MANHATTAN ASSOCIATES, INC. The following discussion should be read in conjunction with the condensed
consolidated financial statements for the three months ended
References in this filing to the "Company," "
Business Overview
We develop, sell, deploy, service and maintain software solutions designed to manage supply chains, inventory and omnichannel operations for retailers, wholesalers, manufacturers, logistics providers and other organizations. Our customers include many of the world's most premier and profitable brands.
Our business model is singularly focused on the development and implementation of complex commerce enablement software solutions that are designed to optimize supply chains, and retail store operations including point of sale effectiveness and efficiency for our customers.
We have five principal sources of revenue:
• cloud subscriptions, including software as a service (SaaS) and hosting of
software;
• licenses of our software;
• customer support services and software enhancements (collectively,
"maintenance");
• professional services, including solutions planning and implementation,
related consulting, customer training, and reimbursements from customers
for out-of-pocket expenses (collectively, "services"); and
• hardware sales.
In the three months ended
We have three geographic reportable segments:
Future Expectations
Our results for the first quarter 2020 were in line with our internal expectations due to continued demand for our cloud-based supply chain and omnichannel commerce solutions. However, the impacts of global macroeconomic disruption directly related to coronavirus disease ("COVID-19") on our business are currently uncertain. In general, we have not seen notable cancelations and are noticing a larger pipeline of opportunities for the balance of the year versus a quarter ago. However, we would expect to see some shifts in the expected timing of deal closings from the second quarter of 2020 to the second half of the year and delays of some of our services projects. Therefore, we have taken a conservative approach and proactive measures to position our company for uncertainty in the near-term while maintaining flexibility to extend our market-leading position when a normalization of business activity resumes.
We have taken steps to best ensure the health and safety of our employees globally. Our daily execution has evolved into a largely virtual model, and we continue to find innovative ways to engage with customers and prospects, ensuring that they are supported as they navigate their way through this period.
As previously announced, effective
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Importantly, these expense reductions will not materially impact our ability to support our customers or make key investments in research and development to further extend our competitive positioning. We will continue to actively monitor the situation and may take further actions that modify our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, and partners.
Going forward, we are investing significantly in our transition to a cloud business, including enterprise investments in innovation, and strategic operating expenses to support growth objectives. Our pace of investment and timing combined with global macroeconomic conditions and disruptions related to COVID-19 as a whole, have impacted and may continue to impact revenue and earnings growth, based on timing of recovery. The pace at which the market for our products transitions from perpetual license to cloud subscriptions, resulting in revenue recognition spread out over the subscription period rather than up front, combined with extended lead times for developing new business, can cause uncertainty for our future expectations, impacting our ability to accurately forecast bookings and revenues from quarter to quarter and over the longer term.
For 2020, our five strategic goals are:
• Focus on customer success and drive sustainable long-term growth;
• Aggressively invest in innovation to expand our products and total
addressable market;
• Expand our Manhattan Active Suite of Cloud Solutions;
• Develop and grow our cloud business and cloud subscription revenue; and
• Expand our global sales and marketing teams.
Cloud Subscription
Historically, our software licenses were sold as perpetual licenses, under which customers own the software license and revenue is recognized at the time of sale. In 2017, we released Manhattan Active™ Solutions, accelerating our business transition to cloud subscriptions. Under a cloud subscription, customers pay a periodic fee for the right to use our software within a cloud-based environment that we provide and manage over a specified period of time. As part of our subscription program, we allow our existing customers to convert their maintenance contracts to cloud subscription contracts. Some customers have converted their maintenance contracts to cloud subscriptions, and we expect there will be continued opportunities to convert existing maintenance contracts to cloud subscription contracts in the future.
With the launch of Manhattan Active™ Solutions, the transition to a cloud subscription model has had, and may continue to have, an adverse impact on revenue, earnings and cash flow relative to periods in which we primarily sell perpetual licenses. This effect will continue until a stable, recurring mix of perpetual license to cloud subscription revenue develops.
Global Economic Trends and Industry Factors
Global macro-economic trends, technology spending, and supply chain management
market growth are important barometers for our business. In the three months
ended
We sell technology-based solutions with total pricing, including software and
services, in many cases exceeding
While we are encouraged by our results, we, along with many of our customers, still remain cautious regarding the pace of global economic growth. We believe global geopolitical and economic volatility likely will continue to shape customers' and prospects' enterprise software buying decisions, making it challenging to forecast sales cycles for our products and the timing of large enterprise cloud subscription and software license sales.
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Revenue
Cloud Subscriptions and Software License revenue. Cloud subscriptions revenue and remaining performance obligation growth are the leading indicators of our business performance, primarily derived from cloud subscription fees that customers pay for supply chain solutions. Since we announced our transition to becoming a cloud-first company in 2017 with our launch of Manhattan Active Solutions, we have continued to see a significant shift in demand for cloud solutions versus software license. By comparison, in 2016, cloud subscriptions and software license revenue represented 7% and 93%, respectively, of our total cloud and software license revenue mix. In the full year ended 2020, we estimate cloud subscriptions and software license revenue to be 75% and 25%, respectively, of our total cloud and software license revenue mix. From 2016 to 2020 forecast, we estimate software license revenue to decline on an annual compounded negative growth of 26%, driven by the overall strong demand for cloud solutions. In the first quarter of 2020, cloud subscriptions revenue surpassed software license revenue, representing 64% of the total cloud and software license revenue mix. Going forward, we expect cloud revenue to increase as a percentage of total software and cloud revenue mix as market demand for cloud solutions is supplanting legacy perpetual license demand.
In the three months ended
In the three months ended
Cloud subscriptions and software license revenue growth are influenced by the
strength of general economic and business conditions and the competitive
position of our software products. These revenues generally have long sales
cycles. In addition, the timing of the closing of a few large software license
transactions can have a material impact on our software license revenues,
operating profit, operating margins and earnings per share. For example,
Our software solutions are focused on core supply chain commerce operations
(Warehouse Management, Transportation Management and Labor Management),
Inventory optimization and Omnichannel operations (e-commerce, retail store
operations and point of sale), which are intensely competitive markets
characterized by rapid technological change. We are a market leader in the
supply chain management and omnichannel software solutions market as defined by
industry analysts such as
Maintenance Revenue. Our maintenance revenue for the three months ended
Services revenue. In the three months ended
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Our professional services organization provides our customers with expertise and assistance in planning and implementing our solutions. To ensure a successful product implementation, consultants assist customers with the initial installation of a system, the conversion and transfer of the customer's historical data onto our system, and ongoing training, education, and system upgrades. We believe our professional services enable customers to implement our software rapidly, ensure the customer's success with our solutions, strengthen our customer relationships, and add to our industry-specific knowledge base for use in future implementations and product innovations.
Although our professional services are optional, the majority of our customers use at least some portion of these services for their planning, implementation, or related needs. Professional services are typically rendered under time and materials-based contracts with services typically billed on an hourly basis. Professional services are sometimes rendered under fixed-fee based contracts with payments due on specific dates or milestones.
Services revenue growth is contingent upon our software license revenue, cloud subscriptions and customer upgrade cycles, which are influenced by the strength of general economic and business conditions and the competitive position of our software products. In addition, our professional services business has competitive exposure to offshore providers and other consulting companies. All of these factors potentially create the risk of pricing pressure, fewer customer orders, reduced gross margins, and loss of market share.
Hardware Revenue. Our hardware revenue, which we recognize net of related costs,
totaled
Product Development
We continue to invest significantly in research and development (R&D) to provide
leading solutions that help global retailers, manufacturers, wholesalers,
distributors, and logistics providers successfully manage accelerating and
fluctuating demands as well as the increasing complexity and volatility of their
local and global supply chains, retail store operations and point of sale. Our
R&D expenses were
We expect to continue to focus our R&D resources on the development and enhancement of our core supply chain, inventory optimization, omnichannel and point of sale software solutions. We offer what we believe to be the broadest solutions portfolio in the supply chain solutions marketplace, to address all aspects of inventory optimization, transportation management, distribution management, planning, and omnichannel operations including order management, store inventory & fulfillment, call center and point of sale.
We also plan to continue to enhance our existing solutions and to introduce new solutions to address evolving industry standards and market needs. We identify opportunities to further enhance our solutions and to develop and provide new solutions through our customer support organization, as well as through ongoing customer consulting engagements and implementations, interactions with our user groups, association with leading industry analysts and market research firms, and participation in industry standards and research committees. Our solutions address the needs of customers in various vertical markets, including retail, consumer goods, food and grocery, logistics service providers, industrial and wholesale, high technology and electronics, life sciences, and government.
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Cash Flow and Financial Condition
For the three months ended
During the three months ended
For the remainder of 2020, our priorities for use of cash will continue to be investments in product development and growth of our business. We expect to continue to evaluate acquisition opportunities that are complementary to our product footprint and technology direction. We also expect to continue to weigh our share repurchase options against cash for acquisitions and investing in the business. We do not anticipate any borrowing requirements for the remainder of 2020 for general corporate purposes.
Results of Operations
In the following table, we present a summary of our consolidated results for the
three months ended
Three Months Ended March 31,
2020 2019
(in thousands, except per share data)
Revenue $ 153,903 $ 148,404
Costs and expenses 129,707 120,128
Operating income 24,196 28,276
Other income (loss), net 1,420 (371 )
Income before income taxes 25,616 27,905
Net income $ 22,530 $ 20,972
Diluted earnings per share $ 0.35 $ 0.32
Diluted weighted average number of shares 64,342 65,204
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We have three geographic reportable segments: the
Three Months Ended March 31,
% Change vs.
2020 2019 Prior Year
Revenue: (in thousands)
Cloud subscriptions
Americas 15,243 6,920 120 %
EMEA 1,488 744 100 %
APAC 529 195 171 %
Total cloud subscriptions 17,260 7,859 120 %
Software license
Americas 8,450 6,128 38 %
EMEA 1,024 6,045 -83 %
APAC 261 241 8 %
Total software license 9,735 12,414 -22 %
Maintenance
Americas 28,460 29,101 -2 %
EMEA 5,171 4,891 6 %
APAC 2,113 2,107 0 %
Total maintenance 35,744 36,099 -1 %
Services
Americas 67,249 69,323 -3 %
EMEA 16,619 14,608 14 %
APAC 3,538 4,700 -25 %
Total services 87,406 88,631 -1 %
Hardware
Americas 3,744 3,401 10 %
EMEA 11 - N/A
APAC 3 - N/A
Total hardware and other 3,758 3,401 10 %
Total Revenue
Americas 123,146 114,873 7 %
EMEA 24,313 26,288 -8 %
APAC 6,444 7,243 -11 %
Total revenue $ 153,903 $ 148,404 4 %
Operating income:
Americas 16,282 18,051 -10 %
EMEA 6,313 7,734 -18 %
APAC 1,601 2,491 -36 %
Total operating income $ 24,196 $ 28,276 -14 %
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Condensed Consolidated Financial Summary - First Quarter 2020
• Consolidated total revenue: $153.9 million for the first quarter of 2020,
compared to $148.4 million for the first quarter of 2019;
• Cloud subscription revenue: $17.3 million for the first quarter of 2020,
compared to $7.9 million for the first quarter of 2019;
• Software license revenue: $9.7 million for the first quarter of 2020,
compared to $12.4 million for the first quarter of 2019;
• Operating income: $24.2 million for the first quarter of 2020, compared to
$28.3 million for the first quarter of 2019;
• Operating margins: 15.7% for the first quarter of 2020, compared to 19.1%
for the first quarter of 2019;
• Diluted earnings per share: $0.35 for the first quarter of 2020 compared to
$0.32 for the first quarter of 2019;
• Cash flow from operations: $11.6 million in the first quarter of 2020,
compared to $35.2 million in the first quarter of 2019;
• Days sales outstanding: 67 days at March 31, 2020 , compared to 61 days at
December 31, 2019 ;
• Cash and investments: $75.3 million at March 31, 2020 , compared to $110.7
million at December 31, 2019 ;
• Share repurchases: In the three months ended March 31, 2020 , we reduced our
common shares outstanding by approximately 0.1%, primarily through the
repurchase of approximately 0.3 million shares of our common stock, under
the share repurchase program authorized by our board of directors, for a
total investment of $25.0 million .
• In April 2020 , our Board of Directors confirmed our existing authority to
repurchase up to an aggregate of $50.0 million of our outstanding common
stock, but we have suspended the share repurchase program to position our
Company for uncertainty in the near-term as a result of COVID-19 pandemic.
Below we discuss our consolidated results of operations for the first quarters
of 2020 and 2019.
Revenue
Three Months Ended March 31,
% Change vs. % of Total Revenue
2020 2019 Prior Year 2020 2019
(in thousands)
Cloud subscriptions $ 17,260 $ 7,859 120 % 11 % 5 %
Software license 9,735 12,414 -22 % 6 % 8 %
Maintenance 35,744 36,099 -1 % 23 % 24 %
Services 87,406 88,631 -1 % 57 % 60 %
Hardware 3,758 3,401 10 % 3 % 3 %
Total revenue $ 153,903 $ 148,404 4 % 100 % 100 %
Cloud Subscriptions revenue. In 2017, we released Manhattan Active™ Solutions
accelerating our business transition to cloud subscriptions. In the first
quarter of 2020, cloud subscriptions revenue increased
Software License revenue. Software license revenue decreased
The perpetual license sales percentage mix across our product suite in the first
quarter ended
Maintenance revenue. Maintenance revenue decreased
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Services revenue. Services revenue decreased
Hardware revenue. Hardware sales increased
Cost of Revenue
Three Months Ended March 31,
% Change vs.
2020 2019 Prior Year
Cost of software license $ 555 $ 592 -6 %
Cost of cloud subscriptions, maintenance and
services 74,276 66,578 12 %
Total cost of revenue $ 74,831 $ 67,170 11 %
Cost of Software License. Cost of software license consists of the costs associated with software reproduction; media, packaging and delivery; documentation, and other related costs; and royalties on third-party software sold with or as part of our products. Cost of software license remained relatively flat in the first quarter of 2020 compared with the same quarter in the prior year.
Cost of Cloud Subscriptions, Maintenance and Services. Costs of cloud
subscriptions, maintenance and services consist primarily of salaries and other
personnel-related expenses of employees dedicated to cloud subscriptions;
maintenance services; and professional and technical services as well as hosting
fees. The
Operating Expenses
Three Months Ended March 31,
% Change vs.
2020 2019 Prior Year
(in thousands)
Research and development $ 23,328 $ 21,213 10 %
Sales and marketing 13,088 14,781 -11 %
General and administrative 16,114 15,050 7 %
Depreciation and amortization 2,346 1,914 23 %
Operating expenses $ 54,876 $ 52,958 4 %
Research and Development. Our principal R&D activities have focused on the expansion and integration of new products and releases, while expanding the product footprint of our software solution suites in Supply Chain, Inventory Optimization and Omnichannel, including cloud-based solutions, point-of-sale and tablet retailing.
For each of the quarters ended
R&D expenses primarily consist of salaries and other personnel-related costs for
personnel involved in our R&D activities. R&D expenses for the quarter ended
Sales and Marketing. Sales and marketing expenses include salaries, commissions,
travel and other personnel-related costs and the costs of our marketing and
alliance programs and related activities. Sales and marketing expenses decreased
General and administrative (G&A). G&A expenses consist primarily of salaries and
other personnel-related costs of executive, financial, human resources,
information technology, and administrative personnel, as well as facilities,
legal, insurance, accounting, and other administrative expenses. G&A expenses
increased
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Depreciation and Amortization. Depreciation and amortization of intangibles and
software expense for the first quarter of 2020 and 2019 was
Operating Income
Operating income in the first quarter of 2020 was
Other Income and Income Taxes
Three Months Ended March 31,
% Change vs.
2020 2019 Prior Year
Other income (loss), net $ 1,420 $ (371 ) -483 %
Income tax provision 3,086 6,933 -55 %
Other income, net. Other income, net primarily includes interest income, foreign
currency gains and losses, and other non-operating expenses. Other income, net
increased
Income tax provision. Our effective income tax rates were 12.0% and 24.8% for
the quarters ended
Liquidity and Capital Resources
During the first three months of 2020, we funded our business through cash
generated from operations. Our cash and cash equivalents as of
Cash flow from operating activities totaled
Cash flow used in investing activities totaled
Financing activities used cash of
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As disclosed in our Annual Report on Form 10-K, our principal commitments
consist of obligations under operating leases. As we continue our business
transition to a cloud subscription model, we have entered into multiple
non-cancellable contracts for cloud infrastructure services. As of
Periodically, opportunities may arise to grow our business through the acquisition of complementary products, and technologies. Any material acquisition could result in a decrease to our working capital depending on the amount, timing, and nature of the consideration to be paid. We believe that our existing cash and investments will be sufficient to meet our working capital and capital expenditure needs at least for the next twelve months, although there can be no assurance that this will be the case. With the COVID-19 impact, we are focused on preserving liquidity and protecting our headcount capacity to support our customers and grow our business when global economic activity begins to recover. For the remainder of 2020, we anticipate that our priorities for use of cash will be similar to prior years, with our first priority being continued investment in product development and profitably and growing our business to extend our market leadership. We will continue to evaluate acquisition opportunities that are complementary to our product footprint and technology direction. We will also continue to weigh our share repurchase options against cash for acquisitions and investing in the business. At this time, we do not anticipate any borrowing requirements for the remainder of 2020 for general corporate purposes.
Critical Accounting Policies and Estimates
In the first three months of 2020, there were no significant changes to our
critical accounting policies and estimates from those disclosed in the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our annual report on Form 10-K for the year ended
Forward-Looking Statements
Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to expectations about global macroeconomic trends and industry developments, plans for future business development activities, anticipated costs of revenues, product mix and service revenues, research and development, selling, general and administrative activities, and liquidity and capital needs and resources. When used in this quarterly report, the words "may," "expect," "forecast," "anticipate," "intend," "plan," "believe," "could," "seek," "project," "estimate," and similar expressions are generally intended to identify forward-looking statements. Undue reliance should not be placed on these forward-looking statements, which reflect opinions only as of the date of this quarterly report. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Some of the factors that could cause actual results to differ materially from the results discussed in forward-looking statements include:
• the duration and severity of the coronavirus (COVID-19) pandemic and of
measures taken to combat its spread, and the effects of both on our
employees, customers, partners and the global economy;
• ongoing disruption and transformation in our vertical markets, including
the aggravating effects of the COVID-19 pandemic on the sector;
• the operational and financial effects of our business transition to cloud
subscription-based solutions;
• economic, political and market conditions;
• our ability to attract and retain highly skilled employees;
• competition;
• our dependence on a single line of business;
• our dependence on generating revenue from software licenses and cloud
subscriptions to drive business;
• undetected errors or "bugs" in our software;
• the risk of defects, delays or interruptions in our cloud subscription
services;
• possible compromises of our data protection and IT security measures;
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• risks associated with large system implementations;
• possible liability to customers if our products fail;
• the requirement to maintain high quality professional service capabilities;
• the risks of international operations, including foreign currency exchange
risk;
• the possibility that research and development investments may not yield
sufficient returns;
• the long sales cycle associated with our products;
• the difficulty of predicting operating results;
• the need to continually improve our technology;
• risks associated with managing growth;
• reliance on third party and open source software;
• the need for our products to interoperate with other systems;
• the need to protect our intellectual property, and our exposure to
intellectual property claims of others;
• economic conditions and regulatory changes caused by the United Kingdom's
pending exit from the European Union ;
• the possible effects on international commerce of new or increased tariffs,
or a "trade war";
• other risks described under the heading "Risk Factors" in this Form 10-Q
and in our Annual Report on Form 10-K for the year ended December 31, 2019 ,
as these may be updated from time to time in subsequent quarterly reports.
We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.
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