Manhattan Associates, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are to the same 2016 periods unless stated otherwise. The company develops and implements supply-chain, inventory-management and omnichannel software. Results are unaudited.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $152.9 million | $152.2 million | $450.5 million | $457.0 million |
| Operating income | $51.1 million | $53.6 million | $142.1 million | $149.0 million |
| Operating margin | 33.4% | 35.2% | 31.5% | 32.6% |
| Net income | $32.6 million | $33.5 million | $92.0 million | $94.3 million |
| Diluted EPS | $0.47 | $0.47 | $1.32 | $1.30 |
| Operating cash flow | $44.0 million | $42.0 million | $116.6 million | $101.5 million |
- Q3 revenue was essentially flat; operating income fell about 5% and net income about 3%. For the first nine months, revenue declined about 1%, operating income about 5%, and net income about 2.5%.
- Q3 revenue mix was 12% software license, 76% services and 12% hardware and other. License gross margin was 84.9%, services 61.3%, and hardware and other 16.4% for the quarter.
- At September 30, cash and cash equivalents were $124.8 million and short-term investments were $4.9 million, or $129.7 million combined. The company reported no debt and no credit facilities. Current assets were $238.4 million versus current liabilities of $122.4 million.
- Cash from operations was $116.6 million for the nine months. Investing used $8.4 million, principally for investment purchases and capital expenditures; financing used $81.7 million, principally for stock purchases and tax-withholding shares.
Material changes and operating trends
- Q3 license revenue declined 13% to $18.8 million. Management attributed the decrease partly to customers shifting from traditional perpetual licenses to cloud arrangements. Nine-month license revenue rose 2% to $64.0 million.
- Services revenue fell 3% in Q3 and 4% year to date. Lower professional-services revenue, especially in the Americas, reflected retail customers delaying implementations and upgrades, as well as faster implementation cycles. Customer support and software enhancements revenue increased.
- Hardware and other revenue rose 64% in Q3 and 17% year to date; management noted hardware sales can fluctuate with customer requirements.
- Regional results were mixed: Americas revenue declined 4% in Q3 and 7% year to date, while EMEA and APAC revenue grew in both periods. The Americas remained the largest segment.
- Management said it accelerated its transition to cloud with the Q2 2017 launch of Manhattan Active solutions. The company recognized license revenue of at least $1 million on four new contracts in Q3 and twelve in the first nine months.
Outlook, risks and unusual items
- No specific full-year revenue, earnings or EPS guidance is provided in the filing. Management expects to continue investing in product development and business growth, evaluate complementary acquisitions, and weigh repurchases against those uses of cash. It did not anticipate borrowing for general corporate purposes for the remainder of 2017.
- Management cited extended sales cycles for large license deals, macroeconomic uncertainty, customer delays in strategic spending, competition, and the sensitivity of quarterly results to a small number of large transactions. A $1.1 million license deal was estimated to affect diluted EPS by about one cent.
- In May, the company eliminated about 100 positions amid retail-sector headwinds and to align services capacity with demand. It recorded a $2.9 million pretax restructuring charge ($1.9 million after tax, or $0.03 per diluted share); the remaining accrual was $44,000 and expected to be paid by year-end.
- The company repurchased 1,539,208 shares during the first nine months for a reported $75.0 million investment. No shares were repurchased under the publicly announced program during Q3. In October, the board confirmed authority to repurchase up to $50.0 million of shares.
- The company plans to adopt the new revenue standard in Q1 2018 using the modified retrospective method. It expects hardware revenue and related cost of sales to be presented net, reducing both reported amounts, and is evaluating deferral and amortization of some sales commissions.
- Management intends to indefinitely reinvest remaining undistributed foreign earnings; repatriation could trigger additional taxes. It reported no legal proceedings expected to have a material adverse effect and no material changes in market-risk disclosures. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the cloud transition can sustain license growth as perpetual-license revenue declines, and how the revenue-standard adoption affects reported revenue, margins and commission expense.
- Whether professional-services demand, especially in the Americas retail sector, recovers and whether faster implementations continue to reduce services revenue.
- How large-deal timing, customer spending delays and competition affect license revenue and operating margins.
- How management allocates cash among investment, acquisitions and repurchases; note the difference between the $75.0 million reported program investment and $81.7 million of financing cash outflow, which included shares withheld for taxes.
- The extent and potential tax cost of foreign earnings held outside the United States; the filing does not provide a clear estimate of the repatriation tax impact.