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What changed in SPS COMMERCE INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of SPS COMMERCE INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+163 added−146 removedSource: 10-K (2024-02-21) vs 10-K (2023-02-21)

Top changes in SPS COMMERCE INC's 2023 10-K

163 paragraphs added · 146 removed · 116 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeHuman Capital As of December 31, 2022, our employees worked across the following functional areas: # of Employees Cost of revenues 1,122 Sales and marketing 557 Research and development 359 General and administrative 177 Total employees 2,215 Substantially all of our employees are employed on a full-time basis, 84% of which are based in North America.
Biggest changeOur People As of December 31, 2023, we had a total of 2,489 employees worldwide, including 1,238 in cost of revenues, 644 in sales and marketing, 402 in research and development, and 205 in general and administrative. 81% are based in North America with the remaining in Europe and Asia Pacific.
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, 2022, 2021, and 2020. Increasing Demand for a Retail Network The retail industry has undergone many changes in recent years, which have accelerated the need for a more automated supply chain.
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, 2023, 2022, and 2021. Increasing Demand for a Retail Network The retail industry has undergone many changes in recent years, which have accelerated the need for a more automated supply chain.
To date, 115,000 customers across 85 countries have used SPS Comm erce products to expand and optimize the performance of their trading relationships through the network. Our products fundamentally change how organizations communicate information to manage their omnichannel, supply chain, and other business requirements.
To date , 120,000 customers across approximately 85 countries have used SPS Comm erce products to expand and optimize the performance of their trading relationships through the network. Our products fundamentally change how organizations communicate information to manage their omnichannel, supply chain, and other business requirements.
Our development efforts take place at our U.S. locations in Minnesota and New Jersey, as well as in Melbourne, Australia; Toronto, Canada; and Kyiv, Ukraine. Operations We operate our infrastructure in third-party data centers located throughout the United States ("U.S.") and in Australia, as well as provisioned services with cloud providers.
Our development efforts take place at our United States ("U.S.") locations in Minnesota and New Jersey, as well as in Melbourne, Australia; Toronto, Canada; and Kyiv, Ukraine. Operations We operate our infrastructure in third-party data centers located throughout North America, Europe, and Australia, as well as provisioned services with cloud providers.
Once connected to the SPS Commerce cloud-based retail network, our customers often require additional integrations to new organizations that represent an expansion of our cloud-based network and new sources of revenues for us. For the years ended December 31, 2022, 2021, and 2020, we generated revenues of $450.9 million, $385.3 million, and $312.6 million, respectively.
Once connected to the SPS Commerce cloud-based retail network, our customers often require additional integrations to new organizations that represent an expansion of our cloud-based network and new sources of revenues for us. For the years ended December 31, 2023, 2022, and 2021, we generated revenues of $536.9 million, $450.9 million, and $385.3 million, respectively.
Our quarter ended December 31, 2022 represented our 88th consecutive quarter of revenue growth. Recurring revenues from recurring revenue customers accounted for 93%, 92%, and 94% of our total revenues for the years ended December 31, 2022, 2021, and 2020, respectively.
Our quarter ended December 31, 2023 represented our 92nd consecutive quarter of revenue growth. Recurring revenues from recurring revenue customers accounted for 94%, 93%, and 92% of our total revenues for the years ended December 31, 2023, 2022, and 2021, respectively.
In most cases, infrastructure and services are managed by us. We have internal and third-party monitoring software that continually checks our cloud-based network and key underlying components for continuous availability and performance, helping ensure that the network is always available and providing desired service levels. We have a technology team that includes system provisioning, management, maintenance, monitoring, and back-up.
In most cases, infrastructure and services are managed by us. We have internal and third-party monitoring software that continually checks the status of services and underlying infrastructure for availability and performance, helping ensure that the network is always available and providing desired service levels. We have a technology team that includes system provisioning, management, maintenance, monitoring, and back-up.
Depending on the jurisdiction, trademarks are generally valid as long as they are in use or their registrations are properly maintained, and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use.
Depending on the jurisdiction, trademarks are generally valid as long as they are in use or their registrations are properly maintained, and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use. We have one patent we acquired through the acquisition of GCommerce.
As of December 31, 2022, we had 42,300 customers with ongoing contracts to pay us monthly fees, which we refer to as recurring revenue customers. In addition to our recurring revenue customers, to date we have provided our cloud-based supply chain management services to 72,700 other organizations, and we refer to the combination as our customers.
As of December 31, 2023, we had approximately 44,800 customers with ongoing contracts to pay us monthly fees, which we refer to as recurring revenue customers. In addition to our recurring revenue customers, to date we have provided our cloud-based supply chain management services to approximately 75,200 other organizations, and we refer to the combination as our customers.
Our cloud-service model treats all customers as logically separate tenants within a shared virtual infrastructure. As a result, we spread the cost of delivering our products across our customer base.
We use commercially available hardware and cloud-services with a combination of proprietary and commercially available software. Our cloud-service model treats all customers as logically separate tenants within a shared virtual infrastructure. As a result, we spread the cost of delivering our products across our customer base.
Our products include: • Fulfillment - Our Fulfillment product is a full-service electronic data interchange ("EDI") solution that scales as a business grows. Companies can use a single system to manage orders and logistics from all sales channels, including wholesale, eCommerce, and marketplaces.
SPS COMMERCE, INC. 4 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Our products include: • Fulfillment - Our Fulfillment product is a full-service electronic data interchange ("EDI") solution that scales as a business grows. Companies can use a single system to manage orders and logistics from all sales channels, including wholesale, eCommerce, and marketplaces.
We plan to continue to evaluate potential acquisitions based on the number of new customers, revenue, functionality, or geographic reach the acquisition would provide relative to the purchase price, and our ability to integrate and operate the acquired business. In 2022, we acquired GCommerce, Inc. ("GCommerce"), a leading EDI provider within the automotive aftermarket industry.
We plan to continue to evaluate potential acquisitions based on the number of new customers, revenue, functionality, or geographic reach the acquisition would provide relative to the purchase price, and our ability to integrate and operate the acquired business. In 2023, we acquired TIE Kinetix Holding B.V.
Key elements of our strategy include: • Further Penetrate Our Current Market - We believe the global supply chain management market is underpenetrated.
Our Growth Strategy Our objective is to be the leading global retail network and provider of supply chain management products. Key elements of our strategy include: • Further Penetrate Our Current Market - We believe the global supply chain management market is underpenetrated.
Channel Partners - In addition to the customer acquisition sources identified above, we market and sell our products through a variety of channel partners, including software providers, resellers, system integrators, and logistics partners.
SPS COMMERCE, INC. 5 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Channel Partners - In addition to the customer acquisition sources identified above, we market and sell our products through a variety of channel partners, including software providers, resellers, system integrators, and logistics partners.
SPS COMMERCE, INC. 7 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Competition Vendors in the supply chain management industry offer products through three delivery methods: traditional on-premise software, cloud-based managed services, and cloud-based full-service products. The market for cloud-based supply chain management products is fragmented and rapidly evolving.
Competition Vendors in the supply chain management industry offer products through three delivery methods: traditional on-premise software, cloud-based managed services, and cloud-based full-service products. The market for cloud-based supply chain management products is fragmented and rapidly evolving.
Traditional on-premise software companies use a single-tenant approach in which information maps to retailers are built for and used by one supplier, as compared to cloud-service products that allow multiple customers to share information maps with a retailer. Managed service providers focused on the supply chain management market include IBM Sterling, OpenText, TrueCommerce and many other small providers.
This method requires customers to invest in staff to operate and maintain the software. Traditional on-premise software companies use a single-tenant approach in which information maps to retailers are built for and used by one supplier, as compared to cloud-service products that allow multiple customers to share information maps with a retailer.
Our marketing teams focus on driving awareness and demand for our products through the following activities: • Demand Generation - Engages with target audiences using the latest digital marketing strategies to bring opportunities to our sales teams. • Communications - Manages our brand, public relations, and go-to-market support. • Product Marketing - Equips our sales teams, performs market studies, and promotes the unique capabilities of each of our products using our go-to-market strategies. • Events - Highlights our presence at industry trade shows and orchestrates virtual and in-person events.
Our marketing teams focus on driving awareness and demand for our products through the following activities: • Demand Generation - Engages with target audiences using the latest digital marketing strategies to bring opportunities to our sales teams. • Communications - Manages our brand and public relations, as well as provides go-to-market support.
This approach offloads the time-intensive process of managing these products, which is not a core competency for most businesses. Customers of traditional on-premise software providers must typically make significant upfront investments in the supply chain management products these competitors provide, which can decrease customers’ willingness to abandon their investments in favor of a cloud-service product.
Customers of traditional on-premise software providers must typically make significant upfront investments in the supply chain management products these competitors provide, which can decrease customers’ willingness to abandon their investments in favor of a cloud-service product. Cloud-service vendors compete with these traditional software products based on the total cost of ownership and flexibility.
As customers expand their business, the SPS Commerce retail network is a core part of their omnichannel strategy.
As customers expand their business, the SPS Commerce retail network is a core part of their omnichannel strategy. Each additional channel brings more reliance and volume to the network and increases customer revenue.
Each additional channel brings more reliance and volume to the network and increases customer revenue. • Retail needs automation - With increased retail store openings and closings, labor shortages, supply chain disruptions, and new buying patterns, retailers are demanding more from their trading partners as they need to be agile and transition their businesses as markets change.
SPS COMMERCE, INC. 6 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents • Retail needs automation - With increased retail store openings and closings, labor shortages, supply chain disruptions, and new buying patterns, retailers are demanding more from their trading partners as they need to be agile and transition their businesses as markets change.
Fulfillment is configurable for any trading partner, document or business system used for order management and offers a full suite of tools to help businesses efficiently manage their supply chain.
Fulfillment is configurable for any trading partner, document or business system used for order management and offers a full suite of tools to help businesses efficiently manage their supply chain. • Analytics - Our Analytics product enables organizations to improve visibility into how products are selling through a single connection across all sales channels, including wholesale, eCommerce, and marketplaces.
These companies offer a “do-it-yourself” method in which customers purchase, install, and manage specialized software, hardware, and value-added networks for their supply chain integration needs. This method requires customers to invest in staff to operate and maintain the software.
Cloud-service vendors also compete with traditional on-premise software companies. Traditional on-premise software companies focused on supply chain integration management include IBM Sterling and OpenText. These companies offer a “do-it-yourself” method in which customers purchase, install, and manage specialized software, hardware, and value-added networks for their supply chain integration needs.
Technology, Development and Operations Technology SPS Commerce was an early provider of cloud-services to the retail supply chain management industry, launching the first version of what would become our current services in 1997. We use commercially available hardware and cloud-services with a combination of proprietary and commercially available software.
The SPS Commerce retail network automates these relationships to quickly secure product details, initiate orders, and track performance to help keep operations running smoothly. Technology, Development and Operations Technology SPS Commerce was an early provider of cloud-services to the retail supply chain management industry, launching the first version of what would become our current services in 1997.
These companies offer a cloud-based product in which they develop and maintain the core technology, while the customer’s internal staff is responsible for the day-to-day customization, optimization, and operations of the technology. In contrast, full-service providers, including SPS Commerce, offer cloud-based products and expert resources that customize, optimize, and operate the technology.
Managed service providers focused on the supply chain management market include IBM Sterling, OpenText, TrueCommerce and many other small providers. These companies offer a cloud-based product in which they develop and maintain the core technology, while the customer’s internal staff is responsible for the day-to-day customization, optimization, and operations of the technology.
Stockholders may also request copies of these documents by writing to us at the address above, with attention to "Investor Relations". SPS COMMERCE, INC. 9 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents
Stockholders may also request copies of these documents by writing to us at the address above, with attention to "Investor Relations".
We strive to create an organization where every employee feels welcomed and is empowered to do their best work. Our core values drive our culture and are foundational to how we create an engaging workplace, how we train and develop our teams, and how we identify the right talent for the organization.
Our core values drive our culture and are foundational to how we create an engaging workplace, identify the right talent, and train and develop our teams. Our values guide our interactions with our customers, partners, and one another.
Cloud-service vendors compete with these traditional software products based on the total cost of ownership and flexibility. Intellectual Property and Proprietary Content SPS Commerce relies on a combination of copyright, trademark, and trade secret laws as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand.
SPS COMMERCE, INC. 8 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Intellectual Property and Proprietary Content SPS Commerce relies on a combination of copyright, trademark, patent, and trade secret laws as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand.
As retailers evolve, their trading partner relationships must support any new product introductions or new suppliers to achieve their merchandising goals. The SPS Commerce retail network automates these relationships to quickly secure product details, initiate orders, and track performance to help keep operations running smoothly.
Consumers want the latest products and retailers are continually chasing trends, offering differentiated items, and introducing new products and suppliers to their supply chains. As retailers evolve, their trading partner relationships must support any new product introductions or new suppliers to achieve their merchandising goals.
Also in 2022, we acquired InterTrade Systems Inc. ("InterTrade"), a leading EDI provider within the apparel and general merchandising markets. These acquisitions further extend the capabilities of our network and added new customers and technology.
("TIE Kinetix"), a leading provider of supply chain digitalization including EDI and e-invoicing in Europe and the United States. This acquisition further extends the capabilities of our network and added new customers and technology.
Our software is also protected under copyright law, but we do not have any registered copyrights.
Our trade secrets consist primarily of the software we have developed for our SPS Commerce cloud-based products and network. Our software is also protected under copyright law, but we do not have any registered copyrights. Human Capital At SPS, we believe our employees have and will continue to be a primary reason for our growth and success.
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SPS COMMERCE, INC. 4 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents • Analytics - Our Analytics product enables organizations to improve visibility into how products are selling through a single connection across all sales channels, including wholesale, eCommerce, and marketplaces.
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SPS COMMERCE, INC. 7 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents • Product Marketing - Equips our sales teams, performs market studies, and promotes the unique capabilities of each of our products using our go-to-market strategies. • Events - Highlights our presence at industry trade shows and orchestrates virtual and in-person events.
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SPS COMMERCE, INC. 5 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Our Growth Strategy Our objective is to be the leading global retail network and provider of supply chain management products.
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In contrast, full-service providers, including SPS Commerce, offer cloud-based products and expert resources that customize, optimize, and operate the technology. This approach offloads the time-intensive process of managing these products, which is not a core competency for most businesses.
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Consumers want the latest products and retailers are continually chasing trends, offering differentiated items, and introducing new products and suppliers to their SPS COMMERCE, INC. 6 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents supply chains.
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We attract, retain, and reward exceptional talent by cultivating an inclusive, high-performing culture and engaging employees with meaningful work and opportunities to grow and develop. Oversight and Governance Our board of directors and Compensation and Talent Committee have oversight of our human capital management and diversity, equity, and inclusion efforts.
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We expect to encounter new and increased competition as this market segment consolidates and matures. Consolidation among cloud-service vendors could create a direct competitor that can compete with us more effectively than the numerous, smaller vendors currently offering cloud-service supply chain management products.
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They receive regular updates from our Chief Human Resources Officer on key strategic initiatives and other relevant matters related to human resources including, but not limited to, hiring, development, retention, employee engagement, succession planning, compensation and benefits, and human resources-related risks.
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Increased competition from cloud-service vendors could reduce our market share, revenues, and operating margins or otherwise adversely affect our business. Cloud-service vendors also compete with traditional on-premise software companies. Traditional on-premise software companies focused on supply chain integration management include IBM Sterling and OpenText.
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Substantially all our employees are employed on a full-time basis. We also engage third-party agencies for staff augmentation to support our operations. Although we have statutory employee representation obligations in certain countries, none of our U.S. employees are represented by a labor union. 36% of our global workforce identify as female and 2% did not specify their gender.
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We have one patent we acquired through the acquisition of SPS COMMERCE, INC. 8 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents GCommerce. Our trade secrets consist primarily of the software we have developed for our SPS Commerce cloud-based products and network.
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Within the U.S. 18% of our employees self-identified as being a member of an underrepresented group. Our executive team is comprised of 10 individuals, of which 40% are women. Diversity, Equity, and Inclusion We value diversity, equity, and inclusion and believe our differences make us, our customers, and our communities better.
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We also engage independent contractors to support our operations. None of our employees are represented by a labor union. We believe our employees have and will continue to be a primary reason for our growth and success. SPS values diversity, equity, and inclusion and believes that our differences make us, our customers, and our communities better.
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We strive to create an organization where every employee feels welcomed and is empowered to do their best work. We make our commitment to diversity, equity, and inclusion a reality by incorporating it into our human resource core processes and our talent strategies.
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Our values guide our interactions with our customers, partners, and one another. We offer our employees pay and benefits packages that we believe are competitive with others in our industry, as well as within the local markets in which we operate, and that align individual performance with our success.
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Our Employee Resource Groups ("ERGs") foster employee connections across the globe, provide learning, engagement, and networking opportunities, as well as provide important insights in support of advancing equity company-wide. These employee-led resource groups create community and focus across several dimensions including gender, race and ethnicity, gender identity, sexual orientation, ability/disability, military service and more.
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To foster an engaged and motivated team we provide training, development, review and feedback programs to develop employees’ expertise and skillsets, as well as strive to provide a safe, harassment-free work environment guided by principles of fair and equal treatment.
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All employees are welcome and encouraged to participate in one or more of our ERGs, which include the Black Business Resource Group, the Diversity and Inclusion Group, the LGBTQ+ Group, and Women in Tech. Since 2021, all new hires participate in an interactive diversity, equity, and inclusion curriculum focused on the History of Racism, Implicit Bias, and Allyship.
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As a result, we believe our employees are committed to building strong, innovative, and long-term relationships with each other and our organization in order to succeed together and with our customers. The health and wellness of our employees is also very important to us. W e have, where possible, offered remote work flexibility, without significant impacts to productivity.
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Additionally, we provide our managers with resources to support building inclusive teams and being an inclusive leader.
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We support several Employee Resource Groups ("ERGs") to encourage connections across the globe and support a sense of belonging at SPS. Current ERGs include the Black Business Resource Group, the Diversity & Inclusion Group, the LGBTQ+ Resource Group, and Women in Tech.
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SPS COMMERCE, INC. 9 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents For well over a decade, SPS has invested in and supported the communities in which we live and work, focused on efforts that expand our future talent pipeline by helping to develop the workforce of tomorrow.
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These groups provide support for employees and allies, give employees the chance to build community and connections, develop and grow, as well as further shape our culture to create a more inclusive workplace. Company Information We were originally incorporated as St. Paul Software, Inc., a Minnesota corporation, on January 28, 1987.
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Over the years we have invested in student programs focused on creating opportunities for high school and college students who are part of underrepresented populations including women, genderqueer and non-binary individuals, and racial minorities. These opportunities build experiences through job shadowing, work-study, mentoring, and professional development in areas of Science, Technology, Engineering and Math ("STEM"), supply-chain, analytics, and customer success.
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Established in 2020, the SPS Diverse Scholar Program supports diverse first-generation college students pursuing a career in technology. In addition to receiving funding for their education, our diverse scholars participate in our internship program, have access to mentors, are offered part-time work during the school year, and are connected to a wide range of business professionals.
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Additionally, as a federal contractor we comply with federal contractor affirmative action requirements to employ and promote women, minorities, individuals with disabilities, and protected veterans. Talent Acquisition, Engagement, and Retention We work diligently to attract the best talent from a variety of sources to meet current and future business needs.
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We have cultivated relationships with many colleges and universities, including Historically Black Colleges and Universities ("HBCUs"), industry groups, professional associations, and other student programs focused on hiring women, non-binary and genderqueer, minorities, and individuals with disabilities.
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Our campus program focuses on bringing in talent with experience from schools that are leaders in technology, supply chain, engineering, and business. 41% of our hires from our most recent campus cohort identify as underrepresented minorities. We regularly survey our employees to better understand their perspectives and where we can focus to improve their experience.
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Our 2023 employee engagement survey indicated a positive engagement score of 71%, which is higher than the benchmark provided by our survey vendor both globally and for North American companies of similar size or within our sector. Additionally, feedback on diversity and inclusion continues to score higher than benchmarks with an 81% positive perception score.
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Our 2023 employee retention rate of 92% improved compared to 88% in 2022. We believe our strong company culture and focus on providing meaningful work, professional development, flexible work options, competitive pay and benefits, as well as our commitment to diversity, equity, and inclusion contribute to our high employee retention.
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Growth and Development Development of our employees and leaders results in high performing teams who are empowered to grow their careers and deliver exceptional results, and it begins on the first day of employment with SPS.
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When new employees join SPS, they attend a robust new hire onboarding program that focuses on the skills necessary to become productive employees, including training on company technology, collaboration tools, our company culture, values, and a comprehensive diversity, equity, and inclusion learning experience. Onboarding is followed by on-the-job training and regular performance and development discussions between employees and their managers.
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We provide ongoing opportunities for our employees to build new skills, develop in their current role, and prepare for future roles. All employees have access to an online learning platform that supports their development as well as opportunities to participate in programs such as AccelerateMe and Exploring Leadership.
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Annually we host SPS Professional Development Week ("PDW"), a collection of learning and development opportunities designed to help employees develop skills for continued growth. In 2023, the PDW employee track focused on how to effectively receive feedback and owning your SPS career.
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The PDW manager track focused on change management, what it means to be an inclusive leader, and building Crucial Conversation skills. Our talent strategy prioritizes growing and developing our own leaders. In 2023, we refreshed our Leadership Model by introducing competencies for each of our four leadership pillars: People Developer, Culture Champion, Strategist, and Results Enabler.
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These competencies will help frame our leadership development programs as we continue to build tools and resources to advance our leaders’ capabilities to grow and scale their teams. Additionally, we assess our leadership talent across the organization through our talent review process, which allows us to differentiate talent based on performance and potential.
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This process is the basis for succession planning for critical roles in the organization.
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SPS COMMERCE, INC. 10 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Total Rewards and Employee Well-being At SPS, our total rewards strategies support the financial, physical, and mental well-being of our employees and their families and incorporate market competitive pay and comprehensive benefits programs for all global employees.
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We offer compelling and competitive packages designed to attract, retain, and motivate our employees. Our benefit programs align to our geographies and provide a comprehensive healthcare offering and other programs, including an employee stock purchase plan in most jurisdictions.
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We believe in paying team members equitably, regardless of gender, race, or ethnicity, and we regularly review the pay data of U.S. and other geographies to ensure fairness. The well-being of our workforce is particularly important to us.
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In addition to our traditional employee benefits, we offer several supplemental benefits to support the physical, mental, and financial health of all our employees.
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We have partnered with a global employee assistance program ("EAP") vendor that provides curated webinars in support of mental health and well-being, and offers all employees and their dependents access to mental health providers and free sessions with a licensed provider. Our U.S. healthcare platform offers virtual mental health solutions, including tools focused on mindfulness, meditation, and wellness.
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In 2023, we launched our Wellbeing at SPS intranet site providing greater access to all our programs and resources. At SPS, we believe generosity and caring make a difference. We actively contribute to our communities and encourage volunteerism and philanthropy among our employees.
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The Team SPS Gives Back Matching program amplifies SPS employees’ charitable contributions or volunteer hours with matching donations, furthering their support to the organizations they believe in and care about. Company Information We were originally incorporated as St. Paul Software, Inc., a Minnesota corporation, on January 28, 1987.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf the market for cloud-based supply chain management products declines or does not maintain its historical growth rates, our revenues may decline or fail to grow, and we may incur operating losses. We derive, and expect to continue to derive, substantially all of our revenues from providing cloud-based supply chain management products to retailers, grocers, distributors, suppliers, and logistics firms.
Biggest changeWe derive, and expect to continue to derive, substantially all of our revenues from providing cloud-based supply chain management products to retailers, grocers, distributors, suppliers, and logistics firms. The market for these products has historically experienced growth, but it is uncertain whether these products will continue or sustain growing levels of demand and market acceptance.
Any delay or failure in the introduction of new or enhanced products could adversely affect our business, results of operations and financial condition. We rely on third-party infrastructure, software and services that could take a significant time, and involve a complex transition, to replace or upgrade.
Any delay or failure in the introduction of new or enhanced products could adversely affect our business, results of operations and financial condition. We rely on third-party infrastructure, software and services that could take significant time, and involve a complex transition, to replace or upgrade.
In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S. intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to capture market share.
In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S. and intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to capture market share.
Our operating results in one or more future quarters may fluctuate, fall below the expectations of securities analysts and investors, or be less than any guidance we may provide to the market. If this occurs, the trading price of our common stock could decline significantly. Our stock price may be volatile.
Our operating results in one or more future quarters may fluctuate, fall below the expectations of securities analysts and investors, or be less than any guidance we may provide to the market. If this occurs, the trading price of our common stock could decline significantly.
If these defects lead to service failures, we could experience delays or lost revenues, diversion of technology resources, negative media attention or increased service costs as a result of performance claims during the period required to correct the cause of the defects.
If these defects lead to service failures, we could experience delays or lost revenues, diversion of technology resources, negative media attention or increased service costs as a result of performance-based claims during the period required to correct the cause of the defects.
Acquisitions involve numerous risks including: • incurring significantly higher than anticipated capital expenditures and operating expenses; • failing to assimilate the operations, customers, and personnel of the acquired company or business; • disrupting our ongoing business; • dissipating or distracting our management resources; • dilution to existing stockholders from the issuance of equity securities; • liabilities or other problems associated with the acquired business; • becoming subject to adverse tax consequences, substantial depreciation, or deferred compensation charges; • improper compliance with laws and regulations and exposure to other contingent liabilities; • failing to maintain uniform standards, controls, and policies; and • impairing relationships with employees and customers as a result of changes in management.
Acquisitions involve numerous risks including: • incurring significantly higher than anticipated capital expenditures and operating expenses; • failing to assimilate the operations, customers, and personnel of the acquired company or business; • disrupting our ongoing business; • dissipating or distracting our management resources; • dilution to existing stockholders from the issuance of equity securities; • liabilities or other problems associated with the acquired business; • becoming subject to adverse tax consequences, substantial depreciation, or deferred compensation charges; • compliance with laws and regulations and exposure to other contingent liabilities; • retaining key management of the acquired company; • failing to maintain uniform standards, controls, and policies; and • impairing relationships with employees and customers as a result of changes in management.
We could also be subject to litigation for actual or alleged losses to our customers’ businesses, which may require us to spend significant time and money in litigation or arbitration or to pay significant settlements or damages. We do not currently maintain any warranty reserves.
We could also be subject to litigation for actual or alleged losses to our customers, which may require us to spend significant time and money in litigation or arbitration or to pay significant settlements or damages. We do not currently maintain any warranty reserves.
The open source community is comprised of many different formal and informal groups of software developers and individuals who have created a wide variety of software and have made that software available for use, distribution, and modification, often free of charge.
The open source community comprises many different formal and informal groups of software developers and individuals who have created a wide variety of software and have made that software available for use, distribution, and modification, often free of charge.
Expanding international sales and operations subjects us to new risks that, generally, we have not faced in the U.S., including: • misjudging the markets and competitive landscape of foreign jurisdictions; • fluctuations in currency exchange rates; • unexpected changes in foreign regulatory requirements; • longer accounts receivable payment cycles and difficulties in collecting accounts receivable; • difficulties in managing and staffing international operations; • differing technology standards; • potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings; • localization of our products, including translation into foreign languages and associated expenses; • the burdens of complying with a wide variety of foreign laws and different legal standards, including laws and regulations related to privacy; • increased financial accounting and reporting burdens and complexities; • political, social, and economic instability abroad, terrorist attacks and security concerns in general; • greater potential for corruption and bribery; and • reduced or varied protection for intellectual property rights in some countries.
Expanding international sales and operations subjects us to new risks that, generally, we have not faced in the U.S., including: • misjudging the markets and competitive landscape of foreign jurisdictions; • fluctuations in currency exchange rates; • longer accounts receivable payment cycles and difficulties in collecting accounts receivable; • difficulties in managing and staffing international operations; • differing technology standards; • potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings; • localization of our products, including translation into foreign languages and associated expenses; • the burdens of complying with a wide variety of foreign laws and regulations, and changes to such laws and regulations, including laws and regulations related to employment, privacy and tax; • increased financial accounting and reporting burdens and complexities; • unexpected changes in effective tax rates due to international tax liabilities subject to allocation of expenses in differing jurisdictions; • political, social, and economic instability abroad, terrorist attacks and security concerns in general; • greater potential for corruption and bribery; and • reduced or varied protection for intellectual property rights in some countries.
Given the interconnected nature of the retail supply chain, our significant presence in the retail industry, and the occurrence of cyber-attacks on our system in the past, we believe that we are an attractive target for such attacks.
Given the interconnected nature of the retail supply chain, our significant presence in the retail industry, and the occurrence of cyber-attacks on our system in the past, we believe that we are a target for such attacks.
These mandatory disclosures regarding a data security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in our products and the effectiveness of our data security measures.
These mandatory disclosures regarding a data security breach or other cyber incident often lead to widespread negative publicity, which may cause our customers to lose confidence in our products and the effectiveness of our data security measures.
Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section: • our ability to retain and increase sales to customers and attract new customers, including our ability to maintain and increase our number of recurring revenue customers; • the timing and success of introductions of new products or upgrades by us or our competitors; • the strength of the U.S. and global economy, in particular, as it affects the U.S. retail sector; • the financial condition of our customers; • changes in our pricing policies or those of our competitors; • competition, including entry into the industry by new competitors; • the amount and timing of our expenses, including stock-based compensation and expenditures related to expanding our operations, supporting new customers, performing research and development, or introducing new products; • changes in laws and regulations impacting our business; • regulatory compliance costs and unforeseen legal expenses, including litigation and settlement costs; • the timing, size, integration and operational success of potential future acquisitions; • changes in the payment terms for our products; and • system or service failures, security breaches or network downtime.
Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section: • our ability to retain and increase sales to customers and attract new customers, including our ability to maintain and increase our number of recurring revenue customers; • the timing and success of introductions of new products or upgrades by us or our competitors; • the strength of the U.S. and global economy, in particular, as it affects the U.S. retail sector; • the financial condition of our customers; • changes in our pricing policies or those of our competitors; SPS COMMERCE, INC. 21 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents • competition, including entry into the industry by new competitors; • the amount and timing of our expenses, including stock-based compensation and expenditures related to expanding our operations, attracting and retaining talent, supporting new customers, performing research and development, or introducing new products; • changes in laws and regulations impacting our business; • regulatory compliance costs and unforeseen legal expenses, including litigation and settlement costs; • the timing, size, integration and operational success of potential future acquisitions; • changes in the payment terms for our products; and • system or service failures, security breaches or network downtime.
Our inability to adapt to rapid technological change could impair our ability to remain competitive. The industry in which we compete is characterized by rapid technological change, frequent introductions of new products and evolving industry standards.
Our inability to adapt to rapid technological change could impair our ability to remain competitive. The industry in which we compete is characterized by rapid technological change, frequent introductions of new products, and evolving industry standards, which may include advancements in artificial intelligence.
SPS COMMERCE, INC. 11 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents The markets in which we participate are highly competitive, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business.
SPS COMMERCE, INC. 13 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents The markets in which we participate are highly competitive, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business.
The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks included in this section are not the only ones we face.
The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
Violations of these laws may result in severe civil and criminal sanctions and penalties, which could disrupt our business and have a material adverse effect on our reputation, results of operations or financial condition. Any unrest, military activities, or sanctions impacting our international operations, should they occur, could disrupt operations, and have a material adverse effect on our business.
Violations of these laws may result in severe civil and criminal sanctions and penalties, which could disrupt our business and have a material adverse effect on our reputation, results of operations or financial condition.
Any such disruption to our operations may be prolonged and require a transition to alternative workforce locations. An alternative workforce location may be more expensive to train, staff, and operate and may cause delays and shortfalls in programming deliverables and services, thus potentially harming our business.
An alternative workforce location may be more expensive to train, staff, and operate and may cause delays and shortfalls in programming deliverables and services, thus potentially harming our business.
Our failure to maintain adequate internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 or to prevent or detect material misstatements in our annual or interim financial statements in the future could result in inaccurate financial reporting, or could otherwise harm our business and investor confidence in our financial reporting.
SPS COMMERCE, INC. 22 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents General Our failure to maintain adequate internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 or to prevent or detect material misstatements in our annual or interim financial statements in the future could result in inaccurate financial reporting, or could otherwise harm our business and investor confidence in our financial reporting.
To the extent that we are able to sustain such growth, it might place a significant strain on our management, administrative, operational, and financial resources, and infrastructure. Our success will depend in part upon the ability of our senior management to manage this growth effectively. To do so, we must continue to hire, train, and manage new employees as needed.
We have experienced a period of rapid growth in our headcount and operations. To the extent that we are able to sustain such growth, it might place a significant strain on our management, administrative, operational, and financial resources, and infrastructure. Our success will depend in part upon the ability of our senior management to manage this growth effectively.
SPS COMMERCE, INC. 16 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents The insurers under our existing liability insurance policy could deny coverage of a future claim that results from an error or defect in our technology or a resulting disruption in our products, or our existing liability insurance might not be adequate to cover any or all of the damages and other costs of such a claim.
The insurers under our existing liability insurance policy could deny coverage of a future claim that results from an error or defect in our technology or a resulting disruption in our products, or our existing liability insurance might not be adequate to cover any or all of the damages and other costs of such a claim.
Additionally, the growing costs to avoid or reduce the risks of such a failure could adversely affect our results of operations. As demonstrated by the frequency and sophistication of material and high-profile data security breaches within the retail industry; computer malware, viruses, computer hacking, phishing attacks, spamming, ransomware, and other cyber threats have become more prevalent in our industry.
As demonstrated by the frequency and sophistication of material and high-profile data security breaches within the retail industry; computer malware, viruses, computer hacking, phishing attacks, spamming, ransomware, and other cyber threats have become more prevalent in our industry.
While we monitor the use of a majority of open source software in our products, processes and technology and work to ensure that open source software is not used in such a way as to require us to disclose the source code to the related product or products, such use could inadvertently occur.
SPS COMMERCE, INC. 19 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents While we monitor the use of open source software in our products, processes and technology and work to ensure that open source software is not used in such a way as to require us to disclose the source code to the related product or products, such use could inadvertently occur.
Fully integrating an acquired company or business into our operations may take a significant amount of time and resources. In addition, we may only be able to conduct limited due diligence on an acquired company’s operations.
SPS COMMERCE, INC. 14 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Fully integrating an acquired company or business into our operations may take a significant amount of time and resources. In addition, we may only be able to conduct limited due diligence on an acquired company’s operations.
Regulation Privacy concerns and laws, evolving regulation of the internet and cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our products and adversely affect our business.
SPS COMMERCE, INC. 20 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Regulation Privacy concerns and laws, evolving regulation of the internet and cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our products and adversely affect our business.
Ownership of Our Common Stock Our results of operations may fluctuate in the future, which could result in volatility in our stock price. Our quarterly revenues and results of operations have varied in the past and may fluctuate in the future.
Our quarterly revenues and results of operations have varied in the past and may fluctuate in the future.
Our ability to deliver our services depends on the development and maintenance of telecommunications infrastructure by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity, and security.
We use third-party data centers, located in the U.S. and internationally, as well as provision services from cloud providers, to conduct our operations. Our ability to deliver our services depends on the development and maintenance of telecommunications infrastructure by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity, and security.
SPS COMMERCE, INC. 17 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents An assertion by a third-party that we are infringing its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses and our business might be materially harmed.
An assertion by a third-party that we are infringing its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses and our business might be materially harmed.
SPS COMMERCE, INC. 14 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Our business is dependent on our ability to maintain and scale our technical infrastructure, and any failure to effectively maintain or scale such infrastructure could damage our reputation, result in a potential loss of revenue, and adversely affect our financial results.
Our business is dependent on our ability to maintain and scale our technical infrastructure, and any failure to effectively maintain or scale such infrastructure could damage our reputation, result in a potential loss of revenue, and adversely affect our financial results.
We may experience service failures or interruptions due to defects in the hardware, software, infrastructure, third-party components or processes that comprise our existing or new products, any of which could adversely affect our business. Technology products like ours may contain undetected defects in the hardware, software, infrastructure, third-party components or processes that are part of the products we provide.
Technology products like ours may contain undetected defects in the hardware, software, infrastructure, third-party components or processes that are part of the products we provide.
If we fail to attract, retain, and train members of our senior management team, including our Chief Executive Officer and other key personnel, our business plan would be impacted, and we might not be able to implement it successfully.
If we fail to attract, retain, and train members of our senior management team and other key personnel, or if we are not able to successfully manage the transition of our Chief Executive Officer or our President and Chief Operating Officer, our business could be adversely affected.
To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we will be unable to execute our business plan as expected.
To do so, we must continue to hire, train, and manage new employees as needed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures.
SPS COMMERCE, INC. 13 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies could reduce our ability to compete successfully and adversely affect our results of operations.
Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies could reduce our ability to compete successfully and adversely affect our results of operations.
Products and Service Offerings Any new products and changes to existing products we pursue could fail to attract or retain customers or generate expected revenues. Our ability to retain, increase, and engage our customers and to increase our revenues depends heavily on our ability to identify, develop, and launch successful new products.
Our ability to retain, increase, and engage our customers and to increase our revenues depends heavily on our ability to identify, develop, and launch successful new products.
Our continued growth could significantly strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to implement our business plan successfully. We have experienced a period of rapid growth in our headcount and operations.
SPS COMMERCE, INC. 12 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Our continued growth could significantly strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to implement our business plan successfully.
The market for these products has historically experienced growth, but it is uncertain whether these products will continue or sustain growing levels of demand and market acceptance. Our success will depend on the willingness of retailers and their trading partners to accept our products as an alternative to traditional licensed hardware and software products.
Our success will depend on the willingness of retailers and their trading partners to accept our products as an alternative to traditional licensed hardware and software products.
Regulators in certain industries have adopted and may in the future adopt regulations or interpretive positions regarding the use of cloud computing and other outsourced services. The costs of compliance with, and other burdens imposed by, industry-specific laws, regulations and interpretive positions may limit customers’ use and adoption of our services and reduce overall demand for our services.
The costs of compliance with, and other burdens imposed by, industry-specific laws, regulations and interpretive positions may limit customers’ use and adoption of our services and reduce overall demand for our services. In addition, an inability to satisfy the standards of certain voluntary third-party certification bodies that our customers may expect may have an adverse impact on our business.
Our sales cycles may lengthen if purchasing SPS COMMERCE, INC. 10 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents decisions are delayed as a result of uncertain technology or development budgets or contract negotiations become more protracted or difficult as customers institute additional internal approvals for technology purchases.
In addition, economic conditions or uncertainty may cause customers and potential customers to reduce or delay technology purchases, including purchases of our products. Our sales cycles may lengthen if purchasing decisions are delayed as a result of uncertain technology or development budgets or contract negotiations become more protracted or difficult as customers institute additional internal approvals for technology purchases.
SPS COMMERCE, INC. 12 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated earnings.
Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated earnings.
SPS COMMERCE, INC. 15 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents A failure to protect the integrity and security of our customers’ information and prevent cyber-attacks could materially damage our reputation, expose us to claims and litigation, and lead to service disruptions and harm our business.
A failure to protect the integrity and security of our customers’ information and prevent cyber-attacks could materially damage our reputation, expose us to claims and litigation, and lead to service disruptions and harm our business. Additionally, the growing costs to avoid or reduce the risks of such a failure could adversely affect our results of operations.
Businesses in the retail industry have experienced material sales declines after discovering data security breaches, and our business could be similarly impacted in the event of a breach or other cyber incident. Furthermore, many U.S. states and international jurisdictions have enacted laws requiring companies to notify consumers of data security breaches involving their personal data.
SPS COMMERCE, INC. 18 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Businesses in the retail industry have experienced material sales declines after discovering data security breaches, and our business could be similarly impacted in the event of a breach or other cyber incident.
Interruptions or delays from third-party data centers or to the telecommunications infrastructure we use or rely on could impair the delivery of our products and our business could suffer. We use third-party data centers, located in the U.S. and internationally, as well as provision services from cloud providers, to conduct our operations.
SPS COMMERCE, INC. 17 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Interruptions or delays from third-party data centers or to the telecommunications infrastructure we use or rely on could impair the delivery of our products and our business could suffer.
SPS COMMERCE, INC. 18 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Industry-specific regulation is evolving, and unfavorable or burdensome industry-specific laws, regulations or interpretive positions could harm our business. Our customers and potential customers do business in a variety of industries.
Industry-specific regulation is evolving, and unfavorable or burdensome industry-specific laws, regulations or interpretive positions could harm our business. Our customers and potential customers do business in a variety of industries. Regulators in certain industries have adopted and may in the future adopt regulations or interpretive positions regarding the use of cloud computing and other outsourced services.
In addition, an inability to satisfy the standards of certain voluntary third-party certification bodies that our customers may expect may have an adverse impact on our business. If in the future we are unable to achieve or maintain these industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business.
If in the future we are unable to achieve or maintain these industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business. In some cases, industry-specific laws, regulations, or interpretive positions may also apply directly to us as a service provider.
In some cases, industry-specific laws, regulations, or interpretive positions may also apply directly to us as a service provider. Any failure or perceived failure by us to comply with such requirements could have an adverse impact on our business.
Any failure or perceived failure by us to comply with such requirements could have an adverse impact on our business. Ownership of Our Common Stock Our results of operations may fluctuate in the future, which could result in volatility in our stock price.
If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management. Our charter documents and Delaware law may delay, discourage, or inhibit a takeover that stockholders consider favorable.
Our charter documents and Delaware law may delay, discourage, or inhibit a takeover that stockholders consider favorable.
Removed
We operate in a very competitive and rapidly changing environment.
Added
SPS COMMERCE, INC. 11 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents The risks included in this section are not the only ones we face. We operate in a very competitive and rapidly changing environment.
Removed
In addition, economic conditions or uncertainty may cause customers and potential customers to reduce or delay technology purchases, including purchases of our products.
Added
If we fail to successfully manage our growth, we will be unable to execute our business plan as expected.
Removed
The COVID-19 pandemic could have adverse impacts on our business, including causing significant volatility in demand for our services due to disruption and downturns in our customers’ businesses and related supply chains, disruptions to our third party technology providers, limitations on our employees' ability to work and travel, and significant changes in the economic or political conditions in markets in which we operate.
Added
Further, our former Chief Executive Officer, Archie Black, retired as Chief Executive Officer effective October 2, 2023, and the board of directors appointed his successor, Chad Collins, as of that date. We also announced the planned retirement of our President and Chief Operating Officer, James Frome, effective December 31, 2024.
Removed
Our stock price has fluctuated and may fluctuate in the future, depending on a number of factors, including: • fluctuations in our guidance and quarterly financial results or the guidance or quarterly financial results of companies perceived to be similar to us; • fluctuations in our recorded revenue, even during periods of significant sales order activity; • fluctuations in stock market volume; SPS COMMERCE, INC. 19 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents • changes in estimates of our financial results or recommendations by securities analysts; • failure of any of our products to achieve or maintain market acceptance; • changes in market valuations of companies perceived to be similar to us; • success of competitive products or services; • changes in our capital structure, such as future issuances of securities or the incurrence of debt; • announcements by us or our competitors of significant products, contracts, acquisitions, or strategic alliances; • legal or regulatory developments in the U.S., foreign countries, or both; • litigation involving our company, our general industry or both; • additions or departures of key personnel; • investors’ general perception of us; and • changes in general economic, industry and market conditions.
Added
Leadership transitions and management changes involve inherent risks, can be difficult to manage and may cause uncertainty or a disruption, which could adversely affect our business. If the market for cloud-based supply chain management products declines or does not maintain its historical growth rates, our revenues may decline or fail to grow, and we may incur operating losses.
Removed
In addition, if the market for software or technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or results of operations.
Added
SPS COMMERCE, INC. 15 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Any unrest, military activities, or sanctions impacting our international operations, should they occur, could disrupt operations, and have a material adverse effect on our business. Any such disruption to our operations may be prolonged and require a transition to alternative workforce locations.
Removed
SPS COMMERCE, INC. 20 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents General Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.
Added
SPS COMMERCE, INC. 16 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Products and Service Offerings Any new products and changes to existing products we pursue could fail to attract or retain customers or generate expected revenues.
Removed
We are subject to income taxes in the U.S. and various foreign jurisdictions, and our domestic and international tax liabilities will be subject to the allocation of expenses in differing jurisdictions.
Added
Furthermore, many U.S. states and international jurisdictions have enacted laws requiring companies to notify consumers of data security breaches involving their personal data. Additionally, the SEC recently issued final rules related to cybersecurity risk management and incident disclosure, which may further increase our required disclosures and cost of compliance in such events.
Removed
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including: • changes in the valuation of our deferred tax assets and liabilities; • expected timing and amount of the release of tax valuation allowances; • expiration of, or detrimental changes in, research and development tax credit laws; • tax effects of stock-based compensation; • costs related to intercompany restructurings; • changes in tax laws, regulations, accounting principles or interpretations thereof; and • future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates.
Added
If we fail to comply with these laws and regulations, we could be subject to enforcement action or litigation, which could harm our business. We may experience service failures or interruptions due to defects in the hardware, software, infrastructure, third-party components or processes that comprise our existing or new products, any of which could adversely affect our business.
Removed
In addition, we are subject to audits of our income, sales, and other taxes by the Internal Revenue Service and other foreign and state tax authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeFor additional information regarding obligations under operating leases, see Note I of our consolidated financial statements, included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. SPS COMMERCE, INC. 21 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents
Biggest changeFor additional information regarding obligations under operating leases, see Note I of our consolidated financial statements, included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings We are not currently subject to any material legal proceedings. From time to time, we may be named as a defendant in legal actions or otherwise be subject to claims arising from our normal business activities.
Biggest changeItem 3. Legal Proceedings We are not currently subject to, or aware of, any claims or actions that would have a material adverse effect on our business, financial condition, or results of operations. From time to time, we may be named as a defendant in legal actions or otherwise be subject to claims arising from our normal business activities.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest change(1) On July 26, 2022 (announced July 27, 2022), our board of directors authorized a program to repurchase up to $50.0 million of our common stock. Under the program, purchases may be made from time to time in the open market or in privately negotiated purchases, or both.
Biggest changeUnder the program, purchases may be made from time to time in the open market or in privately negotiated purchases, or both. The new share repurchase program became effective August 26, 2022 and expires on July 26, 2024. We did not make any repurchases under the program during the quarter ended December 31, 2023.
Stockholders of Record - As of February 10, 2023, we had 68 stockholders of record of our common stock, excluding holders whose stock is held either in nominee name and/or street name brokerage accounts. Dividends - We have not declared or paid cash dividends on our common stock.
Stockholders of Record - As o f February 13, 2024, we had 69 s t ockholders of record of our common stock, excluding holders whose stock is held either in nominee name and/or street name brokerage accounts. Dividends - We have not declared or paid cash dividends on our common stock.
The table and graph below compare the cumulative total stockholder return of our common stock with that of the Nasdaq US Benchmark TR Index and the Nasdaq Computer Index from December 31, 2017 through December 31, 2022, utilizing the last trading day of each respective year.
The graph below compares the cumulative total stockholder return of our common stock with that of the Russell 1000 Index and the Nasdaq Computer Index from December 31, 2018 through December 31, 2023, utilizing the last trading day of each respective year.
The return assumes that $100 was invested in shares of our common stock and the other indexes at the close of market on December 29, 2017, the last trading day of 2017, and that dividends, if any, were reinvested.
The return assumes that $100 was invested in shares of our common stock and the other indexes at the close of market on December 31, 2018, and that dividends, if any, were reinvested. In our Annual Report on Form 10-K for the year ended December 31, 2022, we compared our return to the Nasdaq US Benchmark TR Index.
The comparisons in this table and graph are based on historical data and are not intended to forecast or be indicative of future performance of our common stock.
The comparison in this graph is based on historical data and is not intended to forecast or be indicative of future performance of our common stock. Comparison of Cumulative Total Returns of SPS Commerce, Inc. to Comparable Indexes Recent Sales of Unregistered Securities; Use of Proceeds from Sales of Registered Securities Not applicable.
Removed
Comparison of Cumulative Total Returns of SPS Commerce, Inc. to Comparable Indexes Date SPS Commerce Nasdaq US Benchmark TR Index Nasdaq Computer Index 12/29/2017 $ 100.00 $ 100.00 $ 100.00 12/31/2018 169.54 94.56 96.32 12/31/2019 228.11 124.03 144.80 12/31/2020 446.96 150.41 217.17 12/31/2021 585.92 189.36 299.39 12/30/2022 528.63 152.00 192.28 SPS COMMERCE, INC. 23 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Recent Sales of Unregistered Securities; Use of Proceeds from Sales of Registered Securities Not applicable.
Added
In 2023 and going forward, we will use the Russell 1000 Index as we believe it is now more reflective of the market we serve and is a more appropriate index to compare our stock performance.
Removed
Purchases of Equity Securities by the Issuer and Affiliated Purchasers The share repurchase activity for the quarter ended December 31, 2022 was as follows: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Program (1) Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (1) October 1 - 31, 2022 1,291 $ 120.06 1,291 $ 47,368,000 November 1 - 30, 2022 3,024 119.05 3,024 47,008,000 December 1 - 31, 2022 — — — 47,008,000 Total 4,315 $ 119.35 4,315 $ 47,008,000 For more information regarding our share repurchase programs, refer to Note J to our consolidated financial statements, included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Added
SPS COMMERCE, INC. 25 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Purchases of Equity Securities by the Issuer and Affiliated Purchasers On July 26, 2022 (announced July 27, 2022), our board of directors authorized a program to repurchase up to $50.0 million of our common stock.
Removed
The new share repurchase program became effective August 26, 2022 and expires on July 26, 2024.
Added
For more information regarding our share repurchase programs, refer to Note J to our consolidated financial statements, included in Part II Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeSPS COMMERCE, INC. 27 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Results of Operations Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The following table presents our results of operations for the periods indicated: Year Ended December 31, 2022 2021 Change ($ in thousands) $ % of revenue (1) $ % of revenue (1) $ % Revenues $ 450,875 100.0 % $ 385,276 100.0 % $ 65,599 17.0 % Cost of revenues 153,065 33.9 131,678 34.2 21,387 16.2 Gross profit 297,810 66.1 253,598 65.8 44,212 17.4 Operating expenses Sales and marketing 101,772 22.6 88,044 22.9 13,728 15.6 Research and development 45,748 10.1 39,038 10.1 6,710 17.2 General and administrative 67,340 14.9 61,305 15.9 6,035 9.8 Amortization of intangible assets 11,768 2.6 10,126 2.6 1,642 16.2 Total operating expenses 226,628 50.3 198,513 51.5 28,115 14.2 Income from operations 71,182 15.8 55,085 14.3 16,097 29.2 Other income (expense), net 142 — (1,544) (0.4) 1,686 (109.2) Income before income taxes 71,324 15.8 53,541 13.9 17,783 33.2 Income tax expense 16,190 3.6 8,944 2.3 7,246 81.0 Net income $ 55,134 12.2 % $ 44,597 11.6 % $ 10,537 23.6 % (1) Amounts in column may not foot due to rounding Revenues - Revenues increased for the 88th consecutive quarter.
Biggest changeSPS COMMERCE, INC. 29 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Results of Operations Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 The following table presents our results of operations for the periods indicated: Year Ended December 31, 2023 2022 Change ($ in thousands) $ % of revenue (1) $ % of revenue (1) $ % Revenues $ 536,910 100.0 % $ 450,875 100.0 % $ 86,035 19.1 % Cost of revenues 182,069 33.9 153,065 33.9 29,004 18.9 Gross profit 354,841 66.1 297,810 66.1 57,031 19.2 Operating expenses Sales and marketing 122,936 22.9 101,772 22.6 21,164 20.8 Research and development 53,654 10.0 45,748 10.1 7,906 17.3 General and administrative 84,887 15.8 67,340 14.9 17,547 26.1 Amortization of intangible assets 16,116 3.0 11,768 2.6 4,348 36.9 Total operating expenses 277,593 51.7 226,628 50.3 50,965 22.5 Income from operations 77,248 14.4 71,182 15.8 6,066 8.5 Other income, net 8,315 1.5 142 — 8,173 NM (2) Income before income taxes 85,563 15.9 71,324 15.8 14,239 20.0 Income tax expense 19,739 3.7 16,190 3.6 3,549 21.9 Net income $ 65,824 12.3 % $ 55,134 12.2 % $ 10,690 19.4 % (1) Amounts in column may not foot due to rounding (2) NM = "not meaningful" Revenues - Revenues increased for the 92nd consecutive quarter.
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.
As such, set-up fees and related costs are deferred and recognized ratably, generally over two years, which is the estimated period for which a material right is present for our customers.
The discussion of our liquidity and capital resources for the year ended December 31, 2021 compared to the year ended December 31, 2020 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, 2021.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The discussion of our liquidity and capital resources for the year ended December 31, 2022 compared to the year ended December 31, 2021 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, 2022.
Research and Development Expenses - Research and development expenses consist primarily of personnel costs and stock-based compensation expense for development of new and maintenance of existing products, net of amounts capitalized as developed software.
Research and Development Expenses - Research and development expenses consist primarily of personnel, stock-based compensation, and technology costs for development of new and maintenance of existing products, net of amounts capitalized as developed software.
Cost of Revenues and Operating Expenses Cost of Revenues - Cost of revenues consist primarily of personnel costs for our customer success and implementation teams, customer support personnel, and application support personnel, as well as amortization related to internally developed software.
Cost of Revenues and Operating Expenses Cost of Revenues - Cost of revenues consist primarily of personnel, stock-based compensation, and technology costs for our customer success and implementation teams, customer support personnel, and application support personnel, as well as amortization related to internally developed software.
Sales and Marketing Expenses - Sales and marketing expenses consist primarily of personnel costs for our sales, marketing, product management teams, and commissions earned by our sales personnel and referral partners.
Sales and Marketing Expenses - Sales and marketing expenses consist primarily of personnel costs and stock-based compensation expense for our sales, marketing, product management teams, and commissions earned by our sales personnel and referral partners.
SPS COMMERCE, INC. 31 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents 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.
SPS COMMERCE, INC. 33 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents 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 “Accounting Pronouncements Recently Adopted” and “Accounting Pronouncements Not Yet Adopted” as applicable, included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
The increase in revenues resulted from two primary factors: the increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions, and the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share. • The number of recurring revenue customers increased 13% to 42,300 at December 31, 2022 from 37,500 at December 31, 2021 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions. • Wallet share increased 4% to $10,500 at December 31, 2022 from $10,050 at December 31, 2021.
The increase in revenues resulted from two primary factors: the increase in recurring revenue customers, which is driven primarily by continued business growth and by business acquisitions, and the increase in average recurring revenues per recurring revenue customer, which we also refer to as wallet share. • The number of recurring revenue customers increased 6% to approximately 44,800 at December 31, 2023 from approximately 42,300 at December 31, 2022 primarily due to sales and marketing efforts to acquire new customers and due to recent acquisitions. • Wallet share increased 10% to approximately $11,550 at December 31, 2023 from approximately $10,500 at December 31, 2022.
This was partially offset by a decrease in nondeductible executive compensation. Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.
This was partially offset by an increase in excess tax benefits due to the current period equity award settlements. 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.
The following table provides a comparison of Margin to Adjusted EBITDA Margin: Year Ended December 31, (in thousands, except Margin and Adjusted EBITDA Margin) 2022 2021 Revenue $ 450,875 $ 385,276 Net income 55,134 44,597 Margin 12 % 12 % Adjusted EBITDA $ 132,268 $ 107,015 Adjusted EBITDA Margin 29 % 28 % Non-GAAP Income per Share - Non-GAAP income per share 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, other adjustments as necessary for a fair presentation, and the corresponding tax impacts of the adjustments to net income, divided by the weighted average number of shares of common and diluted stock outstanding during each period.
The following table provides a comparison of Margin to Adjusted EBITDA Margin: Year Ended December 31, (in thousands, except Margin and Adjusted EBITDA Margin) 2023 2022 Revenue $ 536,910 $ 450,875 Net income 65,824 55,134 Margin 12 % 12 % Adjusted EBITDA $ 157,630 $ 132,268 Adjusted EBITDA Margin 29 % 29 % Non-GAAP Income per Share - Non-GAAP income per share 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, other adjustments as necessary for a fair presentation, including the expense impacts from acquisition-related employee severance costs and disposals of certain capitalized internally developed software, and the corresponding tax impacts of the adjustments to net income, divided by the weighted average number of shares of common and diluted stock outstanding during each period.
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 $4.4 million and stock-based compensation of $1.3 million.
Research and Development Expenses - The increase in research and development expense was primarily due to increased headcount, which resulted in increases of $5.3 million in personnel-related costs and $1.2 million of software subscriptions. Additionally, the increase was due to a $1.6 million increase in stock-based compensation.
Contractual and Commercial Commitment Summary Our contractual obligations and commercial commitments as of December 31, 2022 are summarized below: Payments Due by Period (in thousands) Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Total Operating lease obligations, including imputed interest $ 4,889 $ 8,854 $ 5,029 $ — $ 18,772 Purchase commitments 3,126 1,789 — — 4,915 Total $ 8,015 $ 10,643 $ 5,029 $ — $ 23,687 Future Capital Requirements Our future capital requirements may vary significantly from those now planned and will depend on many factors, including: • costs to develop and implement new products and applications, if any; • sales and marketing resources needed to further penetrate our market and gain acceptance of new products and applications that we may develop; • expansion of our operations in the U.S. and internationally; • response of competitors to our products and applications; and • use of capital for acquisitions.
Contractual and Commercial Commitment Summary Our contractual obligations and commercial commitments as of December 31, 2023 are summarized below: Payments Due by Period (in thousands) Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Total Operating lease obligations, including imputed interest $ 4,910 $ 8,641 $ 1,324 $ 76 $ 14,951 Purchase commitments 14,536 20,528 — — 35,064 Total $ 19,446 $ 29,169 $ 1,324 $ 76 $ 50,015 Future Capital Requirements Our future capital requirements may vary significantly from those now planned and will depend on many factors, including: • costs to develop and implement new products and applications, if any; • sales and marketing resources needed to further penetrate our market and gain acceptance of new products and applications that we may develop; • expansion of our operations in the U.S. and internationally; • response of competitors to our products and applications; and • use of capital for acquisitions.
This was primarily attributable to increased usage of our products by our recurring revenue customers. Recurring revenues increased 18% in 2022, as compared to 2021, and accounted for 93% and 92% of our total revenues in 2022 and 2021, respectively.
This was primarily attributable to increased usage of our products by our recurring revenue customers. Recurring revenues increased 20% to $502.0 million in 2023, as compared to 2022, and accounted for 94% and 93% of our total revenues in 2023 and 2022, respectively.
SPS COMMERCE, INC. 30 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Net Cash Flows from Investing Activities The increase in net cash used in investing activities was primarily due to increased business acquisition activity.
SPS COMMERCE, INC. 32 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents Net Cash Flows from Investing Activities The decrease in net cash used in investing activities was primarily due to business acquisition activity.
The following table provides a reconciliation of net income to non-GAAP income per share: Year Ended December 31, (in thousands, except per share amounts) 2022 2021 Net income $ 55,134 $ 44,597 Stock-based compensation expense 33,399 27,574 Amortization of intangible assets 11,768 10,126 Realized loss from foreign currency on cash and investments held 1,026 1,456 Other — (192) Income tax effects of adjustments (14,639) (16,454) Non-GAAP income $ 86,688 $ 67,107 Shares used to compute non-GAAP income per share Basic 36,117 35,928 Diluted 36,953 36,962 Non-GAAP income per share Basic $ 2.40 $ 1.87 Diluted $ 2.35 $ 1.82 Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 The discussion of our results from operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 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, 2021.
The following table provides a reconciliation of net income to non-GAAP income per share: Year Ended December 31, (in thousands, except per share amounts) 2023 2022 Net income $ 65,824 $ 55,134 Stock-based compensation expense 45,508 33,399 Amortization of intangible assets 16,116 11,768 Realized (gain) loss from foreign currency on cash and investments held (1,726) 1,026 Other 1,198 — Income tax effects of adjustments (19,983) (14,639) Non-GAAP income $ 106,937 $ 86,688 Shares used to compute net income and non-GAAP income per share Basic 36,646 36,117 Diluted 37,475 36,953 Net income per share, basic $ 1.80 $ 1.53 Non-GAAP adjustments to net income per share, basic 1.12 0.87 Non-GAAP income per share, basic $ 2.92 $ 2.40 Net income per share, diluted $ 1.76 $ 1.49 Non-GAAP adjustments to net income per share, diluted 1.09 0.86 Non-GAAP income per share, diluted $ 2.85 $ 2.35 Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The discussion of our results from operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 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, 2022.
A critical accounting policy or estimate is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective, or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations.
SPS COMMERCE, INC. 28 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents A critical accounting policy or estimate is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective, or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations.
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.
We treat each of these units, which may include divisions, departments, affiliates and franchises, as distinct recurring revenue customers.
Other Income (Expense) - The change was primarily due to increased investment income and favorable foreign currency exchange rate changes. Income Tax Expense - The increase in income tax expense was driven by an increase in pre-tax income and a decrease in excess tax deductions due to the current period equity award settlements.
Other Income (Expense) - The change was primarily due to increased investment income and favorable foreign currency exchange rate changes. Income Tax Expense - The increase in income tax expense was driven by an increase in pre-tax income and an increase in nondeductible executive compensation.
General and Administrative Expenses - General and administrative expenses consist primarily of personnel costs and stock-based compensation expense for finance, human resources, and internal technology support, as well as professional services and other fees, such as bad debt expense and credit card processing fees.
SPS COMMERCE, INC. 27 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents General and Administrative Expenses - General and administrative expenses consist primarily of personnel, stock-based compensation, and technology costs for finance, human resources, and internal technology support, as well as professional services and other fees, such as bad debt expense and credit card processing fees.
Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount which resulted in an increase of $15.6 million in personnel-related costs and an increase of $1.9 million in stock-based compensation.
Cost of Revenues - The increase in cost of revenues was primarily due to increased headcount, which resulted in increases of $21.9 million in personnel-related costs and $3.0 million of software subscriptions. Additionally, the increase was due to a $1.5 million increase in stock-based compensation.
The following table provides a reconciliation of net income to Adjusted EBITDA: Year Ended December 31, (in thousands) 2022 2021 Net income $ 55,134 $ 44,597 Income tax expense 16,190 8,944 Depreciation and amortization of property and equipment 16,421 14,788 Amortization of intangible assets 11,768 10,126 Stock-based compensation expense 33,399 27,574 Realized loss from foreign currency on cash and investments held 1,026 1,456 Investment income (1,670) (278) Other — (192) Adjusted EBITDA $ 132,268 $ 107,015 Adjusted EBITDA Margin - Adjusted EBITDA Margin consists of Adjusted EBITDA divided by revenue.
The following table provides a reconciliation of net income to Adjusted EBITDA: Year Ended December 31, (in thousands) 2023 2022 Net income $ 65,824 $ 55,134 Income tax expense 19,739 16,190 Depreciation and amortization of property and equipment 18,631 16,421 Amortization of intangible assets 16,116 11,768 Stock-based compensation expense 45,508 33,399 Realized (gain) loss from foreign currency on cash and investments held (1,726) 1,026 Investment income (7,660) (1,670) Other 1,198 — Adjusted EBITDA $ 157,630 $ 132,268 Adjusted EBITDA Margin - Adjusted EBITDA Margin consists of Adjusted EBITDA divided by revenue.
Accordingly, we believe that our policies for revenue SPS COMMERCE, INC. 26 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents recognition, internally developed software, and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations.
Accordingly, we believe that our policies for revenue recognition, internally developed software, and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations.
The summary of activity within the consolidated statements of cash flows was as follows: Twelve Months Ended December 31, (in thousands) 2022 2021 Net cash provided by 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) Net Cash Flows from Operating Activities The decrease in cash provided by operating activities was primarily driven by changes in the amount and timing of settlement of operating assets and liabilities, primarily the change in accrued compensation.
The summary of activity within the consolidated statements of cash flows was as follows: Year Ended December 31, (in thousands) 2023 2022 Net cash provided by operating activities $ 132,298 $ 100,052 Net cash used in investing activities (92,642) (112,790) Net cash provided by (used in) financing activities 15,970 (31,631) Net Cash Flows from Operating Activities The increase in cash provided by operating activities was primarily driven by changes in the amount and timing of settlement of operating assets and liabilities, in addition to increased net income.
SPS COMMERCE, INC. 25 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Overhead Allocation - We allocate overhead expenses such as rent, certain employee benefit costs, and depreciation of general office assets to cost of revenues and operating expenses categories based on expense type using department headcount or salary.
Overhead Allocation - We allocate overhead expenses such as rent, certain employee benefit costs, certain software costs, and depreciation of general office assets to cost of revenues and operating expenses categories based on expense type using department headcount or salary.
Liquidity and Capital Resources At December 31, 2022, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $214.3 million, and net accounts receivable of $39.4 million. Our investments are selected in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation.
Liquidity and Capital Resources At December 31, 2023, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $275.4 million, and net accounts receivable of $46.8 million. Our investments are selected in accordance with our investment policy, with a goal to preserve principal, provide liquidity, and maximize income consistent with minimizing risk of material loss.
Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount which resulted in an increase of $9.4 million in personnel-related costs and an increase of $1.3 million in stock-based compensation. Additionally, there was an increase of $1.2 million in sales commissions due to increased sales.
Sales and Marketing Expenses - The increase in sales and marketing expense was primarily due to increased headcount, which resulted in increases of $13.8 million in personnel-related costs and $2.7 million in variable compensation earned by sales personnel and referral partners. Additionally, the increase was due to a $2.2 million increase in stock-based compensation.
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 $1.9 million. There was also an increase of $1.3 million in stock-based compensation.
SPS COMMERCE, INC. 30 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents General and Administrative Expenses - The increase in general and administrative expense was primarily related to increased stock-based compensation of $6.9 million. Additionally, the increase was due to an increase in headcount which resulted in an increase in personnel-related costs of $6.3 million.
Net Cash Flows from Financing Activities The increase in net cash used in financing activities was primarily due to the increased repurchases of common stock.
Net Cash Flows from Financing Activities The change in cash provided by (used in) financing activities was primarily due to the decrease in cash used for share repurchases.
Income Tax Expense Income tax expense consists primarily of income taxes for U.S. federal jurisdiction in addition to income taxes for various state and international jurisdictions. Metrics and Non-GAAP Financial Measures Recurring Revenue Customers - As of December 31, 2022, we had 42,300 customers with ongoing contracts to pay us monthly fees, which we refer to as recurring revenue customers.
Income Tax Expense Income tax expense consists primarily of income taxes for U.S. federal jurisdiction in addition to income taxes for various state and international jurisdictions.
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Additionally, as we continued to support growing operations, there was an increase in professional fees of $1.6 million and an increase of $1.3 million in software subscriptions, partially offset by a decrease of $1.3 million in bad debt expense.
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Metrics and Non-GAAP Financial Measures Recurring Revenue Customers - As of December 31, 2023, we had approximately 44,800 customers with ongoing contracts to pay us monthly 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 and are separately invoiced.
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SPS COMMERCE, INC. 28 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by increased intangible assets related to recent business acquisitions.
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Finally, there was an increase in bad debt expense of $2.3 million due primarily to overall business growth. Amortization of Intangible Assets - The increase in amortization of intangible assets was driven by increased intangible assets related to recent business acquisitions.
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For the year ended December 31, 2021, other adjustments included disposals of cloud hosting arrangement implementation costs and accelerated tenant improvement benefit, which was incurred as part of executing a lease agreement.
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O ther adjustments included the expense impacts from acquisition-related employee severance costs and disposals of certain capitalized internally developed software. Net income is the comparable GAAP measure of financial performance.
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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.
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SPS COMMERCE, INC. 31 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents 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.
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For the year ended December 31, 2021, other adjustments included disposals of cloud hosting arrangement implementation costs and accelerated tenant improvement benefit, which was incurred as part of executing a lease SPS COMMERCE, INC. 29 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents agreement.
Removed
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. 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeWe have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future. SPS COMMERCE, INC. 32 Form 10-K for the Annual Period ended December 31, 2022 Table of Con t ents
Biggest changeWe have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future. SPS COMMERCE, INC. 34 Form 10-K for the Annual Period ended December 31, 2023 Table of Contents
However, based on the nature and current level of our cash, cash equivalents, and investments, we believe there is no material risk exposure. We do not enter into investments for trading or speculative purposes. We did not have any variable interest rate outstanding debt as of December 31, 2022.
However, based on the nature and current level of our cash, cash equivalents, and investments, we believe there is no material risk exposure. We do not enter into investments for trading or speculative purposes. We did not have any variable interest rate outstanding debt as of December 31, 2023.
Therefore, we do not have any material risk to interest rate fluctuations. Foreign Currency Exchange Risk Due to international operations, we have revenue, expenses, assets, and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian and Canadian dollars.
Therefore, we do not have any material risk to interest rate fluctuations. Foreign Currency Exchange Risk Due to international operations, we have revenue, expenses, assets, and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian dollar, Canadian dollar, and Euro.
We believe that a hypothetical 10% change in foreign currency exchange rates or an inability to access foreign funds would not materially affect our ability to meet our operational needs, result in a material foreign currency loss or have a material impact on our consolidated financials.
We believe that a hypothetical 10% change in foreign currency exchange rates or an inability to access foreign funds would not materially affect our ability to meet our operational needs, result in a material foreign currency loss, or have a material impact on our consolidated financial statements.
Our expenses are generally denominated in the local currencies in which our operations are located. As of December 31, 2022, we maintained 11% of our total cash and cash equivalents and investments in foreign currencies.
Our expenses are generally denominated in the local currencies in which our operations are located. As of December 31, 2023, we maintained 10% of our total cash and cash equivalents and investments in foreign currencies.

Other SPSC 10-K year-over-year comparisons