Business context and reporting period
Manhattan Associates, Inc. develops and implements supply-chain, inventory-management and omnichannel software. This Form 10-Q covers the three months ended March 31, 2018, compared with the first quarter of 2017; balance-sheet comparisons are with December 31, 2017. The company reported results under the new revenue-recognition standard, ASC 606, adopted January 1, 2018.
Financial results and position
| Metric | Q1 2018 | Q1 2017 or prior date | Change |
|---|---|---|---|
| Revenue | $130.6 million | $143.5 million | Down 9% |
| Operating income | $27.8 million | $41.7 million | Down 33% |
| Operating margin | 21.3% | 29.1% | Down 7.8 percentage points |
| Net income | $22.7 million | $28.2 million | Down 20% |
| Diluted EPS | $0.33 | $0.40 | Down 18% |
| Operating cash flow | $51.3 million | $61.3 million | Down $10.0 million |
| Cash and short-term investments | $119.0 million | $125.5 million at Dec. 31, 2017 | Down $6.5 million |
Revenue mix: software licenses $7.6 million (down 64%); cloud subscriptions $4.5 million (up 199%); maintenance $36.4 million (up 9%); services $78.8 million (down 1%); hardware $3.4 million (down 55% as reported). Services made up 60% of revenue. The effective tax rate fell to 20.7% from 31.7%, mainly reflecting the U.S. federal rate reduction under the Tax Cuts and Jobs Act.
At March 31, 2018, current assets were $218.9 million and current liabilities $142.8 million. Cash and cash equivalents were $106.7 million and short-term investments $12.3 million. The filing reports no debt and no credit facilities; management said existing cash and investments should cover working-capital and capital needs for at least 12 months. Deferred revenue was $85.5 million, up from $75.1 million at year-end. The company generated $51.3 million from operations, used $14.8 million in investing activities, and used $55.8 million in financing activities, primarily for stock repurchases and shares withheld for taxes.
Material changes and comparability
- The decline in reported revenue and earnings primarily reflects substantially lower license revenue, which management attributed to extended sales cycles and customers shifting from perpetual licenses to cloud subscriptions. Cloud revenue grew rapidly but remains a small share of total revenue and is recognized over subscription terms.
- ASC 606 changed hardware reporting from gross to net because the company now treats itself as agent in hardware transactions. Q1 2018 hardware revenue would have been $11.2 million, with $7.8 million of related cost, under the prior presentation. On a comparable ASC 606 basis, Q1 2017 hardware revenue would have been $2.2 million rather than the reported $7.6 million; consequently, reported total-revenue growth comparisons are affected by presentation.
- Operating expenses increased 12% to $44.9 million, including research and development expense up 20% to $17.1 million. Management cited increased R&D staffing and compensation, cloud-related computer costs, marketing programs, and compensation increases as contributing factors to cost growth.
- Share repurchases reduced the quarter-end share count. The filing reports 1.16 million shares repurchased under the public program for approximately $50.0 million; cash used for common-stock purchases was $55.8 million, including tax-withholding shares.
Outlook, risks and unusual items
No specific numerical revenue or earnings guidance is provided. Management expects the cloud transition to continue weighing on revenue, earnings and cash flow relative to an upfront perpetual-license model until a stable recurring mix develops. It also noted that long sales cycles, customer caution, retail-sector disruption and macroeconomic uncertainty make bookings and revenue difficult to forecast. Priorities for the remainder of 2018 include continued product development and business growth; management will also consider acquisitions and share repurchases and does not anticipate borrowing for general corporate purposes.
Key risks cited include competition and pricing pressure; delays in large customer decisions; cloud-service interruptions, software defects and cybersecurity or data-protection failures; dependence on skilled employees and professional-services capacity; international and foreign-exchange risks; and the possibility that R&D investment may not yield sufficient returns. Management reported no legal proceedings it believes are likely to have a material adverse effect and no material changes to previously disclosed market-risk information.
The company adopted ASC 606 using the modified retrospective method. Adoption increased opening retained earnings by $2.0 million, net of tax, from deferring qualifying sales commissions. The company also reported that its estimates of certain Tax Act effects remain provisional; its transition-tax estimate was $3.3 million, and it was still evaluating the accounting for GILTI. Management reduced its provisional deferred-tax-asset write-down estimate by $0.3 million in the quarter.
Important facts for investors to verify
- How quickly cloud subscription growth and customer conversions can offset lower perpetual-license revenue, and the resulting effects on margins and cash flow.
- The revenue and cost comparison on a consistent ASC 606 basis, especially the effect of net hardware reporting on reported year-over-year growth.
- The sustainability of operating cash flow and the implications of repurchases, including the difference between program repurchases and total cash used for stock purchases.
- How the company’s final U.S. tax-reform and GILTI accounting estimates compare with the provisional amounts disclosed.
- Whether the stated liquidity outlook remains adequate if sales cycles lengthen, customer implementations are delayed, or acquisition and repurchase needs change.