Manhattan Associates, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; financial statements are unaudited. Manhattan develops and implements supply-chain, inventory, and omnichannel commerce software and services.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $135.6 million | $154.3 million | $289.5 million | $302.7 million |
| Operating income | $26.7 million | $27.6 million | $50.9 million | $55.9 million |
| Operating margin | 19.7% | 17.9% | 17.6% | 18.5% |
| Net income | $19.2 million | $20.9 million | $41.7 million | $41.9 million |
| Diluted EPS | $0.30 | $0.32 | $0.65 | $0.64 |
| Operating cash flow | $48.8 million | $37.2 million | $60.4 million | $72.4 million |
Cash and debt: Cash and cash equivalents were $123.6 million at June 30, 2020, up from $110.7 million at December 31, 2019. The company reported no debt and no credit facilities. Current assets were $251.8 million and current liabilities were $183.4 million. DSO increased to 73 days from 67 days at March 31, 2020.
Cash uses and obligations: First-half investing cash outflow was $1.8 million, and financing cash outflow was $43.2 million, principally for stock repurchases and shares withheld for taxes. Operating lease liabilities totaled $35.0 million. Cloud-infrastructure commitments were approximately $52 million over five years; internal-software subscription commitments were approximately $7 million over three years.
Material changes versus comparable periods
- Q2 revenue decreased 12%; first-half revenue decreased 4%. Q2 net income fell about 8%, while first-half net income was nearly flat year over year.
- Cloud subscriptions grew 105% in Q2 to $18.5 million and 112% in the first half to $35.8 million. Conversely, software-license revenue fell 52% in Q2 and 36% in the first half, reflecting the shift toward subscriptions and delayed deal closings.
- Services revenue declined 24% in Q2 and 13% in the first half, primarily as customers delayed implementation and upgrade projects amid COVID-19. Maintenance revenue declined 4% in Q2 and 2% in the first half.
- Operating margin rose in Q2 despite lower revenue, primarily due to lower performance-based compensation and travel costs; first-half operating margin declined. First-half operating cash flow fell $12.0 million, mainly due to employee bonus payments and collection timing, partly offset by lower tax payments.
- Deferred revenue was $118.8 million at quarter-end, compared with $94.4 million at year-end 2019. Remaining performance obligations for specified cloud, maintenance, and managed-services contracts were approximately $225.5 million; about half is expected to be recognized over the next 24 months.
Outlook, management commentary, and risks
- Management described demand for cloud supply-chain and omnichannel solutions as solid and competitive win rates as strong. The May launch of Manhattan Active Warehouse Management received a better-than-expected reception, with pipeline opportunities building.
- Management cautioned that the global recovery may be slow and protracted, sales cycles may lengthen, and it expects services revenue to decline in the second half because of COVID-19 effects and the customary fourth-quarter retail peak-season impact. No specific consolidated revenue or earnings guidance is provided in the filing text.
- For full-year 2020, management estimated that cloud subscriptions and software licenses would represent 75% and 25%, respectively, of their combined revenue mix. The filing also notes that the cloud transition spreads revenue recognition over subscription terms and may affect revenue, earnings, and cash flow relative to perpetual-license sales.
- To preserve flexibility, the company suspended share repurchases in April, suspended its 401(k) match, reduced certain executive and director compensation, managed expenses, and largely suspended hiring. Management said these actions were not expected to materially impair customer support or key R&D investment. It considered existing cash sufficient for working capital and capital expenditures for at least 12 months and did not anticipate borrowing for general corporate purposes during the remainder of 2020.
- Risks include COVID-19 duration and economic effects, delayed customer investment decisions, long sales cycles and large-deal timing, competition, cloud-transition execution, software defects or service interruptions, cybersecurity, implementation and product-liability exposure, and international and currency risks. The company reported no legal proceedings it believed likely to have a material adverse impact.
Important facts for investors to verify
- Whether cloud growth and new-product demand offset continued weakness in licenses and services, and whether delayed deals close as expected.
- Whether services declines, customer project delays, and elevated DSO affect revenue, margins, and cash collections in the second half.
- Whether deferred revenue and remaining performance obligations convert to recognized revenue on the expected schedule.
- Whether cash generation remains adequate for cloud commitments, product investment, and possible acquisitions while repurchases remain suspended.
- How COVID-19 conditions, the cloud transition, and the resulting timing of bookings and revenue affect results; management cautions that interim results are not necessarily indicative of full-year performance.