Business context and reporting period
Manhattan Associates, Inc. develops and implements supply-chain, inventory and omnichannel software. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. The business is shifting from perpetual software licenses toward cloud subscriptions, alongside investment in product development, cloud operations and services capacity.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $162.3 | $142.4 | $465.0 | $414.8 |
| Operating income | $35.0 | $36.1 | $90.9 | $99.6 |
| Operating margin | 21.6% | 25.4% | 19.5% | 24.0% |
| Net income | $27.1 | $28.5 | $69.0 | $78.8 |
| Diluted EPS | $0.42 | $0.43 | $1.06 | $1.18 |
| Operating cash flow | $39.9 | $35.2 | $112.3 | $103.3 |
- Q3 revenue grew 14%; nine-month revenue grew 12%. Cloud subscriptions rose 121% in Q3 and 91% year to date; software license revenue rose 34% and 24%, respectively.
- Services remained the largest revenue source: 56% of Q3 revenue and 59% year to date. Maintenance revenue was nearly flat year over year; nine-month hardware revenue declined 17%.
- At September 30, cash and cash equivalents were $113.6 million, with no debt and no credit facilities. Current assets were $241.6 million and current liabilities $182.5 million. The company said existing cash and investments should cover working capital and capital expenditures for at least the next 12 months.
- Nine-month investing cash outflow was $9.9 million, including $11.4 million of property and equipment purchases. Financing cash outflow was $86.5 million, principally common-stock purchases. Cash increased $14.5 million from year-end 2018.
- The company reported no material legal proceedings and no material change in market-risk disclosures.
Material changes and management commentary
- Revenue growth did not translate into higher operating profit: operating income and net income declined in both comparison periods. Management attributed lower operating margins principally to investment in the cloud transition, R&D, cloud infrastructure and headcount, and hiring to meet consulting demand before new staff reach full utilization. Higher performance-based compensation also contributed.
- Cost of cloud subscriptions, maintenance and services rose 22% in Q3 and 22% for the first nine months, driven by personnel, performance compensation and cloud infrastructure costs. R&D expense increased 23% in both periods.
- Management said customer preference for cloud solutions is increasing, including migrations from on-premises products. Cloud revenue is recognized over subscription terms, typically 36–60 months; the transition can therefore weigh on earnings and cash flow relative to upfront perpetual-license sales.
- Management cited extended sales cycles for large deals, uncertainty in retail and global markets, and difficulty forecasting the timing of license and subscription sales. It provided no specific numerical full-year 2019 revenue or earnings guidance in the supplied filing text.
- For the remainder of 2019, stated priorities were continued investment in product development and business growth, evaluation of complementary acquisitions, and balancing repurchases against investment needs. Management did not anticipate borrowing for general corporate purposes.
Outlook, risks and unusual items
- Key risks include the pace and economics of the cloud transition; retail-sector and broader economic or geopolitical uncertainty; long sales cycles and concentration in software licenses and cloud subscriptions as business drivers; competition and pricing pressure; recruiting and retaining skilled employees; cloud-service interruptions, software defects and cybersecurity; large implementation and product-liability exposure; and foreign currency and international operating risks.
- At September 30, operating lease liabilities totaled $40.4 million, including $6.5 million current. Adoption of the new lease standard in 2019 recorded right-of-use assets and lease liabilities; management reported no effect on retained earnings, income or cash flows from adoption. Four ten-year Bangalore office leases accounted for approximately $13.8 million of lease liabilities.
- The company repurchased approximately 1.2 million shares for $80.9 million under its program during the first nine months; total financing cash used for common-stock purchases was $86.5 million, including shares withheld for taxes. The board confirmed up to $50.0 million of repurchase authority in October 2019.
- Nine-month equity-based compensation expense increased to $23.6 million from $14.6 million. The effective tax rate was 24.4%, versus 23.4% in the prior-year period, partly reflecting lower excess tax benefits and a prior-year tax-reform benefit.
Important facts for investors to verify
- Whether cloud subscription growth and remaining performance obligations—approximately $152.0 million, with about half expected to be recognized over the next 24 months—convert into durable revenue and cash generation.
- Whether margin pressure eases as cloud and services investments scale, and whether rising personnel, infrastructure and equity-compensation costs remain proportionate to revenue growth.
- The timing and size of large license and cloud deals, the impact of extended sales cycles, and the durability of maintenance renewals; management reported a renewal rate above 90% over the prior three years.
- Cash deployment among repurchases, business investment and acquisitions, alongside the company’s liquidity needs and lease commitments.
- Exposure to retail and macroeconomic conditions, competition, cybersecurity or cloud-service disruptions, implementation claims, and foreign currency movements.