Manhattan Associates, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Manhattan Associates develops and implements supply-chain, inventory and omnichannel commerce software. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $198.1 | $169.2 | $569.0 | $492.1 |
| Operating income | $36.8 | $42.4 | $108.0 | $107.2 |
| Operating margin | 18.6% | 25.1% | 19.0% | 21.8% |
| Net income | $29.7 | $36.7 | $91.1 | $89.9 |
| Diluted EPS | $0.47 | $0.57 | $1.43 | $1.40 |
| Operating cash flow | $39.9 | $59.7 | $124.4 | $145.1 |
Q3 revenue rose 17% year over year, led by cloud subscriptions (+41%) and services (+17%). Software license revenue fell 25%; maintenance rose 4%. For the first nine months, revenue grew 16%, with cloud subscriptions up 43% and services up 16%, while software licenses declined 21% and maintenance declined 1%.
Operating income decreased 13% in Q3 despite higher revenue; management attributed lower operating margin to investment in R&D, cloud operations, infrastructure and hiring to meet consulting demand. Nine-month operating income was nearly flat year over year, while margin contracted 2.8 percentage points. Q3 net income also reflected a higher effective tax rate (22.7% versus 13.5%); the nine-month rate was 19.1% versus 16.1%.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $197.1 million at September 30, 2022, down from $263.7 million at December 31, 2021. The company reported no debt and no credit facilities.
- Nine-month operating cash flow was $124.4 million, compared with $145.1 million a year earlier. Management attributed the decline mainly to higher tax payments related to required tax capitalization of R&D costs.
- Investing activities used $4.2 million, primarily for property and equipment. Financing activities used $179.0 million, principally for common-stock purchases, including shares withheld for taxes.
- The company reported $150.1 million of share repurchases under its program in the first nine months, reducing shares outstanding by approximately 1.2%. The filing also reports $179.0 million of total stock-purchase cash outflow, including tax-withholding shares. In October, the board replenished repurchase authority to an aggregate $75.0 million.
- Management believes existing cash will cover working capital and capital needs for at least the next 12 months and does not anticipate borrowing for general corporate purposes in the remainder of 2022.
Outlook, commentary and risks
- Management said first-nine-month results exceeded expectations, citing demand for cloud solutions, and described cloud as customers’ dominant preference. It provided no numerical revenue or earnings guidance in this filing.
- Remaining performance obligations with non-cancelable terms over one year were approximately $969.6 million; more than 97% related to cloud-native subscriptions. Management expects about 40% to be recognized over the next 24 months. RPO growth was 69% year over year.
- A stronger U.S. dollar reduced Q3 revenue by approximately 4% versus the prior-year exchange-rate basis and reduced reported RPO growth by approximately 7% versus constant exchange rates. Management cautioned that foreign-exchange volatility may materially affect results.
- Management noted uncertainty from long sales cycles, timing of customer capital spending, global economic and geopolitical volatility, inflation, and the pace of cloud adoption. Other cited risks include competition, attracting and retaining skilled employees, cloud-service interruptions or security compromises, implementation and product failure claims, and returns on R&D investment.
- Cloud infrastructure commitments were approximately $122.9 million over five years; internal software subscription commitments were approximately $19.8 million over five years. Operating lease liabilities totaled $23.6 million.
- The Inflation Reduction Act will impose a 1% excise tax on net stock repurchases beginning in 2023; the company expects to record it as a reduction to shareholders’ equity. The company reported no legal proceedings it believes are likely to have a material adverse effect.
Key facts for investors to verify
- Whether cloud and RPO growth continue, and whether the RPO translates into recognized revenue on the expected timeline.
- Whether hiring and cloud investment improve capacity without further material erosion in operating margins.
- Cash conversion, accounts-receivable collection and the effect of tax payments; Q3 days sales outstanding rose to 67 from 63 at June 30, 2022.
- The effects of currency movements, customer spending decisions and economic conditions on revenue, RPO and operating results.
- Share-repurchase pace and authorization, including the 2023 excise tax and the distinction between program repurchases and total stock-purchase cash outflows.