Manhattan Associates, Inc. — FY 2018 Form 10-K
Business context and reporting period. The company develops and implements supply-chain, inventory, and omnichannel commerce software and related services. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below refer to the three months ended December 31, 2018. Revenue is reported across the Americas, EMEA, and APAC.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $559.2 million | $594.6 million | -6% |
| Operating income | $133.9 million | $185.6 million | -28% |
| Operating margin | 23.9% | 31.2% | -7.3 percentage points |
| Net income | $104.7 million | $116.5 million | -10% |
| Diluted EPS | $1.58 | $1.68 | -6% |
| Cash from operations | $137.3 million | $164.1 million | -16% |
| Cash, cash equivalents and investments | $100.6 million | $125.5 million | -20% |
| Debt | None | None | — |
FY 2018 revenue by source: services $329.7 million (59%); maintenance $147.0 million (26%); software licenses $45.4 million (8%); cloud subscriptions $23.1 million (4%); and hardware $14.0 million (3%). Software license revenue had an 88.3% gross margin. Management notes that the large services mix lowers the company’s overall margin profile relative to software-license-heavy businesses.
At December 31, 2018, current assets were $215.4 million and current liabilities were $145.3 million; deferred revenue was $81.9 million. Shareholders’ equity was $147.1 million. Operating cash flow exceeded net income, while investing activities used $9.8 million and financing activities used $149.3 million, primarily for stock repurchases. The company repurchased approximately 3.15 million shares for $143.3 million under its program during 2018. It reported $37.9 million of future operating lease payments, including $6.2 million due in 2019.
Q4 2018: Revenue was $144.4 million, operating income $34.3 million, net income $25.9 million, and diluted EPS $0.40. Q4 2017 revenue was $144.1 million, operating income $43.6 million, net income $24.5 million, and diluted EPS $0.36.
Material changes versus the prior comparable period
- Cloud subscription revenue grew 141% to $23.1 million, while software license revenue fell 37% to $45.4 million. Management attributed the shift to longer sales cycles and customers moving from perpetual licenses to cloud subscriptions.
- Services revenue rose 1% and maintenance revenue rose 3%; hardware revenue as reported fell 68%. Hardware comparisons are materially affected by adoption of ASC 606: the company began reporting hardware revenue net of related costs in 2018. On a comparable net basis, hardware revenue increased 27% to $14.0 million from $11.0 million in 2017.
- Operating income and margin declined as lower license revenue and investment in the cloud transition coincided with higher costs. R&D expense increased 25% to $71.9 million; costs for cloud, maintenance, and services increased 13%.
- Operating cash flow declined $26.8 million, which management primarily attributed to the transition to cloud subscriptions. Cash and investments decreased by $25.0 million, alongside substantial share repurchases.
- The effective tax rate fell to 23.2% from 37.0%, primarily reflecting the lower U.S. federal corporate tax rate following the 2017 Tax Cuts and Jobs Act. The company finalized related tax accounting in 2018, including a $0.3 million additional transition-tax expense and a $0.5 million tax benefit related to Section 162(m).
Outlook, commentary, risks and unusual items
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. Its 2019 priorities include customer success and growth, product innovation, expanding cloud operations and subscriptions, growing Manhattan Active omnichannel/POS/customer engagement, and expanding global sales and marketing.
- Management expects the cloud transition to continue affecting revenue, earnings, and cash flow until a stable mix of cloud subscriptions and perpetual licenses develops. Subscription revenue is recognized over contract terms, typically 36–60 months, rather than largely upfront as with perpetual licenses. The company expects to continue seeking opportunities to convert maintenance customers to subscriptions.
- Management cited retail-sector disruption, cautious customer spending, long sales cycles, macroeconomic uncertainty, competition, and the timing and mix of cloud versus license deals as factors that make results difficult to forecast. Other principal risks include cloud-service interruptions or cybersecurity incidents, implementation delays, talent retention, foreign currency exposure, and intellectual-property claims.
- The company expects existing cash and investments to cover working capital and capital expenditures for at least the next 12 months, has no credit facility, and did not anticipate borrowing for general corporate purposes in 2019. It intends to prioritize business and product-development investment while weighing acquisitions against share repurchases. The board authorized up to an additional $50 million in repurchases in January 2019.
- ASC 606 adoption changed hardware reporting to net presentation and required deferral of some sales commissions; it also increased opening retained earnings by $2.0 million, net of tax. The company expected ASC 842 lease adoption in Q1 2019 to add operating lease right-of-use assets and liabilities; the precise balance-sheet impact was still being evaluated.
- No legal proceeding was identified as likely to have a material adverse impact, and no liabilities were recorded for customer indemnities or warranties. However, certain contractual indemnity obligations have no specified monetary cap. The company reported no off-balance-sheet arrangements. Its financial statements and internal control over financial reporting received unqualified auditor opinions.
Important facts for investors to verify
- Whether cloud-subscription growth and recurring revenue can offset continued declines in license revenue without further pressure on margins and cash flow.
- How future bookings, renewals, customer conversions, and deferred revenue develop; the filing disclosed approximately $77.0 million of remaining performance obligations for specified contracts longer than one year, with about 60% expected to be recognized over the next 24 months.
- Whether comparable hardware results are assessed on the net basis required by ASC 606, rather than by comparing reported 2018 revenue with prior gross-presented figures.
- How the company allocates cash among product investment, acquisitions, and repurchases, and whether substantial buybacks remain sustainable as cash balances decline.
- The realized balance-sheet effect of ASC 842, and any developments in tax audits, foreign-exchange exposure, cybersecurity, service delivery, or customer indemnity claims.