Manhattan Associates, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in millions of dollars unless otherwise noted. The company develops and implements supply-chain, inventory-management and omnichannel commerce software, with revenue from cloud subscriptions, software licenses, maintenance, services and hardware.
Financial performance
- Q3 revenue: $149.8, down 8% year over year. Cloud subscriptions rose 48% to $21.1; software licenses fell 15% to $13.2; maintenance declined 1% to $37.3; services declined 20% to $73.5; hardware rose 48% to $4.7.
- Q3 earnings: Operating income was $35.0, essentially unchanged; operating margin increased to 23.4% from 21.6%. Net income was $25.0, down from $27.1, and diluted EPS was $0.39 versus $0.42. A $0.9 foreign-currency loss in other income contributed to the decline.
- First nine months: Revenue was $439.3, down 6%; operating income was $85.9, down 5%; operating margin was 19.5%, unchanged; net income was $66.7 versus $69.0; diluted EPS was $1.04 versus $1.06. Cloud subscriptions grew 83% to $56.8, while licenses fell 28% to $28.6 and services fell 15% to $232.7.
- Cash flow: Operating cash flow was $42.5 in Q3 versus $39.9 a year earlier; for nine months it was $102.9 versus $112.3. Year-to-date investing cash outflow was $1.9, and financing cash outflow was $43.5, principally related to share purchases and shares withheld for taxes.
- Liquidity and debt: Cash and cash equivalents were $166.3 at September 30, versus $110.7 at December 31, 2019; the company reported no debt and no credit facilities. Current assets were $288.4 and current liabilities $185.1. Management said existing cash was expected to cover working capital and capital needs for at least 12 months and anticipated no general-purpose borrowing for the rest of 2020.
- Other balance-sheet items: Deferred revenue was $113.2, up from $94.4 at year-end. Total operating lease liabilities were $34.2. The company disclosed approximately $49 of cloud-infrastructure commitments over five years and $9 of internal-software subscription commitments over three years.
Material changes and management commentary
- The business continued shifting from perpetual licenses to cloud subscriptions. Cloud revenue growth was accompanied by lower license revenue, in part because customers chose SaaS offerings; cloud revenue exceeded license revenue for the first nine months.
- COVID-19-related customer project delays weighed on services revenue. Management said professional services revenue for the first nine months was about 15% lower year over year, and expected Q4 services revenue to be lower than Q4 2019, also reflecting the usual retail peak-season impact.
- Management described cloud demand and competitive win rates as solid, noted a positive reception and a growing pipeline for Manhattan Active Warehouse Management, and cautioned that sales cycles may lengthen. It characterized the global recovery as potentially slow and protracted.
- Cost reductions helped preserve Q3 operating income and improve margin, including lower travel and performance-based compensation expenses. The company maintained a partial hiring freeze and continued expense management while stating that key customer support and R&D investment would be maintained.
- The share repurchase program was suspended effective April 1 due to COVID-19 uncertainty; no program repurchases occurred in Q2 or Q3. The authorized repurchase limit remained $50.0. Management identified product development and business growth as cash priorities and said it would continue evaluating acquisitions and repurchases.
Outlook, risks and contingencies
- No formal quantified full-year earnings or revenue guidance is provided in the filing. Management’s specific near-term outlook is for lower Q4 services revenue year over year.
- Key risks include COVID-19 duration and economic effects, delayed customer decisions and long sales cycles, the financial effects and timing of the cloud transition, competition, reliance on software and cloud sales, foreign-currency exposure, software or cloud-service defects or interruptions, cybersecurity and data-protection risks, and execution risks in large implementations.
- Remaining performance obligations for specified cloud, maintenance and managed-services contracts were approximately $257.3; about 49% was expected to be recognized over the next 24 months. This excludes contracts with terms of one year or less.
- The company reported no legal proceeding it believed likely to have a material adverse effect. It cautioned that product failures could nevertheless lead to substantial customer claims and contractual liability limits may not always be enforceable.
- The company adopted the expected-credit-loss accounting standard in 2020; management said the adoption’s financial-statement impact was immaterial. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether cloud-subscription growth and remaining performance obligations convert into sustained recognized revenue and profitability as the license-to-cloud mix shifts.
- Whether customer implementation delays ease, particularly given management’s expectation of lower Q4 services revenue and a slow recovery.
- Cash generation, collections and deferred-revenue trends, including the effect of customer payment timing and employee bonus payments.
- How cloud infrastructure commitments, continued product investment and any acquisitions affect liquidity and margins; confirm that no debt or credit facility was reported as of September 30, 2020.
- Whether the share repurchase suspension continues and how future cash use is balanced among repurchases, acquisitions and investment in the business.