Thursday, December 1 2022
The following discussion and analysis of our financial condition and results of
operations should be read together with our audited financial statements and
related notes which are included in Part II, Item 8, "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K. Our actual results could
differ materially from those anticipated in the forward-looking statements
included in this discussion as a result of certain factors, including, but not
limited to, those discussed in Part I, Item 1A, "  Risk Factors  " of this
Annual Report on Form 10-K.

Overview

SPS Commerce is a leading provider of cloud-based supply chain management
services across our global retail network. Our products 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 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 SPS Commerce provides 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, ensuring
that suppliers, grocers, distributors, and logistics firms can satisfy exacting
retailer requirements.

We plan to continue to grow our business by further penetrating the supply chain
management market, increasing revenues from our customers as their businesses
grow, expanding our distribution channels, expanding our international presence
and, from time to time, developing new products and applications. We also intend
to selectively pursue acquisitions that will add customers, allow us to expand
into new regions or allow us to offer new functionalities.

For the years ended December 31, 2021, 2020, and 2019, we generated revenues of
$385.3 million, $312.6 million and $279.1 million, respectively. Our quarter
ended December 31, 2021 represented our 84th consecutive quarter of revenue
growth. Recurring revenues from recurring revenue customers accounted for 92%,
94%, and 94% of our total revenues for the years ended December 31, 2021, 2020,
and 2019, respectively. Our revenues are not concentrated with any customer, as
our largest customer represented less than 1% of total revenues for the years
ended December 31, 2021, 2020, and 2019.

Key financial terms and parameters

Sources of income

Fulfillment – Our fulfillment product provides fulfillment automation and replaces or augments an organization’s existing staff and business partner electronic communication infrastructure by enabling easy compliance with retailer rules, automatic exchange and digitalization of information between multiple trading partners through various protocols and greater visibility into an order’s journey.

Analytics - Our Analytics product consists of data analytics applications that
enable our customers to improve their visibility across their supply chains
through greater analytics capabilities. When focused on point-of-sale data, for
example, retailers and suppliers can ensure inventory is located where demand is
highest. Additionally, retailers improve their visibility into supplier
performance and their understanding of product sell-through.

Other Products - We provide several complimentary products such as our
assortment product (which enables accurate order management and rapid
fulfillment) and our community solution (which accelerates vendor onboarding and
ensures trading partner adoption of new supply chain requirements). In addition
to our product offerings, we also provide one-time services such as professional
services and testing and certification.

Cost of Operating Revenues and Expenses

Revenue cost – Revenue cost primarily includes staffing costs for our customer success and implementation teams, customer support staff and application support staff, and network services costs.

Sales and Marketing Expenses – Sales and marketing expenses primarily include personnel costs for our sales, marketing and product management teams, commissions earned by our sales personnel, and marketing expenses.

Research and Development Expenses - Research and development expenses consist
primarily of personnel costs for development of new and maintenance of existing
products, net of amounts capitalized as developed software.
                                                        Form 10-K for the Annual
[[Image Removed]]  SPS                                 Period ended December 31,
COMMERCE, INC.                        24                                    2021


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General and Administrative Expenses - General and administrative expenses
consist primarily of personnel costs for finance, human resources, and internal
information technology support, as well as legal, accounting, and other fees,
such as bad debt expense and credit card processing fees.

Allocation of overhead expenses – We allocate overhead expenses such as rent, certain benefit costs, office supplies, and amortization of general office assets to revenue cost and operating expense categories based on the workforce.

Non-GAAP Metrics and Measures

Recurring Revenue Customers - As of December 31, 2021, we had approximately
37,500 customers with contracts to pay us recurring fees, which we refer to as
recurring revenue customers. A small portion of our recurring revenue customers
consist of separate units within a larger organization. We treat each of these
units, which may include divisions, departments, affiliates and franchises, as
distinct customers.

Wallet Share - We calculate average recurring revenues per recurring revenue
customer, which we also refer to as wallet share, by dividing the recurring
revenues from recurring revenue customers for the period by the average of the
beginning and ending number of recurring revenue customers for the period.

Non-GAAP Financial Measures - To supplement our financial statements, we also
provide investors with Adjusted EBITDA, Adjusted EBITDA Margin, and non-GAAP
income per share, which are non-GAAP financial measures. We believe that these
non-GAAP measures provide useful information to management 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 measures are also
presented to our board of directors.

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."

Significant Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based
upon our consolidated financial statements, which are prepared in accordance
with GAAP. The preparation of these consolidated 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.

We believe that our critical accounting policies and estimates, which are
described in the notes to our consolidated financial statements, involve a
greater degree of judgment and complexity and are material to our financial
statement presentation. 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 for uncertain matters that
could have a material effect on our financial condition and results of
operations. Accordingly, these are the policies we believe are the most critical
to aid in fully understanding and evaluating our financial condition and results
of operations.

Revenue Recognition

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. Set-up fees are specific for each connection a customer has with a
trading partner and many of our customers have connections with numerous trading
partners. These nonrefundable fees are necessary for our customers to utilize
our services and do not provide any standalone value.

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.
                                                        Form 10-K for the Annual
[[Image Removed]]  SPS                                 Period ended December 31,
COMMERCE, INC.                        25                                    2021


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Software for internal use

Internal-use software consists of capitalized costs incurred during the
application development stage, which include costs related to the design of the
chosen path, coding, installation of the hardware necessary to run the software,
and any testing done before the operational stage. Costs incurred during the
preliminary project stage and post-implementation stage are expensed as
incurred. Internal-use software is amortized over the estimated useful life,
three years, commencing on the date when the asset is ready for its intended
use. Amortization is computed using the straight-line method. Maintenance and
enhancements of internal-use software are expensed as incurred.

Business combinations

We allocate the fair value of purchase consideration to the tangible assets
acquired, liabilities assumed, and intangible assets acquired based on their
estimated fair values as of the acquisition date. The excess of the fair value
of purchase consideration over the fair values of these identifiable assets and
liabilities is recorded as goodwill. Such valuations require us to make
significant estimates and assumptions, especially with respect to intangible
assets.

Significant estimates in valuing certain intangible assets include, but are not
limited to, future expected cash flows from acquired customers and acquired
technology from a market participant perspective, useful lives, and discount
rates. Significant estimates in valuing liabilities for contingent consideration
include, but are not limited to, discount rates, projected financial results of
the acquired businesses based on our most recent internal forecasts, and factors
indicating the probability of achieving the forecasted results.

Our estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. During the measurement period,
which is not to exceed one year from the acquisition date, we may record
adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Upon the conclusion of the measurement period,
any subsequent adjustments are recorded to earnings.

Operating results

Year ended December 31, 2021 Compared to the year ended December 31, 2020

The following table presents our results of operations for the periods
indicated:
                                                      Year Ended December 31,
                                               2021                            2020                        Change
(dollars in thousands)                            % of revenue                    % of revenue                      %
Revenues                            $ 385,276             100.0 %   $ 312,630             100.0 %   $ 72,646         23.2 %
Cost of revenues                      131,678              34.2        99,836              31.9       31,842         31.9
Gross profit                          253,598              65.8       212,794              68.1       40,804         19.2
Operating expenses
Sales and marketing                    88,044              22.9        75,955              24.3       12,089         15.9
Research and development               39,038              10.1        31,024               9.9        8,014         25.8
General and administrative             61,305              15.9        50,119              16.0       11,186         22.3
Amortization of intangible assets      10,126               2.6         5,538               1.8        4,588         82.8
Total operating expenses              198,513              51.5       162,636              52.0       35,877         22.1
Income from operations                 55,085              14.3        50,158              16.0        4,927          9.8
Other income (expense), net            (1,544 )            (0.4 )       2,522               0.8       (4,066 )     (161.2 )
Income before income taxes             53,541              13.9        52,680              16.9          861          1.6
Income tax expense                      8,944               2.3         7,094               2.3        1,850         26.1
Net income                          $  44,597              11.6 %   $  45,586              14.6 %   $   (989 )       (2.2 )%

Revenues – The increase in revenue resulted from two main factors: the increase in the number of recurring customers, which is driven by the continued growth of the business and by business acquisitions, and the increase in the average recurring revenue per recurring customer , which we also call Wallet. to share.

• The number of recurring revenue customers increased by 13% to 37,500

December 31, 2021 from 33,150 to December 31, 2020 due to sales and

marketing efforts to acquire new customers and due to new acquisitions.

• The share of wallet increased by 9% to reach $10,050 at December 31, 2021 from $9,250 at

December 31, 2020. This is mainly due to the increased use of

our products by our recurring customers.

                                                        Form 10-K for the Annual
[[Image Removed]]  SPS                                 Period ended December 31,
COMMERCE, INC.                        26                                    2021


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Recurring revenues from recurring revenue customers increased 20% in 2021, as
compared to 2020, and accounted for 92% and 94% of our total revenues in 2021
and 2020, 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 and on new sources of
revenues.

Revenue cost – The increase in revenue cost is mainly due to the increase in headcount which resulted in an increase in $26.3 million staff costs and an increase of $2.8 million in stock-based compensation. Additionally, as we continue to invest in the infrastructure supporting our platform, depreciation expense has increased by $1.7 million.

Sales and Marketing Expenses - The increase in sales and marketing expense was
primarily due to increased headcount which resulted in an increase of $5.9
million in personnel-related costs, an increase of $1.6 million in sales
commissions, and an increase of $2.1 million in stock-based compensation. Also,
with continued business growth, our referral partners costs increased $2.4
million.

Research and Development Expenses - The increase in research and development
expense was primarily due to increased headcount which resulted in increases of
personnel costs of $5.9 million and stock-based compensation of $0.8 million. In
addition, there was an increase in software subscription expense of $1.4
million.

General and Administrative Expenses - The increase in general and administrative
expense was primarily due to increased headcount which resulted in an increase
in personnel-related costs of $5.8 million and a stock-based compensation
increase of $2.9 million. The remaining increase primarily related to supporting
continued business growth which resulted in increased general and administrative
costs, such as credit card fees, professional fees, and software subscriptions.

Amortization of Intangible Assets - The increase in amortization of intangible
assets was driven by the amortization of the acquired intangible assets related
to recent business combinations.

Other income (expenses) – The variation is mainly attributable to unfavorable variations in exchange rates and the decline in investment income.

Income Tax Expense - The increase in income tax expense was due to an increase
in nondeductible executive compensation and an increase in pre-tax income.
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. See Note M to our
consolidated financial statements, included in this Annual Report on Form 10-K,
for additional information regarding our income taxes.

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 year ended December 31, 2021, other adjustments include
disposals of cloud hosting arrangement implementation costs and accelerated
tenant improvement benefit, which was incurred as part of executing a lease
agreement. This tenant improvement adjustment was partially offset by
accelerated depreciation, which is included within Depreciation and amortization
of property and equipment and was also incurred as part of executing a lease
agreement. For the year ended December 31, 2020, other adjustments included the
expense impact from the disposals of certain capitalized internally developed
software and cloud hosting arrangement implementation costs in addition to an
earn-out liability fair value adjustment. The following table provides a
reconciliation of net income to Adjusted EBITDA:
                                                            Year Ended December 31,
(in thousands)                                              2021                2020
Net income                                              $      44,597       $     45,586
Income tax expense                                              8,944              7,094
Depreciation and amortization of property and
equipment                                                      14,788       

13,127

Amortization of intangible assets                              10,126       

5,538

Stock-based compensation expense                               27,574       

18,936

Realized (gain) loss from foreign currency on cash
and investments held                                            1,456             (1,753 )
Investment income                                                (278 )           (1,208 )
Other                                                            (192 )             (326 )
Adjusted EBITDA                                         $     107,015       $     86,994



                                                        Form 10-K for the Annual
[[Image Removed]]  SPS                                 Period ended December 31,
COMMERCE, INC.                        27                                    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:
                                                               Year Ended December 31,
(in thousands, except Margin and Adjusted EBITDA Margin)       2021                2020
Revenue                                                    $     385,276       $    312,630

Net income                                                        44,597             45,586
Margin                                                                12 %               15 %

Adjusted EBITDA                                            $     107,015       $     86,994
Adjusted EBITDA Margin                                                28 %               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, and
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 stock outstanding during each period. For the year
ended December 31, 2021, other adjustments include disposals of cloud hosting
arrangement implementation costs and accelerated tenant improvement benefit,
which was incurred as part of executing a lease agreement. This tenant
improvement adjustment was partially offset by accelerated depreciation, which
is included within Depreciation and amortization of property and equipment and
was also incurred as part of executing a lease agreement. For the year ended
December 31, 2020, other adjustments included the expense impact from the
disposals of certain capitalized internally developed software and cloud hosting
arrangement implementation costs in addition to an earn-out liability fair value
adjustment.

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 earnings per share:

                                                            Year Ended December 31,
(in thousands, except per share amounts)                    2021            

2020

Net income                                              $      44,597       $     45,586
Stock-based compensation expense                               27,574       

18,936

Amortization of intangible assets                              10,126       

5,538

Realized foreign exchange loss (gain) on cash and investments held

                                            1,456             (1,753 )
Other                                                            (192 )             (326 )
Income tax effects of adjustments                             (16,454 )          (12,285 )
Non-GAAP income                                         $      67,107       $     55,696
Shares used to compute non-GAAP income per share
Basic                                                          35,928             35,226
Diluted                                                        36,962             36,285
Non-GAAP income per share
Basic                                                   $        1.87       $       1.58
Diluted                                                 $        1.82       $       1.53



Year ended December 31, 2020 Compared to the year ended December 31, 2019

The discussion of our results from operations for the year ended December 31,
2020 compared to the year ended December 31, 2019 can be found in Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2020.


Cash and capital resources

At December 31, 2021, our principal sources of liquidity were cash and cash
equivalents, and short-term investments totaling $257.3 million, and net
accounts receivable of $34.6 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, U.S.
treasury securities and U.S. corporate bonds.

The summary of activity within the consolidated statements of cash flows was as
follows:
                                                        Form 10-K for the Annual
[[Image Removed]]  SPS                                 Period ended December 31,
COMMERCE, INC.                        28                                    2021


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                                                        Twelve Months Ended
                                                            December 31,
(in thousands)                                          2021           2020
Net cash provided by operating activities             $ 112,893     $   

88,562

Net cash used in investing activities                   (46,703 )     

(120,469) Net cash provided by (used in) financing activities ($8,361) $2,328

Net cash flow from operating activities

The increase in cash provided by operating activities was primarily driven by an
increase in non-cash expenses and changes in operating assets and liabilities.
Significant changes in non-cash items included increased stock-based
compensation and amortization of intangible assets resulting from business
expansion. Significant changes in operating assets and liabilities included
increases in deferred revenue and accrued compensation balances. This was
partially offset by decreases in other assets and deferred costs.

Net cash flow from investing activities

The decrease in net cash used in investing activities is mainly due to the decrease in cash used for business acquisitions and intangible assets, driven by the larger acquisition in 2020 compared to 2021.

Net cash flow from financing activities

The change in net cash flow from financing activities is mainly explained by the decrease in net proceeds from the exercise of stock options.

The discussion of our liquidity and capital resources for the year ended
December 31, 2020 compared to the year ended December 31, 2019 can be found in
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2020.

Summary of contractual and commercial commitments

Our contractual obligations and commercial commitments as of December 31, 2021
are summarized below:
                                                               Payments Due by Period
                                       Less Than                                       More Than
(in thousands)                          1 Year         1-3 Years       3-5 Years        5 Years        Total
Operating lease obligations,
including imputed interest            $     4,865     $     8,944     $     7,631     $     1,269     $ 22,709
Purchase commitments                        6,462           3,460               -               -        9,922
Total                                 $    11,327     $    12,404     $     7,631     $     1,269     $ 32,631

Future capital needs

Our future capital requirements may differ significantly from those currently anticipated and will depend on many factors, including:

• the costs of developing and implementing new products and applications, if any;

• the 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 expenses in line with the growth of our operations and our staff, and we expect our expenses to continue to increase as we expand our business.

We believe that our cash, cash equivalents, investments and cash flow 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

                                                        Form 10-K for the Annual
[[Image Removed]]  SPS                                 Period ended December 31,
COMMERCE, INC.                        29                                    2021


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We have no off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debts. In addition, we are not a party to any derivative contracts or synthetic leases.

Exchange rate and inflation rate

For information regarding the effect of foreign currency exchange rate changes,
refer to the section entitled "Foreign Currency Exchange Risk," included in Part
II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of
this Annual Report on Form 10-K.

Over the past three years, inflation and price changes have not had a material impact on our business and we do not expect inflation or price changes to have a material impact on our business. in the foreseeable future.

Recent accounting pronouncements

For information regarding recent accounting pronouncements, refer to Note A,
General, in our Notes to Consolidated Financial Statements in the sections
entitled "Recently Adopted Accounting Pronouncements" and "Accounting
Pronouncements Not Yet Adopted" as applicable, included in Part II, Item 8,
"Financial Instruments and Supplementary Data" of this Annual Report on Form
10-K.


                                                        Form 10-K for the Annual
[[Image Removed]]  SPS                                 Period ended December 31,
COMMERCE, INC.                        30                                    2021


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