SPS(SPSC) - 2022 Q4 - Annual Report

Part I Business SPS Commerce provides cloud-based supply chain management services, achieving 88 consecutive quarters of growth through its full-service model and network effect Financial Performance (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | $450.9M | $385.3M | $312.6M | | Recurring Revenue % | 93% | 92% | 94% | - As of December 31, 2022, the company had 42,300 recurring revenue customers and has served a total of 115,000 customers across 85 countries to date[17][21] - The company's core products include Fulfillment (EDI solution), Analytics (sales and inventory data), Assortment (item data management), and Community (supplier onboarding)[23][30] - Growth is driven by a "network effect," where each new trading partner added to the network increases its value for all existing participants, leading to new revenue opportunities[26] - In 2022, SPS Commerce acquired GCommerce, Inc, an EDI provider for the automotive aftermarket, and InterTrade Systems Inc, an EDI provider for apparel and general merchandising, to extend network capabilities[32] Employee Distribution by Function (as of Dec 31, 2022) | Functional Area | of Employees | | :--- | :--- | | Cost of revenues | 1,122 | | Sales and marketing | 557 | | Research and development | 359 | | General and administrative | 177 | | Total employees | 2,215 | Risk Factors The company faces significant business, technology, international, regulatory, and financial risks that could impact its operations and stock performance - Business Risks: The company's growth depends on attracting new customers and selling more to existing ones; most customer contracts are short-term (30-90 day notice), making renewal rates critical, while economic downturns, intense competition, and challenges in integrating acquisitions or expanding internationally pose significant threats[57][58][59][65][67] - Technology & Service Risks: The business relies on the performance and security of its technical infrastructure, with risks including service interruptions from third-party data centers, failure to protect customer data from cyber-attacks, undetected software defects, and the inability to adapt to rapid technological changes[80][81][83][84] - International Operations Risks: Expansion outside the U.S. exposes the company to risks such as currency fluctuations, regulatory changes, political instability, and compliance with anti-corruption laws; operations in Ukraine and the Philippines are noted as being in potentially volatile political environments[70][73] - Regulatory Risks: Increasing regulation of data privacy (e.g, GDPR), cross-border data transfers, and the internet could limit the adoption of cloud-based products and increase compliance costs[99] - Financial & Stock Risks: Future operating results may fluctuate, potentially causing stock price volatility; the company does not intend to pay dividends in the foreseeable future, and charter provisions could discourage a takeover[105][110][112] Unresolved Staff Comments The company reports no unresolved comments from SEC staff - None[117] Properties The company's primary corporate headquarters are leased in Minneapolis, Minnesota, with additional facilities in other domestic and international locations - The main corporate headquarters are in Minneapolis, MN, with a lease for ~198,000 sq. ft. running through 2027[118] Legal Proceedings SPS Commerce is not currently involved in any material legal proceedings - The company is not currently subject to any material legal proceedings[119] Mine Safety Disclosures This section is not applicable to the company's business operations - Not applicable[120] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq (SPSC), with no dividends planned and an active share repurchase program in place - The company's common stock trades on the Nasdaq Global Market under the symbol "SPSC"[123] - SPS Commerce has not declared or paid cash dividends and does not expect to in the foreseeable future, intending to retain earnings for business operations and expansion[124] Share Repurchase Activity (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Oct 1-31, 2022 | 1,291 | $120.06 | $47,368,000 | | Nov 1-30, 2022 | 3,024 | $119.05 | $47,008,000 | | Dec 1-31, 2022 | — | — | $47,008,000 | | Total | 4,315 | $119.35 | $47,008,000 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 17% to $450.9 million in 2022, driven by customer growth and increased wallet share, resulting in higher net income and strong cash flow Results of Operations (2022 vs. 2021) | Metric ($ in thousands) | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $450,875 | $385,276 | $65,599 | 17.0% | | Gross Profit | $297,810 | $253,598 | $44,212 | 17.4% | | Income from Operations | $71,182 | $55,085 | $16,097 | 29.2% | | Net Income | $55,134 | $44,597 | $10,537 | 23.6% | - Revenue growth was driven by a 13% increase in recurring revenue customers (to 42,300) and a 4% increase in wallet share (average recurring revenue per customer) to $10,500[159] - Operating expenses increased primarily due to higher headcount, leading to increased personnel-related costs in Cost of Revenues ($15.6M), Sales and Marketing ($9.4M), R&D ($4.4M), and G&A ($1.9M)[161][162][163][164] Reconciliation of Net Income to Adjusted EBITDA | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net income | $55,134 | $44,597 | | Income tax expense | $16,190 | $8,944 | | Depreciation and amortization | $28,189 | $24,914 | | Stock-based compensation | $33,399 | $27,574 | | Other adjustments | ($644) | $1,036 | | Adjusted EBITDA | $132,268 | $107,015 | Reconciliation of Net Income to Non-GAAP Income | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net income | $55,134 | $44,597 | | Stock-based compensation | $33,399 | $27,574 | | Amortization of intangibles | $11,768 | $10,126 | | Other adjustments | $1,026 | $1,264 | | Income tax effects | ($14,639) | ($16,454) | | Non-GAAP income | $86,688 | $67,107 | | Non-GAAP diluted EPS | $2.35 | $1.82 | Summary of Cash Flows (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $100,052 | $112,893 | | Net cash used in investing activities | ($112,790) | ($46,703) | | Net cash used in financing activities | ($31,631) | ($8,361) | Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure from interest rate and foreign currency fluctuations is considered immaterial - The company's primary market risks are interest rate sensitivity and foreign currency exchange risk[187][189] - Interest rate risk is considered minimal as the company does not have variable interest rate debt and its investment objectives prioritize capital preservation[187][188] - Foreign currency risk exists due to operations in currencies like the Australian and Canadian dollars; as of year-end 2022, 11% of cash and investments were in foreign currencies, and the company believes a 10% change in exchange rates would not have a material impact[189][190][191] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and related notes for the fiscal year ended December 31, 2022 Consolidated Balance Sheets Total assets grew to $672.9 million in 2022, driven by acquisitions, while stockholders' equity increased to $537.1 million Consolidated Balance Sheet Highlights (as of Dec 31) | ($ in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $322,814 | $352,443 | | Cash and cash equivalents | $162,893 | $207,552 | | Goodwill | $197,284 | $143,663 | | Intangible assets, net | $88,352 | $58,587 | | Total Assets | $672,914 | $615,846 | | Total Current Liabilities | $110,642 | $102,872 | | Total Liabilities | $135,841 | $131,587 | | Total Stockholders' Equity | $537,073 | $484,259 | Consolidated Statements of Comprehensive Income The company reported a 17.0% increase in revenue to $450.9 million and a 23.6% rise in net income to $55.1 million for 2022 Income Statement Highlights (Year Ended Dec 31) | ($ in thousands, except per share) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | $450,875 | $385,276 | $312,630 | | Gross Profit | $297,810 | $253,598 | $212,794 | | Income from Operations | $71,182 | $55,085 | $50,158 | | Net Income | $55,134 | $44,597 | $45,586 | | Diluted EPS | $1.49 | $1.21 | $1.26 | Notes to Consolidated Financial Statements Key disclosures detail the 2022 acquisitions, revenue recognition policies, goodwill balances, and stock-based compensation expenses - Business Acquisitions (Note B): In 2022, the company acquired GCommerce for $45.1 million and InterTrade for $49.1 million, adding $55.2 million in goodwill and $41.6 million in intangible assets[272][273][276] - Revenue (Note C): Recurring revenues are recognized ratably over the contract term, while one-time set-up fees are considered a material right and are deferred and recognized over an estimated two-year benefit period[278][282] - Goodwill and Intangibles (Note H): As of Dec 31, 2022, Goodwill stood at $197.3 million and net Intangible Assets were $88.4 million, with future amortization expense estimated to be $15.3 million in 2023[290][291] - Stock-Based Compensation (Note K): Total stock-based compensation expense was $33.4 million in 2022, up from $27.6 million in 2021; $38.6 million of unrecognized expense is expected to be recognized over a weighted-average period of 2.4 years[300] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[322] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, with the audit performed by KPMG LLP[327][330] - The assessment of internal controls excluded the recently acquired GCommerce and InterTrade, which together represented 3.7% of consolidated assets and 1.4% of consolidated revenues for 2022[328][329] Other Information The company amended its bylaws in February 2023 to align with the SEC's new universal proxy rule for director nominations - The company's bylaws were amended on February 17, 2023, to implement procedural mechanisms related to stockholder nominations of directors under SEC Rule 14a-19[333] Part III This part incorporates information by reference from the company's 2023 Proxy Statement regarding governance, compensation, and ownership Directors, Executive Officers and Corporate Governance Information required by this item is incorporated by reference from the company's 2023 Proxy Statement Executive Compensation Information required by this item is incorporated by reference from the company's 2023 Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's 2023 Proxy Statement Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's 2023 Proxy Statement Principal Accounting Fees and Services Information required by this item is incorporated by reference from the company's 2023 Proxy Statement Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K - This section lists the financial statements and exhibits filed with the Form 10-K[345] Form 10-K Summary No optional summary is provided under this item - None[348]