Manhattan Associates, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial amounts below are in millions except per-share data. The company develops and implements supply-chain, inventory-management, and omnichannel software and services.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $141.9 | $154.1 | $272.4 | $297.6 |
| Operating income | $35.7 | $49.3 | $63.5 | $91.0 |
| Operating margin | 25.2% | 32.0% | 23.3% | 30.6% |
| Net income | $27.7 | $31.1 | $50.3 | $59.4 |
| Diluted EPS | $0.42 | $0.45 | $0.75 | $0.85 |
| Operating cash flow | $16.8 | $11.3 | $68.1 | $72.6 |
- Q2 revenue declined 8%, operating income 28%, net income 11%, and diluted EPS 7% year over year. For the first half, revenue declined 8%, operating income 30%, net income 15%, and diluted EPS 12%.
- Q2 revenue mix: services $82.3 (58%); maintenance $37.0 (26%); software licenses $13.0 (9%); cloud subscriptions $5.4 (4%); hardware $4.3 (3%). License gross margin was 83.8% in Q2 and 83.4% for the first half.
- Cash, cash equivalents, and short-term investments totaled $83.4 at June 30, versus $125.5 in cash and cash equivalents at year-end 2017. The company reported no debt and no credit facilities. Current liabilities were $148.0 and current assets $204.7.
- First-half investing cash use was $9.3, including $5.2 of net investment purchases and capital spending. Financing cash use was $103.7, principally common-stock purchases, including shares withheld for taxes. The company repurchased about 2.24 million shares for approximately $97.8 under its program; the cash-flow statement reports $103.7 of total stock purchases.
- Accounts receivable was $99.1; deferred revenue was $90.4 at June 30. Days sales outstanding rose to 64 from 59 at March 31.
Material changes versus the prior period
- Cloud subscription revenue grew 126% in Q2 to $5.4 and 154% for the first half to $9.8, while software license revenue fell 35% in Q2 and 50% for the first half. Management attributed the license decline to extended sales cycles and customers choosing cloud deals instead of perpetual licenses.
- Maintenance revenue increased 3% in Q2 and 6% in the first half; management reported annual maintenance renewals above 90%. Services revenue declined 4% in Q2 and 2% in the first half, partly due to delayed customer projects and upgrades, lower license activity, and more efficient implementation work.
- Operating expenses excluding cost of revenue increased: Q2 R&D rose 29%, sales and marketing 18%, and general and administrative 13%. Management cited increased staffing, compensation, performance-based pay, and marketing investment. The prior-year period included a $3.0 restructuring charge related to approximately 100 job eliminations; there was no comparable 2018 charge.
- Q2 effective tax rate fell to 24.6% from 36.7%; the first-half rate was 22.8% versus 34.4%, primarily reflecting the U.S. federal corporate tax-rate reduction from 35% to 21% under the Tax Cuts and Jobs Act.
Outlook, management commentary, and risks
- No specific full-year revenue or earnings guidance is provided. Management expects the cloud transition, retail-sector disruption, and broader macroeconomic conditions to continue affecting revenue and earnings growth. Cloud subscriptions recognize revenue over contract periods, which management says can adversely affect revenue, earnings, and cash flow compared with upfront perpetual-license sales during the transition.
- Management’s 2018 priorities include investing in product development, growing cloud operations and subscriptions, expanding Manhattan Active omnichannel offerings, and growing global sales and marketing. It expects to evaluate acquisitions and balance them against investment and repurchases, and does not anticipate borrowing for general corporate purposes for the remainder of 2018. It believes cash and investments will cover working-capital and capital-expenditure needs for at least 12 months.
- Retail disruption may delay large customer purchases and lengthen sales cycles; the filing says the duration and effects are difficult to predict. Other identified risks include competition, long and difficult-to-forecast sales cycles, cloud-service defects or interruptions, cybersecurity and data-protection failures, implementation risks, international and foreign-currency exposure, and potential effects of Brexit and increased tariffs.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. Hardware revenue is now reported net because the company acts as agent; this reduces reported hardware revenue and cost without changing the underlying economics. On a comparable net basis, Q2 2017 hardware revenue would have been $2.6 versus $4.3 in Q2 2018. Adoption increased opening retained earnings by $2.0, net of tax, principally for deferred commissions. The company is still evaluating aspects of the tax reform provisions, including GILTI; related estimates could change.
- The filing reports no legal proceedings believed likely to have a material adverse impact. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether cloud subscription growth and customer conversions can offset the steep decline in perpetual-license revenue without continued material margin pressure.
- Whether delayed retail projects, extended sales cycles, and services demand improve or worsen, and how these affect bookings and implementation capacity.
- Whether operating costs and investment growth translate into sustainable revenue and margin performance.
- Cash generation, the pace of repurchases, and the balance between buybacks, product investment, and possible acquisitions; note that reported financing cash use includes tax-withholding share purchases.
- Potential changes in tax-reform estimates and the company’s eventual accounting treatment for GILTI, as well as the comparability effects of ASC 606 on hardware revenue.