Manhattan Associates, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statements are unaudited. The company develops and implements supply-chain, inventory and omnichannel software, with revenue from cloud subscriptions, software licenses, maintenance, services and hardware.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $154.3m | $141.9m | $302.7m | $272.4m |
| Operating income | $27.6m | $35.7m | $55.9m | $63.5m |
| Operating margin | 17.9% | 25.2% | 18.5% | 23.3% |
| Net income | $20.9m | $27.7m | $41.9m | $50.3m |
| Diluted EPS | $0.32 | $0.42 | $0.64 | $0.75 |
| Cash from operations | $37.2m | $16.8m | $72.4m | $68.1m |
Revenue mix, Q2: Services $94.0m (+14% year over year), maintenance $37.3m (+1%), software licenses $11.7m (-10%), cloud subscriptions $9.0m (+68%), and hardware $2.3m (-45%). Services represented 61% of quarterly revenue. International revenue was approximately 31% of Q2 revenue.
Balance sheet and liquidity: Cash and cash equivalents were $119.4m at June 30, versus $99.1m at December 31, 2018; the company reported no debt and no credit facilities. Current assets were $239.6m and current liabilities $169.1m. Operating lease liabilities totaled $42.6m, including $6.8m current. The company said cash and investments should meet working-capital and capital needs for at least the next 12 months, while noting there is no assurance.
First-half investing cash outflow was $1.9m, including $3.3m of property and equipment purchases and $1.4m of net investment maturities. Financing cash outflow was $50.2m, principally common-stock purchases. The filing reports $119.4m cash and cash equivalents at period end.
Material changes versus prior year
- Revenue increased 9% in Q2 and 11% in the first half, led by services and cloud subscriptions. First-half cloud revenue grew 71% to $16.9m; software-license revenue rose 18% to $24.1m.
- Despite higher sales, operating income fell 23% in Q2 and 12% in the first half. Operating margin contracted 7.3 percentage points in Q2 and 4.8 points for the first half. Management attributed pressure to investment in cloud transition and R&D, hiring to meet consulting demand before new staff reach full utilization, and higher performance-based compensation.
- Q2 cost of cloud subscriptions, maintenance and services increased 25%, principally reflecting added professional-services personnel, higher performance compensation and cloud infrastructure costs. First-half R&D expense rose 23% to $43.2m.
- Cash from operations increased in the first half to $72.4m, which management attributed mainly to timing of bonus and tax payments and customer collections. First-half net income nevertheless declined from $50.3m to $41.9m.
- The company adopted lease accounting (ASC 842) in Q1 2019. It recorded $28.5m of right-of-use assets and $31.0m of lease liabilities at adoption, with no impact on retained earnings, income or cash flows. Prior periods were not restated.
Outlook, commentary and risks
No specific full-year revenue, earnings or margin guidance is provided. Management plans to invest in product development, cloud operations and sales and marketing, expand Manhattan Active offerings, and pursue sustainable growth. It expects continued opportunities for existing customers to convert maintenance contracts to cloud subscriptions. Management cautions that the shift from perpetual licenses to subscriptions spreads revenue recognition over time and may weigh on revenue, earnings and cash flow until the revenue mix stabilizes.
Management described long sales cycles, uncertainty in global and retail markets, and timing of large customer decisions as obstacles to forecasting. Key risks include cloud-transition execution and service reliability, competition, hiring and retention, software defects and security, large implementation risks, foreign-currency exposure, and potential disruption from tariffs, trade tensions or Brexit-related developments. Management reported no legal proceeding it believes is likely to materially adversely affect the company.
At June 30, remaining performance obligations for noncancelable cloud and maintenance contracts with terms over one year were approximately $120.4m; about 53% was expected to be recognized over the next 24 months. This excludes contracts with terms of one year or less.
The board confirmed in July 2019 authority to repurchase up to an aggregate $50.0m of common stock. Management said it would weigh repurchases against acquisition opportunities and business investment and did not anticipate borrowing for general corporate purposes through the remainder of 2019.
Important facts for investors to verify
- Whether cloud-subscription growth and new bookings can offset the timing impact of lower upfront perpetual-license revenue.
- Whether consulting hiring and cloud infrastructure investments translate into improved utilization and operating margins.
- The drivers and sustainability of the sharp Q2 margin decline, including higher compensation and operating costs.
- Share repurchase figures: the cash-flow statement reports $50.2m of first-half stock purchases, while management describes approximately $44.9m of repurchases under the program; the filing notes the cash-flow total also includes shares withheld for taxes.
- Lease commitments and the economics of four new ten-year office leases in Bangalore, which represented approximately $14.4m of lease liabilities at June 30.
- Customer renewals and conversion of maintenance contracts to cloud subscriptions; management reported a maintenance renewal rate above 90% over the preceding three years.