Manhattan Associates, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise stated. The company develops and implements supply-chain, inventory and omnichannel software. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance and position
- Revenue: $153.9 million, up 4%. Cloud subscriptions rose 120% to $17.3 million; software license revenue fell 22% to $9.7 million. Maintenance was $35.7 million (down 1%), services $87.4 million (down 1%) and hardware $3.8 million (up 10%).
- Profit: Operating income declined 14% to $24.2 million; operating margin fell to 15.7% from 19.1%. Net income increased 7% to $22.5 million, and diluted EPS rose to $0.35 from $0.32. The effective tax rate decreased to 12.0% from 24.8%, primarily due to $3.8 million in excess tax benefits from restricted-stock vesting.
- Cash flow: Operating cash flow was $11.6 million versus $35.2 million. Management attributed the decrease mainly to higher employee bonus payments and the timing of customer collections. Capital expenditures were $1.2 million.
- Liquidity and debt: Cash and cash equivalents were $75.3 million at quarter-end, down from $110.7 million at December 31, 2019. The company reported no debt and no credit facilities; current assets exceeded current liabilities by approximately $40.8 million. Days sales outstanding increased to 67 from 61.
- Other balance-sheet items: Deferred revenue was $105.5 million, compared with $94.4 million at year-end. Operating lease liabilities totaled $36.7 million. The company reported approximately $54 million of cloud infrastructure commitments over five years and $8 million of internal software subscription commitments over three years.
Material changes and business mix
- The shift from perpetual licenses toward cloud subscriptions continued: cloud subscriptions were 64% of combined cloud and license revenue in Q1, versus 39% a year earlier. Cloud revenue growth was partly offset by lower license revenue.
- Higher costs supporting cloud operations and services, including personnel and infrastructure, alongside increased R&D investment, contributed to lower operating income and margins.
- Revenue by segment was $123.1 million in the Americas (up 7%), $24.3 million in EMEA (down 8%) and $6.4 million in APAC (down 11%). Operating income declined in all three segments.
- Cash declined in part because financing activities used $43.0 million, principally for common-stock purchases and shares withheld for taxes. The company said it repurchased 337,007 shares for approximately $25.0 million under its program; total financing cash outflow for stock purchases, including tax-withholding shares, was $43.0 million.
Outlook, commentary and risks
- Management said Q1 results were in line with internal expectations and reported continued demand for cloud solutions. It had not seen notable cancellations and described the opportunity pipeline as larger than a quarter earlier, but anticipated some deals moving from Q2 to the second half of 2020 and delays to some services projects.
- The company provided no specific numeric earnings or revenue guidance. It estimated that cloud subscriptions would represent 75% and software licenses 25% of full-year 2020 combined cloud and license revenue; this is a mix estimate, not a forecast of total revenue.
- COVID-19’s effects were uncertain. Risks cited include delayed customer investment decisions, extended sales cycles, project implementation delays, reduced customer IT spending, requests for extended payment terms and broader economic disruption. The shift to cloud also spreads revenue recognition over subscription periods and may affect revenue, earnings and cash flow compared with upfront license sales.
- Effective April 1, 2020, the company reduced certain executive, director and employee compensation, suspended share repurchases and the 401(k) company match, and began reducing operating expenses, including a partial hiring freeze. Management said it intended to preserve customer support and key R&D investment. It believed available cash would meet working-capital and capital needs for at least 12 months, while noting there was no assurance.
- Management expected cash priorities to include product development and business growth, would continue to assess acquisitions, and did not anticipate borrowing for general corporate purposes for the remainder of 2020. Remaining performance obligations for specified cloud, maintenance and managed-services contracts were approximately $202.8 million; about half was expected to be recognized over the next 24 months.
- No material legal proceeding was reported. The filing also identifies competition, software defects or service interruptions, cybersecurity, implementation, foreign-currency and other operating risks.
Important facts for investors to verify
- Whether COVID-19 causes the anticipated deal delays, services-project disruption or changes in customer spending—and how those affect bookings, revenue and collections.
- Whether cloud subscription growth and the remaining performance obligation balance convert into recognized revenue as expected, while monitoring the impact of the transition on margins and cash flow.
- Whether working-capital movements, including receivables and deferred revenue, explain the lower operating cash flow and higher days sales outstanding.
- How expense controls, compensation reductions and the pause in repurchases affect operating capacity, R&D investment and liquidity.
- Distinguish the $25.0 million of program repurchases from the $43.0 million total financing cash outflow for stock purchases, which also included shares withheld for taxes.