Manhattan Associates, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The company develops and implements supply-chain, inventory and omnichannel software. This unaudited filing covers the quarter and nine months ended September 30, 2018, compared with the same 2017 periods. Manhattan is transitioning from upfront perpetual software licenses toward cloud subscriptions recognized over contract terms.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $142.4m | $152.9m | $414.8m | $450.5m |
| Operating income | $36.1m | $51.1m | $99.6m | $142.1m |
| Operating margin | 25.4% | 33.4% | 24.0% | 31.5% |
| Net income | $28.5m | $32.6m | $78.8m | $92.0m |
| Diluted EPS | $0.43 | $0.47 | $1.18 | $1.32 |
| Operating cash flow | $35.2m | $44.0m | $103.3m | $116.6m |
Revenue mix, Q3: software license $11.5m (down 29%); cloud subscriptions $6.5m (up 155%); maintenance $37.2m (up 2%); services $84.1m (flat); hardware $3.1m. Nine-month cloud subscription revenue was $16.3m, up 154%, while license revenue was $32.1m, down 44%.
Margins and costs: Lower license revenue and higher costs weighed on profitability. Q3 cost of cloud subscriptions, maintenance and services rose 17%, driven mainly by performance-based compensation, cloud infrastructure and personnel costs. Research and development expense increased 25% in both Q3 and the first nine months.
Liquidity and capital allocation: Cash, cash equivalents and short-term investments totaled $93.9m at September 30, 2018; the company reported no debt and no credit facilities. Cash and cash equivalents alone were $89.7m, versus $125.5m at year-end 2017. Nine-month financing cash outflow was $124.6m, primarily for share purchases. Management reported approximately $118.5m of program repurchases, including about 2.6m shares; October board action confirmed up to $50m of repurchase authority. The company said existing cash and investments should meet working-capital and capital-spending needs for at least 12 months and it did not anticipate borrowing for general corporate purposes during the remainder of 2018.
Material changes and explanations
- Revenue declined 7% in Q3 and 8% year to date; operating income declined 29% and 30%, respectively. Management attributed the pressure principally to the cloud transition, lower license sales and increased compensation and operating costs.
- Cloud growth partly reflects customers choosing subscriptions instead of perpetual licenses. Management cautioned that subscription revenue is recognized over time, creating near-term revenue, earnings and cash-flow pressure during the transition.
- ASC 606, adopted January 1, 2018, changed hardware reporting from gross to net because Manhattan acts as agent. This reduced reported hardware revenue and cost without a comparable reduction in profit: on a net-comparable basis hardware revenue rose 6% in Q3 and 39% year to date. Revenue comparisons should account for this presentation change.
- The effective tax rate fell to 24.4% for Q3 and 23.4% for the nine months, from 36.5% and 35.2%, respectively, mainly following the U.S. corporate tax-rate reduction. The company was still evaluating certain tax-reform effects, including GILTI accounting.
- Foreign-currency translation reduced comprehensive income by $6.0m in the first nine months. Other income included currency gains, principally related to the Indian rupee.
Outlook, risks and contingencies
- No specific numerical revenue or earnings guidance is provided. Management expects the cloud transition, retail-sector disruption and broader macroeconomic conditions to continue affecting growth; long sales cycles and timing of large deals make results difficult to forecast.
- Management plans continued investment in product development, cloud operations, global sales and marketing, and Manhattan Active offerings; it will also evaluate acquisitions and weigh them against share repurchases and business investment.
- Maintenance renewal rates exceeded 90% over the prior three years. As of September 30, about $64.2m of remaining performance obligations for cloud and maintenance contracts with non-cancelable terms over one year was expected to be recognized; approximately two-thirds over the next 24 months.
- Key disclosed risks include competition, delayed customer purchasing decisions, cloud-service interruptions or security breaches, software defects, implementation risks, talent retention, international operations and currency exposure, and potential effects of trade actions or Brexit-related uncertainty.
- The company reported no legal proceedings it believed likely to have a material adverse effect. It cautioned that failures in mission-critical products could nevertheless lead to substantial claims and contractual liability limitations may not always be enforceable.
- In May 2017, the company eliminated 100 positions and recorded a $2.9m restructuring charge; no restructuring charge was recorded in the first nine months of 2018. The company adopted ASC 606 using the modified retrospective method and recorded a $2.0m after-tax opening retained-earnings adjustment for deferred commissions.
- Subsequent to quarter-end, on October 25, 2018, the company amended bylaws and entered new executive employment agreements. These include salary and potential severance and change-of-control benefits; the filing provides executive base salaries and agreement terms.
Important facts for investors to verify
- Track whether cloud subscription growth converts into sustained total-revenue and operating-margin improvement as license revenue falls.
- Assess comparable hardware revenue using the ASC 606 net presentation, rather than comparing reported gross-basis 2017 revenue directly with 2018.
- Review operating cash flow, deferred revenue, and cash balances alongside the scale of share repurchases and planned investment.
- Monitor large-deal timing, retail customer project delays, cloud infrastructure and compensation costs, and maintenance renewals.
- Follow final accounting and tax effects of lease-standard adoption planned for Q1 2019 and the company’s unresolved GILTI accounting policy.
- Consider the remaining repurchase authorization, potential acquisition spending, and obligations under the new executive agreements.