets related
to Data Masons, which we acquired in December 2020 .
Other Income (Expense), Net - The change in other expense, net of $0.4 million ,
compared to the other income, net of $1.5 million in the prior year period, was
primarily due to larger foreign currency exchange losses.
Income Tax Expense - The increase in income tax expense was primarily due to an
increase in nondeductible executive compensation as well as a decrease in both
the discrete tax benefits from stock activity and research and development
credits. 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 depreciation and amortization
expense, investment income or loss, realized gain or loss from foreign currency
on cash and investments held, income tax expense, stock-based compensation
expense, and other adjustments as necessary for a fair presentation. Other
adjustments include the expense impact from the disposals of certain capitalized
internally developed software and cloud hosting arrangement implementation
costs. The following table provides a reconciliation of net income to Adjusted
EBITDA:
Three Months Ended
June 30,
(In thousands) 2021 2020
Net income $ 10,183 $ 11,194
Depreciation and amortization of property and
equipment 3,529 3,138
Amortization of intangible assets 2,671
1,316
Investment income (79 )
(332 ) Realized (gain) loss from foreign currency on cash and investments held
349 (1,370 )
Income tax expense 2,963 1,385
Stock-based compensation expense 7,499 5,009 Other 213 82 Adjusted EBITDA$ 27,328 $ 20,422 Adjusted EBITDA Margin. Adjusted EBITDA Margin, which is a non-GAAP measure of financial performance, consists of Adjusted EBITDA divided by revenue. Margin, the comparable GAAP measure of financial performance, consists of net income divided by revenue. The following table provides a comparison of Margin to Adjusted EBITDA Margin: Three Months Ended June 30, (In thousands, except Margin and Adjusted EBITDA Margin) 2021 2020 Revenue$ 94,539 $ 75,573 Net income 10,183 11,194 Margin 11 % 15 % Adjusted EBITDA 27,328 20,422 Adjusted EBITDA Margin 29 % 27 % Form 10-Q for the [[Image Removed]] SPS Quarterly Period ended COMMERCE, INC. 20 June 30, 2021
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Non-GAAP Income per Share. Non-GAAP income per share, which is a non-GAAP
measure of financial performance, consists of net income adjusted for
stock-based compensation expense, amortization expense related to intangible
assets, realized gain or loss from foreign currency on cash and investments
held, and other adjustments as necessary for a fair presentation, divided by the
weighted average number of shares of common stock outstanding during each
period. Other adjustments include the expense impact of the disposal of certain
capitalized internally developed software and cloud hosting arrangement
implementation costs. 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
June 30 ,
(In thousands, except per share amounts) 2021 2020
Net income$ 10,183 $
11,194
Stock-based compensation expense 7,499
5,009
Amortization of intangible assets 2,671
1,316
Realized (gain) loss from foreign currency on cash and investments held
349 (1,370 )
Other 213 82
Income tax effects of adjustments (3,999 ) (2,886 ) Non-GAAP income$ 16,916 $
13,345
Shares used to compute non-GAAP income per share Basic 35,903 35,030 Diluted 36,753 36,016 Non-GAAP income per share Basic$ 0.47 $ 0.38 Diluted$ 0.46 $ 0.37
Six Months Ended
The following table presents our results of operations for the periods
indicated:
Six Months Ended June 30,
2021 2020 Change
% of revenue % of revenue $ %
Revenues $ 184,633 100.0 % $ 149,765 100.0 % $ 34,868 23.3 %
Cost of revenues 61,700 33.4 47,870 32.0 13,830 28.9
Gross profit 122,933 66.6 101,895 68.0 21,038 20.6
Operating expenses
Sales and marketing 43,307 23.5 36,910 24.6 6,397 17.3
Research and development 17,605 9.5 15,034 10.0 2,571 17.1
General and administrative 30,495 16.5 24,652 16.5 5,843 23.7
Amortization of intangible assets 5,335 2.9 2,652 1.8 2,683 101.2
Total operating expenses 96,742 52.4 79,248 52.9 17,494 22.1
Income from operations 26,191 14.2 22,647 15.1 3,544 15.6
Other income (expense), net (708 ) (0.4 ) 795 0.5 (1,503 ) (189.1 )
Income before income taxes 25,483 13.8 23,442 15.6 2,041 8.7
Income tax expense 5,100 2.8 2,733 1.8 2,367 86.6
Net income $ 20,383 11.0 % $ 20,709 13.8 % $ (326 ) (1.6 )%
Revenues - The increase in revenues resulted from two primary factors: the
increase in recurring revenue customers and an increase in annualized average
recurring revenues per recurring revenue customer, which we also refer to as
wallet share.
• The number of recurring revenue customers increased 10% to 34,550 at
June 30, 2021 from 31,450 at June 30, 2020 .
• Wallet share increased 11% to
2021 from
attributable to increased usage of our solutions by our recurring revenue
customers.
Form 10-Q for the
[[Image Removed]] SPS Quarterly Period ended
COMMERCE, INC. 21 June 30, 2021
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Recurring revenues from recurring revenue customers accounted for 92% and 94% of
our total revenues for the six months ended June 30, 2021 and 2020,
respectively. We anticipate that the number of recurring revenue customers and
wallet share will increase as we increase the number of solutions we offer and
increase the penetration of those solutions across our customer base.
Cost of Revenues - The increase in cost of revenues for the six months ended
June 30, 2021 was primarily due to increased headcount which resulted in an
increase of $11.4 million in personnel-related costs 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
$0.8 million .
Sales and Marketing Expenses - The increase in sales and marketing expense for
the six months ended June 30, 2021 was primarily due to an increase of $2.4
million in variable compensation earned by sales personnel and referral
partners. Additionally, an increase of $2.4 million in personnel-related costs
and an increase of $1.4 million in stock-based compensation contributed to the
overall increase.
Research and Development Expenses - The increase in research and development
expense for the six months ended June 30, 2021 was primarily due to increased
headcount which resulted in an increase in personnel costs of $1.8 million and
an increase in software subscription expense of $0.6 million .
General and Administrative Expenses - The increase in general and administrative
expense for the six months ended June 30, 2021 was driven by increases in
personnel-related costs of $2.0 million and stock-based compensation of $2.0
million . Additionally, an increase of $0.7 million in charitable contributions
led to the overall increase.
Amortization of Intangible Assets - The increase in amortization of intangible
assets was driven by the amortization of the acquired intangible assets related
to Data Masons, which we acquired in December 2020 .
Other Income (Expense), Net - The change in other expense, net of $0.7 million ,
compared to the other income, net of $0.8 million in the prior year period, was
primarily due to larger foreign currency exchange losses and decreased
investment income.
Income Tax Expense - The increase in income tax expense was primarily due to an
increase in nondeductible executive compensation as well as a decrease in both
the discrete tax benefits from stock activity and research and development
credits. 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 depreciation and amortization
expense, investment income or loss, realized gain or loss from foreign currency
on cash and investments held, income tax expense, stock-based compensation
expense, and other adjustments as necessary for a fair presentation. Other
adjustments include the expense impact from the disposals of certain capitalized
internally developed software and cloud hosting arrangement implementation costs
and an earn-out liability fair value adjustment. Additionally, as part of
executing a lease amendment, we incurred accelerated depreciation, included
within Depreciation and amortization of property and equipment, and offsetting
accelerated tenant improvement benefit, which is included within Other. The
following table provides a reconciliation of net income to Adjusted EBITDA:
Six Months Ended
June 30,
2021 2020
Net income $ 20,383 $ 20,709
Depreciation and amortization of property and
equipment 7,294 6,276
Amortization of intangible assets 5,335
2,652
Investment income (176 )
(972 ) Realized (gain) loss from foreign currency on cash and investments held
638 (127 )
Income tax expense 5,100 2,733
Stock-based compensation expense 14,424 9,353 Other (213 ) 154 Adjusted EBITDA$ 52,785 $ 40,778 Form 10-Q for the [[Image Removed]] SPS Quarterly Period ended COMMERCE, INC. 22 June 30, 2021
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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:
Six Months Ended
June 30,
(In thousands, except Margin and Adjusted EBITDA Margin) 2021 2020
Revenue $ 184,633 $ 149,765
Net income 20,383 20,709
Margin 11 % 14 %
Adjusted EBITDA 52,785 40,778
Adjusted EBITDA Margin 29 % 27 %
Non-GAAP Income per Share. Non-GAAP income per share, which is a non-GAAP
measure of financial performance, consists of net income adjusted for
stock-based compensation expense, amortization expense related to intangible
assets, realized gain or loss from foreign currency on cash and investments
held, and other adjustments as necessary for a fair presentation, divided by the
weighted average number of shares of common stock outstanding during each
period. Other adjustments included the impact of the fair value adjustment for
the EDIAdmin earn-out liability and accelerated tenant improvement benefit as
part of executing a lease amendment. 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:
Six Months Ended
June 30,
2021 2020
Net income $ 20,383 $ 20,709
Stock-based compensation expense 14,424 9,353
Amortization of intangible assets 5,335
2,652
Realized (gain) loss from foreign currency on cash and investments held
638 (127 )
Other (213 ) 154
Income tax effects of adjustments (7,974 ) (5,912 ) Non-GAAP income$ 32,593 $
26,829
Shares used to compute non-GAAP income per share Basic 35,828 35,051 Diluted 36,741 35,995 Non-GAAP income per share Basic$ 0.91 $ 0.77 Diluted$ 0.89 $ 0.75 Form 10-Q for the [[Image Removed]] SPS Quarterly Period ended COMMERCE, INC. 23 June 30, 2021
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Liquidity and Capital Resources
AtJune 30, 2021 , our principal sources of liquidity were cash and cash equivalents, certificates of deposit and short-term investments totaling$233.4 million and accounts receivable, net of provision for credit losses, of$37.9 million . Certificates of deposit and investments are invested in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation. Our cash equivalents and short-term investments are held in highly liquid money market funds, commercial paper, federal agency securities and corporate debt securities. The summary of activity within the condensed consolidated statements of cash flows was as follows: Six Months Ended June 30, (In thousands) 2021 2020
Net cash provided by operating activities
Net Cash Flows from Operating Activities
The increase in cash provided by operating activities was primarily driven by the changes in assets and liabilities, principally the increases in deferred revenue and accrued compensation balances. Additionally, business expansion resulted in increased depreciation and amortization of property and equipment, amortization of intangibles assets, and stock-based compensation expense that contributed to the increase.
Net Cash Flows from Investing Activities
The decrease in net cash used in investing activities was primarily due to a decrease of net purchases of investments.
Net Cash Flows from Financing Activities
The change in net cash used in financing activities was primarily due to the decreases in cash used for share repurchases and net proceeds from stock option exercises.
Effect of Foreign Currency Exchange Rate Changes
For information regarding the effect of foreign currency exchange rate changes, refer to the section entitled "Foreign Currency Exchange Risk," included in Part I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk" of this Quarterly Report on Form 10-Q.
Adequacy of Capital Resources
Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:
• costs to develop and implement new solutions and applications, if any;
• sales and marketing resources needed to further penetrate our market and
gain acceptance of new solutions and applications that we may develop;
• expansion of our operations in theU.S. and internationally; • response of competitors to our solutions and applications; and • use of capital for acquisitions, if any.
Historically, we have experienced increases in our expenditures consistent with the growth in our operations, and we anticipate that our expenditures will continue to increase as we expand our business.
We believe our cash, cash equivalents, investments and our cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
Form 10-Q for the
[[Image Removed]] SPS Quarterly Period ended
COMMERCE, INC. 24 June 30, 2021
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Inflation and changing prices did not have a material effect on our business
during the six months ended June 30, 2021 and we do not expect that inflation or
changing prices will materially affect our business in the foreseeable future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as ofJune 30, 2021 are as follows: Payments Due by Period (in thousands) Less Than More Than Contractual Obligations 1 Year 1-3 Years 3-5 Years 5 Years Total Operating lease obligations, including imputed interest$ 4,766 $ 8,860 $ 7,527 $ 3,053 $ 24,206 Purchase commitment 6,362 7,344 - - 13,706 Total$ 11,128 $ 16,204 $ 7,527 $ 3,053 $ 37,912 Form 10-Q for the [[Image Removed]] SPS Quarterly Period ended COMMERCE, INC. 25 June 30, 2021
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