Manhattan Associates, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; it also provides unaudited fourth-quarter results. Manhattan Associates develops and implements supply-chain, inventory-management and omni-channel commerce software, related services and hardware.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $604.6 million | $556.4 million | +9% |
| Operating income | $194.3 million | $161.4 million | +20% |
| Operating margin | 32.1% | 29.0% | +3.1 percentage points |
| Net income | $124.2 million | $103.5 million | +20% |
| Diluted EPS | $1.72 | $1.40 | +23% |
| Cash from operations | $139.3 million | $120.2 million | +16% |
| Cash and investments at year-end | $95.6 million | $128.8 million | Down $33.1 million |
- Revenue mix: Services $467.3 million (77% of revenue), software licenses $85.0 million (14%), and hardware and other $52.3 million (9%). Services revenue grew 9%; license revenue grew 8%.
- Gross margins by revenue category: Licenses 87.3%, services 57.7%, and hardware and other 20.5%. The large services contribution supports recurring customer work but weighs on the overall margin profile relative to license sales.
- Liquidity and debt: The company reported no debt and no credit facilities. Current assets were $207.0 million and current liabilities $117.6 million at year-end (current ratio about 1.76). Cash and investments included $47.7 million held in the U.S. and $47.9 million held by foreign subsidiaries.
- Cash uses: Operating cash flow increased year over year. Financing activities used $162.7 million, primarily for share repurchases and shares withheld for employee taxes. The company repurchased 2.8 million shares for $158.4 million under its public program; year-end shares outstanding fell to 70.2 million from 72.8 million.
- Fourth quarter: Revenue was $147.6 million versus $141.4 million in Q4 2015; operating income was $45.4 million versus $39.5 million; net income was $29.9 million versus $26.4 million; and diluted EPS was $0.42 versus $0.36.
Material changes versus the prior year
- Revenue growth slowed to 9% in 2016 from 13% in 2015. License growth was 8%, compared with 10% in 2015; services growth was 9%, compared with 14%.
- Non-warehouse license revenue increased 29% to $36.7 million, while warehouse-management license revenue decreased 4% to $48.3 million.
- Americas revenue rose 11% to $513.6 million; EMEA revenue fell 5% to $66.3 million; APAC revenue rose 13% to $24.7 million. EMEA operating income was nearly flat, while Americas and APAC operating income increased.
- Operating margin expanded to 32.1%, which management attributed to revenue growth and expense discipline. R&D expense increased 2% to $54.7 million.
- Cash and investments declined despite higher operating cash flow, primarily in the context of substantial share repurchases. The company reported a $3.6 million foreign-currency translation loss in comprehensive income.
Outlook, risks and other notable items
- Outlook: The filing gives no quantified revenue or earnings guidance. Management expected 2017 cash priorities to include hiring and developing sales and services resources, continued product development and evaluation of complementary acquisitions. It did not anticipate borrowing for general corporate purposes and said existing cash and investments should meet working-capital and capital-expenditure needs for at least 12 months.
- Management described uncertainty in global growth and extended sales cycles for large license deals, which can exceed $1 million and typically take nine to twelve months or longer. The company closed 18 such deals in 2016, compared with 21 in 2015.
- Key risks include intense competition and pricing pressure; reliance on one business line and continued license sales; dependence of services revenue on implementations and upgrades; lengthy and variable sales and implementation cycles; ability to attract and retain skilled staff; cybersecurity and software defects; international and foreign-exchange exposure, including costs in India; and potential effects of Brexit on customers and EMEA operations.
- Operating lease commitments totaled $45.9 million, including $7.8 million due in 2017; the Atlanta headquarters lease runs through 2025. Customer contracts include intellectual-property indemnities that generally have no specified monetary limit, but no related liability was recorded. The company reported no legal proceeding expected to have a material adverse impact and no material warranty liability.
- The company planned to adopt the new revenue-recognition standard in Q1 2018 and was still assessing its effects, including treatment of contract performance obligations and sales commissions. The new lease standard was also under evaluation. Management and the auditor reported effective internal control over financial reporting; the audited financial statements received an unqualified opinion.
Important facts for investors to verify
- Whether license growth and large-deal bookings sustain momentum, especially given the decline in warehouse-management licenses and management’s comments on longer sales cycles.
- How much services growth and margin depend on new license sales, customer implementations and renewals; the support-renewal rate was above 90% over the prior three years.
- Whether cash generation can support investment and buybacks while cash and investments have declined; also monitor the allocation of the newly authorized $50 million repurchase program.
- The eventual financial and reporting effects of adopting the new revenue-recognition and lease standards, and any material developments in tax exposures or foreign-currency effects.