MANHATTAN ASSOCIATES, INC. All statements, trend analyses, and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margins, and anticipated expense levels, as well as other statements including words such as "may," "expect," "forecast," "anticipate," "intend," "plan," "believe," "could," "seek," "project," "estimate," and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, including those discussed under the caption "Risk Factors" in Item 1A of this Form 10-K, and our actual results of operations may differ materially from those contained in the forward-looking statements. 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 2019, we generated $617.9 million in total revenue, with a revenue mix of:
cloud subscriptions 8%; software license 8%; maintenance 24%; services revenue
58%; and hardware 2%.
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-------------------------------------------------------------------------------- We have three geographic reportable segments: theAmericas , EMEA, and APAC. Geographic revenue is based on the location of the sale. Our international revenue was approximately$189.1 million ,$174.1 million and$168.3 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively, which represents approximately 31%, 31% and 28% of our total revenue for the years endedDecember 31, 2019 , 2018 and 2017, respectively. International revenue includes all revenue derived from sales to customers outsidethe United States . AtDecember 31, 2019 , we employed approximately 3,400 employees worldwide. We have offices inAustralia ,Chile ,China ,France ,Germany ,India ,Japan ,the Netherlands ,Singapore ,Spain , and theUnited Kingdom , as well as representatives inMexico and reseller partnerships inLatin America ,Eastern Europe , theMiddle East ,South Africa , andAsia .
Future Expectations
Our transition to a cloud subscription model, shifting industry dynamics, economic uncertainty in retail, and our adoption of the new revenue recognition standard (ASC Topic 606) onJanuary 1, 2018 , impacted our revenue and earnings growth in 2019, 2018 and 2017. We expect that, going forward, our transition to a cloud subscription model, including enterprise investments in innovation, sales and marketing, IT, facilities and people, as well as retail global macroeconomic conditions as a whole, may continue to impact revenue and earnings growth. The pace at which the market for our products transitions from perpetual, on-premises installation to cloud subscriptions, which result in revenue recognition spread out over the subscription period rather than up front, and the lead times for developing new business, which can be long for our products, can cause uncertainty for our future expectations, particularly with respect to our ability to accurately forecast bookings and revenues from quarter to quarter and over the longer term.
As we move into 2020, our five strategic goals continue to be:
• Focus on customer success and drive sustainable long-term growth;
• Aggressively invest in innovation to expand our products and total
addressable market;
• Develop and grow our cloud operations and cloud subscription revenue;
• Expand our Manhattan Active Omni/Point-of-Sale/Customer Engagement Business;
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 will 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 revenues 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 2019, approximately 69% of our total revenue was generated inthe United States , 16% in EMEA, and the remaining balance in APAC,Canada , andLatin America . In addition, Gartner Inc., an information technology research and advisory company, estimates that nearly 80% of every supply chain software solutions dollar invested is spent inNorth America andWestern Europe ; consequently, the health of theU.S. and the Western European economies have a meaningful impact on our financial results. We sell technology-based solutions with total pricing, including software and services, in many cases exceeding$1.0 million . Our software is often a part of our customers' and prospects' much larger capital commitment associated with facilities expansion and business improvement. We believe that, given the lingering uncertainty in the global macro environment primarily in the retail industry, the current sales cycles for large license sales and cloud subscriptions of$1.0 million or greater in our target markets have been extended. The current business climate withinthe United States and geographic regions in which we operate continues to affect customers' and prospects' decisions regarding timing of strategic capital expenditures. Delays with respect to such decisions can have a material adverse impact on our business, and may further intensify competition in our already highly competitive markets. InJanuary 2020 , theInternational Monetary Fund (IMF) provided a World Economic Outlook (WEO) update. The WEO update noted, "Global growth is projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent for 2021-a downward revision of 0.1 percentage point for 2019 and 2020 and 0.2 for 2021 compared to those in the October World Economic 23 -------------------------------------------------------------------------------- Outlook (WEO). The downward revision primarily reflects negative surprises to economic activity in a few emerging market economies, notablyIndia , which led to a reassessment of growth prospects over the next two years." The WEO update projected that advanced economies, which represent our primary revenue markets, would grow at about 1.6 percent in 2020 and 2021, while the emerging and developing economies would grow at about 4.4 percent in 2020 and 4.6 percent in 2021. 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 software license and cloud subscription sales.
Revenue
Software License and Cloud Subscriptions revenue: Software license and cloud subscriptions revenue, leading indicators of our business performance, are primarily derived from software license and cloud subscription fees that customers pay for supply chain solutions. In 2019, license revenue totaled$48.9 million , or 8% of total revenue, with gross margins of 94.6%. TheAmericas , EMEA, and APAC segments totaled$34.5 million ,$11.5 million , and$2.8 million in license revenue, respectively, in 2019. Prior to 2017, the overall trend was steady for our large license sales. However, in 2017, we began experiencing extended sales cycles and evaluations with greater focus on capital prioritization as retailers restructure and transform their omnichannel/digital commerce businesses. In addition, during 2017, we introduced Manhattan Active Solutions, our cloud-based solutions, and began to see our customer's transition from perpetual software licenses to cloud-based services solutions. In 2019, cloud subscriptions revenue totaled$46.8 million , or 8% of total revenue. TheAmericas , EMEA, and APAC segments recognized$40.9 million ,$4.8 million and$1.1 million in cloud subscriptions revenue, respectively, in 2019. Cloud subscriptions revenue is recognized ratably over the term of the agreement, typically 36 to 60 months. In 2019, the percentage mix of new to existing customers for the combination of software license revenue and cloud subscriptions deals was approximately 30/70. As we transition to be a cloud first company, we expect software license revenue to decline significantly, diminishing its impact as a leading indicator. In 2017, software license and cloud subscriptions revenue represented 88% and 12%, respectively, of our total software license and cloud revenue mix. In 2019, software license and cloud subscriptions revenue represented 51% and 49%, respectively, of our total software license and cloud revenue mix. In the fourth quarter of 2019, cloud revenue surpassed software license revenue, represented 63% of the total software license and cloud 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. Software license and cloud subscriptions revenue growth is 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,$0.9 million of either pre-tax profit or expense in 2019 equates to approximatelyone cent of diluted earnings per share impact. 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 software solutions market as defined by industry analysts such asARC Advisory Group and Gartner. Our goal is to extend our position as a leading global supply chain solutions provider by growing our software license and cloud subscriptions revenues faster than our competitors through investment in innovation. We expect to continue to face increased competition from Enterprise Resource Planning (ERP) andSupply Chain Management applications vendors and business application software vendors that may broaden their solutions offerings by internally developing, or by acquiring or partnering with independent developers of supply chain planning and execution software. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share. Maintenance revenue: Our maintenance revenue totaled$149.2 million , or 24% of total revenue. TheAmericas , EMEA and APAC segments recognized$118.9 million ,$21.3 million , and$9.0 million , respectively, in maintenance revenue in 2019. For maintenance, we offer a comprehensive 24 hours per day, 365 days per year program that provides our customers with software upgrades, when and if available, which include additional or improved functionality and technological advances incorporating emerging supply chain and industry initiatives. The growth of maintenance revenues is influenced by: (1) new software license revenue growth; (2) annual renewal of support contracts; (3) increase in customers through acquisitions; (4) fluctuations in currency rates, and (5) conversion of maintenance contracts to cloud subscription contracts. Substantially all of our customers renew their annual support contracts. Over the last three years, our annual revenue renewal rate of customers subscribing to comprehensive support and enhancements has been greater than 90%. Maintenance revenue is generally paid in advance and recognized ratably over the term of the agreement, typically twelve months. Maintenance renewal revenue is recognized over the renewal period once we have a contract upon payment from the customer. 24 -------------------------------------------------------------------------------- Services revenue: In 2019, our services revenue totaled$360.5 million , or 58% of total revenue. TheAmericas , EMEA, and APAC segments recognized$283.0 million ,$60.6 million , and$16.9 million , respectively. Due to our large services revenue mix as a percentage of total revenue, our consolidated operating margin profile may be lower than those of our competitors, and while we believe our services margins are strong, they do lower our operating margin profile as services margins are inherently lower than the margin for software license revenue and some of our other revenue sources. 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 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: Our hardware revenue, which we recognize net of related costs as ofJanuary 1, 2018 , totaled$12.5 million in 2019 representing 2% of total revenue. In conjunction with the licensing of our software, and as a convenience for our customers, we resell a variety of hardware products developed and manufactured by third parties. These products include computer hardware, radio frequency terminal networks, RFID chip readers, bar code printers and scanners, and other peripherals. We resell all third-party hardware products and related maintenance pursuant to agreements with manufacturers or through distributor-authorized reseller agreements pursuant to which we are entitled to purchase hardware products and services at discount prices. We generally purchase hardware from our vendors only after receiving an order from a customer. As a result, we do not maintain hardware inventory.
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 research and development expenses for the years endedDecember 31, 2019 , 2018 and 2017 were$87.6 million ,$71.9 million , and$57.7 million , respectively. 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.
Cash Flow and Financial Condition
For 2019, we generated cash flow from operating activities of$146.9 million and have generated a cumulative total of$448.3 million for the three years endedDecember 31, 2019 . Our cash atDecember 31, 2019 totaled$110.7 million , with no debt on our balance sheet. We currently have no credit facilities. During the past three years, our primary uses of cash have been for funding investments in R&D, in operations to drive earnings growth, and in repurchases of our common stock.
During 2019, we repurchased approximately
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In 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 weigh our share
repurchase options against cash for acquisitions and investing in the business.
We do not anticipate any borrowing requirements in 2020 for general corporate
purposes.
Full Year 2019 Financial Summary
• Diluted earnings per share:
• Consolidated revenue:
2018;
• Cloud subscription revenue:
for 2018;
• License revenue:
• Operating income:
• Operating margins: 18.8% for 2019 compared to operating margins of 23.9% for
2018;
• Cash flow from operations:
for 2018;
• Cash on hand:
at
• Share repurchases: In 2019, we reduced common shares outstanding by 2%,
primarily through the repurchase of approximately 1.6 million shares of our
common stock, under the share repurchase program authorized by our Board of
Directors. In
authority to repurchase up to an aggregate of
common stock.
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Results of Operations
In the following table, we present a selection of certain Statement of Income data for 2019, 2018, and 2017. With our transition to and growth in cloud subscriptions, which began in 2017, we believe separate disclosures of our software license, cloud subscriptions, maintenance and services revenue is meaningful to investors and provides an important measure of our business performance.
Year Ended December 31,
% Change vs. Prior Year
2019 2018 2017 2019 2018
(in thousands)
Revenue:
Cloud subscriptions $ 46,831 $ 23,104 $ 9,596 103% 141%
Software license 48,855 45,368 72,313 8% -37%
Maintenance 149,230 147,033 142,998 1% 3%
Services 360,516 329,685 326,502 9% 1%
Hardware 12,517 13,967 43,190 -10% -68%
Total revenue 617,949 559,157 594,599 11% -6%
Costs and expenses:
Cost of software license 2,626 5,297 5,483 -50% -3%
Cost of cloud subscriptions,
maintenance and services 282,341 235,584 208,045 20% 13%
Cost of hardware - - 32,205 NA -100%
Research and development 87,608 71,896 57,704 22% 25%
Sales and marketing 56,860 51,262 47,482 11% 8%
General and administrative 64,603 52,618 46,054
23% 14%
Depreciation and amortization 7,987 8,613 9,060
-7% -5%
Restructuring charges - - 2,921 NA -100%
Total costs and expenses 502,025 425,270 408,954 18% 4%
Income from operations $ 115,924 $ 133,887 $ 185,645 -13% -28%
Operating margin 18.8% 23.9% 31.2%
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-------------------------------------------------------------------------------- We have three geographic reportable segments: theAmericas , EMEA, and APAC. Geographic revenue information is based on the location of sale. The revenues represented below are from external customers only. The geography-based expenses include costs of personnel, direct sales, marketing expenses, and general and administrative costs to support the business. There are certain corporate expenses included in theAmericas segment that we do not charge to the other segments including research and development, certain marketing and general and administrative costs that support the global organization, and the amortization of acquired developed technology. Included in theAmericas costs are all research and development costs, including the costs associated with our operations inIndia . During 2019, 2018, or 2017, we derived the majority of our revenues from sales to customers within ourAmericas segment. In the following table, we present a summary of revenue and operating profit by segment: Year EndedDecember 31 ,
% Change vs. Prior Year
2019 2018 2017 2019 2018
Revenue: (in thousands)
Cloud subscriptions
Americas $ 40,927 $ 20,611 $ 9,274 99% 122%
EMEA 4,762 2,075 322 129% 544%
APAC 1,142 418 - 173% NATotal cloud subscriptions 46,831 23,104 9,596
103% 141% Software license Americas 34,544 28,423 44,145 22% -36% EMEA 11,518 11,406 22,875 1% -50% APAC 2,793 5,539 5,293 -50% 5% Total software license 48,855 45,368 72,313 8% -37% Maintenance Americas 118,891 117,489 116,426 1% 1% EMEA 21,322 20,933 18,710 2% 12% APAC 9,017 8,611 7,862 5% 10% Total maintenance 149,230 147,033 142,998 1% 3% Services Americas 283,008 265,165 264,186 7% 0% EMEA 60,618 50,328 43,431 20% 16% APAC 16,890 14,192 18,885 19% -25% Total services 360,516 329,685 326,502 9% 1% Hardware Americas 12,464 13,798 43,118 -10% -68% EMEA 53 2 11 2550% -82% APAC - 167 61 -100% 174% Total hardware 12,517 13,967 43,190 -10% -68% Total Revenue Americas 489,834 445,486 477,149 10% -7% EMEA 98,273 84,744 85,349 16% -1% APAC 29,842 28,927 32,101 3% -10% Total revenue$ 617,949 $ 559,157 $ 594,599 11% -6% Operating income: Americas$ 78,624 $ 97,529 $ 136,693 -19% -29% EMEA 26,934 26,437 35,829 2% -26% APAC 10,366 9,921 13,123 4% -24% Total operating income$ 115,924 $ 133,887 $ 185,645 -13% -28%
The consolidated results of our operations for the years ended
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Revenue
Our revenue consists of fees generated from cloud subscriptions, software licensing, maintenance, professional services, and hardware sales.
Year Ended December 31,
% Change vs. Prior Year % of Total Revenue
2019 2018 2017 2019 2018 2019 2018 2017
(in thousands)
Cloud subscriptions $ 46,831 $ 23,104 $ 9,596 103 % 141 % 8 % 4 % 2 %
Software license 48,855 45,368 72,313 8 % -37 % 8 % 8 % 12 %
Maintenance 149,230 147,033 142,998 1 % 3 % 24 % 26 % 24 %
Services 360,516 329,685 326,502 9 % 1 % 58 % 59 % 55 %
Hardware 12,517 13,967 43,190 -10 % -68 % 2 % 3 % 7 %
Total revenue $ 617,949 $ 559,157 $ 594,599 11 % -6 % 100 % 100 % 100 %
Cloud Subscriptions Revenue
Year 2019 compared with year 2018
In 2017, we released Manhattan Active™ Solutions accelerating our business transition to cloud subscriptions. As a result, cloud subscriptions revenue increased$23.7 million , or 103%, to$46.8 million in 2019 compared to 2018 as customers began to purchase our SaaS offerings rather than a traditional perpetual license. Our customers increasingly prefer cloud-based solutions, including existing customers that are migrating from on-premise to cloud-based offerings. Cloud subscriptions revenue for theAmericas , EMEA and APAC segments increased$20.3 million ,$2.7 million and$0.7 million , respectively.
Year 2018 compared with year 2017
Cloud subscriptions revenue increased$13.5 million to$23.1 million in 2018 compared to 2017 as customers began to purchase our SaaS offerings rather than a traditional perpetual license. Cloud subscriptions revenue for theAmericas , EMEA and APAC segments increased$11.3 million ,$1.8 million and$0.4 million , respectively. The EMEA segment began recognizing cloud subscription revenue for the first time in 2017 while the APAC segment began in 2018.
Software License Revenue
Year 2019 compared with year 2018
Software license revenue increased$3.5 million to$48.9 million in 2019 compared to 2018. License revenue for theAmericas and EMEA segments increased$6.1 million and$0.1 million , respectively, and license revenue for the APAC segment decreased$2.7 million , in 2019 over 2018.
The perpetual license sales percentage mix across our product suite in 2019 was approximately 80% warehouse management solutions.
Year 2018 compared with year 2017
Software license revenue decreased$26.9 million to$45.4 million in 2018 compared to 2017. The decrease was influenced by (1) extended sales cycles and evaluations for some of our contracts, and (2) the business transition to cloud subscriptions, which resulted in traditional perpetual license deals closing as cloud deals based on customer demand. License revenue for theAmericas and EMEA segments decreased$15.7 million and$11.5 million , respectively, in 2018 over 2017, while license revenue for the APAC segment increased$0.3 million .
The perpetual license sales percentage mix across our product suite in 2018 was approximately 80% warehouse management solutions.
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Maintenance Revenue
Year 2019 compared with year 2018
Maintenance revenue increased$2.2 million in 2019 compared to 2018 primarily due to (1) an increase in the first-year maintenance revenue; (2) our annual renewal rate of customers subscribing to maintenance, which was greater than 90%; and (3) increases in the maintenance renewal prices. Maintenance revenue for theAmericas , EMEA and APAC segments increased$1.4 million ,$0.4 million and$0.4 million , respectively, compared to 2018.
Year 2018 compared with year 2017
Maintenance revenue increased$4.0 million in 2018 compared to 2017 primarily due to (1) an increase in the first-year maintenance revenue; (2) our annual renewal rate of customers subscribing to maintenance, which was greater than 90%; and (3) increases in the maintenance renewal prices. Maintenance revenue for theAmericas , EMEA and APAC segments increased$1.1 million ,$2.2 million and$0.7 million , respectively, compared to 2017.
Services Revenue
Year 2019 compared with year 2018
Services revenue increased$30.8 million , or 9%, in 2019 compared to 2018. TheAmericas , EMEA and APAC segments increased$17.8 million ,$10.3 million and$2.7 million , respectively, compared to 2018.
Year 2018 compared with year 2017
Services revenue increased$3.2 million in 2018 compared to 2017 primarily due to improving demand in theAmericas and solid growth in EMEA. Services revenue for theAmericas and EMEA segment increased$1.0 million and$6.9 million , respectively, and services revenue for the APAC segment decreased$4.7 million , compared to 2017. Hardware Hardware sales, net decreased$1.5 million , or -10% in 2019 compared to 2018. We adopted the new ASC 606 standard as ofJanuary 1, 2018 and elected to use the modified retrospective method. Historical hardware sales prior to the adoption of ASC 606 were recorded on a gross basis, as we were the principal in the transaction in accordance with the previous standard, ASC 605-45. Under the new standard, we are an agent in the transaction as we do not physically control the hardware which we sell. Accordingly, startingJanuary 1, 2018 , we recognize our hardware revenue net of related cost which reduces both hardware revenue and cost of sales as compared to our accounting prior to 2018. For comparison purposes only, had we implemented ASC 606 using the full retrospective method, we would have also presented hardware revenue net of cost for prior periods as shown below. Year Ended December 31, % Change vs. Prior Year 2019 2018 2017 2019 2018 Hardware Revenue (Pre ASC 606 Adoption)$ 44,972 $ 49,914 43,190 -10 % 16 % Cost of hardware (32,455 ) (35,947 ) (32,205 ) -10 % 12 % Hardware Revenue, net (Post ASC 606 Adoption)$ 12,517 $ 13,967 $ 10,985 -10 % 27 %
The majority of hardware sales are derived from our
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Cost of Revenue
Year Ended December 31,
% Change vs. Prior Year
2019 2018 2017 2019 2018
(in thousands)
Cost of software license $ 2,626 $ 5,297 $ 5,483 -50% -3%
Cost of cloud subscriptions,
maintenance and services 282,341 235,584 208,045 20% 13%
Cost of hardware - - 32,205 N/A -100%
Total cost of revenue $ 284,967 $ 240,881 $ 245,733 18% -2%
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. In 2019, cost of license decreased by$2.7 million , compared to 2018 principally due to a$1.7 million decrease in third-party software license fees and a$1.0 million decrease in royalty costs. In 2018, cost of software license decreased$0.2 million compared to 2017 principally due to the decrease in license revenue which resulted in lower royalty costs. Royalty costs decreased$2.1 million and were partially offset by a$1.7 million increase in third-party software license fees.
Cost of Cloud Subscriptions, Maintenance and Services
Year 2019 compared with year 2018
Cost of cloud subscriptions, maintenance and services consists 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$46.8 million increase in 2019 compared to 2018 was principally due to a$25.8 million increase in compensation and other personnel-related expense resulting from increased headcount in cloud operations and professional services, a$9.4 million increase in performance-based compensation expense, and a$8.5 million increase in computer infrastructure costs related to cloud business transition.
Year 2018 compared with year 2017
The$27.5 million increase in 2018 compared to 2017 was principally due to an$11.6 million increase in performance-based compensation expense, an$8.8 million increase in computer infrastructure cost related to cloud business transition, and a$7.0 million increase in other compensation and other personnel-related expenses resulting from increased headcount in professional services. Cost of Hardware As discussed above, we adopted the new revenue recognition standard as ofJanuary 1, 2018 . As a result, we now recognize our hardware revenue net of related costs which reduces both hardware revenue and cost of sales as compared to our accounting prior to 2018. Had we presented the results for 2017 under ASC 606, cost of hardware would have been presented as zero as we would have recognized our hardware revenue net of related costs. In 2019, cost of hardware decreased$3.5 million compared to 2018 on decreased hardware sales, while in 2018, cost of hardware increased$3.7 million compared with 2017 on increased hardware sales. 31
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Operating Expenses
Year Ended December 31,
% Change vs. Prior Year
2019 2018 2017 2019 2018
(in thousands)
Research and development $ 87,608 $ 71,896 $ 57,704 22% 25%
Sales and marketing 56,860 51,262 47,482 11% 8%
General and administrative 64,603 52,618 46,054 23% 14%
Depreciation and amortization 7,987 8,613 9,060 -7% -5%
Restructuring charge - - 2,921 NA -100%
Operating expenses $ 217,058 $ 184,389 $ 163,221 18% 13%
Research and Development
Our principal research and development (R&D) activities during 2019, 2018 and
2017 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 2019, 2018 and 2017, we did not capitalize any R&D costs because the costs
incurred following the attainment of technological feasibility for the related
software product through the date of general release were insignificant.
Year 2019 compared with year 2018
R&D expenses primarily consist of salaries and other personnel-related costs for personnel involved in our research and development activities. Research and development expenses in 2019 increased by$15.7 million , or 22%, compared to 2018. This increase is primarily due to a$10.6 million increase in compensation and other personnel-related expenses,$3.0 million increase in performance-based compensation expense, and$1.7 million increase in computer infrastructure costs, resulting from increased headcount to support R&D activities.
Year 2018 compared with year 2017
Research and development expenses in 2018 increased by
Sales and Marketing
Year 2019 compared with year 2018
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 increased by$5.6 million , or 11%, in 2019 compared to 2018, primarily due to a$4.9 million increase in performance-based compensation expense and a$2.5 million increase in compensation and other personnel-related expenses, offset by a$1.9 million decrease in marketing related expenses.
Year 2018 compared with year 2017
Sales and marketing expenses increased$3.8 million in 2018 compared to 2017, due primarily to an increase of$2.9 million in marketing and campaign programs, a$1.1 million increase in performance-based compensation and a$0.7 million increase in compensation and other personnel-related expenses, partially offset by a$2.0 million decrease in commissions expense as we must defer a portion of our sales commission expense and amortize it over time as the corresponding services are transferred to the customer under ASC 606.
General and Administrative
Year 2019 compared with year 2018
General and administrative 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
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administrative expenses. General and administrative expenses increased $12.0
million , or 23%, in 2019 primarily attributable to a $8.9 million increase in
compensation and other personnel-related expenses resulting from increased
headcount, a $1.9 million increase in performance-based compensation expense,
and a $1.1 million increase in computer infrastructure costs.
Year 2018 compared with year 2017
General and administrative expenses increased
Depreciation and Amortization
Depreciation and amortization of intangibles and software expense amounted to$8.0 million ,$8.6 million , and$9.1 million in 2019, 2018 and 2017, respectively. Amortization of intangibles was immaterial in 2019, 2018 and 2017. We have recorded goodwill and other acquisition-related intangible assets as part of the purchase accounting associated with various acquisitions.
Restructuring Charge
InMay 2017 , we eliminated about 100 positions due primarily toU.S. retail sector headwinds, aligning services capacity with demand. We recorded a restructuring charge of approximately$2.9 million pretax ($1.8 million after-tax or$0.03 per fully diluted share). The charge primarily consisted of employee severance, employee transition costs and outplacement services. The charge is classified in "Restructuring charge" in our Consolidated Statements of Income. Operating Income Operating income in 2019 decreased$18.0 million to$115.9 million , compared to$133.9 million for 2018. Operating margins were 18.8% for 2019 versus 23.9% for 2018. Operating income and margin decreased primarily due to our commitment to strategically invest in a business transition to a cloud first company focused on delivering long-term sustainable growth and earnings leverage. As a result, we are investing significantly in R&D to deliver new innovation, cloud operations headcount, infrastructure and technology to support our ability to scale our cloud business to achieve our growth objectives. In addition, our innovation releases have fueled strong demand for our global consulting services and we are actively hiring to fulfill customer demand, which pressures operating income and margins until new resources ramp to full utilization. Finally, our performance-based compensation expense has increased over the prior year based on strong execution against target objectives. In 2019, operating income in theAmericas segment decreased by$18.9 million and remained relatively flat in the EMEA and APAC segments. Operating income in 2018 decreased$51.7 million to$133.9 million , compared to$185.6 million for 2017. Operating margins were 23.9% for 2018 versus 31.2% for 2017. Operating income and margin decreased primarily as a result of our investment in cloud transition combined with lower license revenue. The operating income decrease in theAmericas , EMEA and APAC segments was$39.1 million ,$9.4 million and$3.2 million , respectively.
Other Income and Income Taxes
Year Ended December 31,
% Change vs. Prior Year
2019 2018 2017 2019 2018
Other income, net $ 153 $ 2,344 $ (812 ) -93% 389%
Income tax provision 30,315 31,541 68,352 -4% -54%
Other Income, net
Other income, net primarily includes interest income, foreign currency gains and
losses, and other non-operating expenses. Interest income was $0.7 million , $1.1
million and $1.2 million for 2019, 2018 and 2017, respectively. The
weighted-average interest rate earned on cash and investments was approximately
1% for the years ended 2019, 2018 and 2017, respectively. We recorded net
foreign currency losses of $1.0 million and $1.8 million in 2019 and 2017,
respectively, and a net foreign currency gain of $1.3 million in 2018. The
foreign currency gains and losses mainly resulted from gains or losses on
intercompany transactions denominated in foreign currencies with subsidiaries
due to the fluctuation of the U.S. dollar relative to other foreign currencies,
primarily the British Pound sterling and the Indian Rupee.
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Income Tax Provision
Our effective income tax rates were 26.1%, 23.2%, and 37.0% in 2019, 2018 and 2017, respectively. Our effective income tax rate takes into account the source of taxable income, domestically by state and internationally by country, and available income tax credits.
The effective tax rate in 2019 increased from 2018 mainly due to an increase in tax contingencies and a decrease in excess tax benefits on restricted stock vesting.
The effective income tax rate in 2018 decreased from 2017 primarily due to the enactment of the Tax Cuts and Jobs Act inDecember 2017 that reduced theU.S. federal corporate income tax rate to 21% from 35%. InDecember 2017 , we recorded a provisional estimate of$3.3 million for the one-time deemed repatriation transition tax on unrepatriated foreign earnings. The provisional amount was based on information available at that time, including estimated tax earnings and profits from foreign investments. In the fourth quarter of 2018, we finalized our transition tax calculation and recorded additional tax expense of$0.3 million . InDecember 2017 , we also recorded a provisional write-down to deferred tax assets of$0.7 million related to changes in Section 162(m), Internal Revenue Code of 1986, regarding deductions for excessive employee compensation. In 2018, we finalized our calculation under Section 162(m) and recorded a tax benefit of$0.5 million . We also recorded a one-time tax benefit inDecember 2017 of$1.2 million from the remeasurement of deferred tax assets and liabilities from 35% to 21%. As ofDecember 31, 2018 , we completed the accounting for all of the impacts of the Act.
The income tax provision for 2019, 2018, and 2017 included excess tax benefits
of
Liquidity and Capital Resources
During 2019, 2018 and 2017, we funded our business through cash generated from operations. Our cash and investments as ofDecember 31, 2019 included$70.7 million held in theU.S. and$40.0 million held by our foreign subsidiaries. We believe that our cash balances in theU.S. are sufficient to fund ourU.S. operations, and we do not intend to repatriate foreign funds to theU.S. In the future, if we elect to repatriate the unremitted earnings of our foreign subsidiaries, we would no longer be subject to additionalU.S. income taxes due to the enactment of the Tax Cut and Jobs Act inDecember 2017 , but could be subject to additional local withholding taxes. Cash flow from operating activities totaled$146.9 million ,$137.3 million , and$164.1 million in 2019, 2018 and 2017, respectively. Typical factors affecting our cash provided by operating activities include our level of revenue and earnings for the period, the timing and amount of employee bonus and income tax payments, and the timing of cash collections from our customers which is our primary source of operating cash flow. Cash flow from operating activities for 2019 increased$9.6 million compared to 2018 primarily attributable to the timing of cash collections and income tax payments. Cash flow from operating activities for 2018 decreased$26.8 million compared to 2017 primarily attributable to our transition to cloud subscriptions. Days sales outstanding was 61, 64 and 59 atDecember 31, 2019 , 2018 and 2017, respectively, reflecting solid cash collections. Investing activities used cash of approximately$13.8 million ,$9.8 million , and$5.8 million in 2019, 2018 and 2017, respectively. Our investing activities for 2019, 2018 and 2017 consisted of capital spending to support company growth and short-term investing. For 2019, 2018 and 2017, capital expenditure was$15.2 million ,$7.3 million , and$6.2 million , respectively. Net investment proceeds in 2019 and 2017 was$1.4 million and$0.4 million , respectively. Net investment purchases in 2018 was$2.5 million . Financing activities used cash of approximately$121.5 million ,$149.3 million , and$131.7 million in 2019, 2018 and 2017, respectively. The principal use of cash for financing activities in 2019, 2018 and 2017 was to purchase our common stock, including shares withheld for taxes due upon vesting of restricted stock. Repurchases of our common stock for 2019, 2018 and 2017 totaled$121.5 million ,$149.3 million , and$131.7 million , respectively, including shares withheld for taxes of$5.6 million ,$6.0 million and$6.8 million , respectively. InJanuary 2020 , our Board of Directors authorized us to repurchase up to an aggregate of$50 million of the Company's common stock. 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. In 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 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 34
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repurchase options against cash for acquisitions and investing in the business. At this time, we do not anticipate any borrowing requirements in 2020 for general corporate purposes.
New Accounting Pronouncements Adopted in Fiscal Year 2019
Leases
InFebruary 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases, which establishes new Accounting Standard Codification (ASC) Topic 842 (ASC 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee is required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with previous GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depends on its classification as a finance or operating lease. However, unlike previous GAAP which required only capital leases to be recognized on the balance sheet, the new standard requires both types of leases to be recognized on the balance sheet. ASC 842 also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. ASC 842 was previously required to be adopted using the modified retrospective approach. However, inJuly 2018 , the FASB issued ASU 2018-11, which allowed for retrospective application with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this option, entities do not need to apply ASC 842 (along with its disclosure requirements) to the comparative prior periods presented. We adopted ASC 842 in the first quarter of 2019. Accordingly, most of our operating leases (primarily for office space) are recognized as operating lease liabilities and right-of-use assets on our balance sheet. We elected to adopt certain of the optional practical expedients, including the package of practical expedients, which, among other things, gives us the option to not reassess: (1) whether expired or existing contracts are or contain leases; (2) the lease classification for expired or existing leases; and (3) initial direct costs for existing leases. We elected the optional transition method that allows for a cumulative-effect adjustment as of the adoption date coupled with the option to not restate prior periods. We also elected the practical expedient to not separate lease and non-lease components, which allows us to account for lease and non-lease components as a single lease component. We did not elect the hindsight practical expedient in our determination of the lease term for our existing leases. Adoption of the new standard resulted in the recording of operating lease assets and operating lease liabilities of approximately$28.5 million and$31.0 million as ofJanuary 1, 2019 , respectively. The adoption had no impact on retained earnings, the Consolidated Statements of Income, or the Consolidated Statements of Cash Flows.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Our principal commitments as ofDecember 31, 2019 consist of obligations under operating leases. We expect to fulfill all of the following commitments from our working capital. We have no off-balance sheet arrangements within the meaning of the rules of theSecurities and Exchange Commission .
Lease Commitments
We lease our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2025. Rent expense for these leases aggregated$8.4 million ,$7.1 million , and$7.1 million during 2019, 2018 and 2017, respectively.
In the following table, we present a summary of our contractual commitments as
of
Total 2020 2021 2022 2023 2024 Thereafter
Operating
Lease
Obligations $46,696 $7,070 $6,780 $6,390 $6,560 $6,359 $13,537
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Indemnities
Our customer contracts generally contain infringement indemnity provisions. Under those provisions, we generally agree, subject to certain exceptions, to indemnify, defend, and hold harmless the customer in connection with third party claims against the customer alleging that the customer's use of our software products in compliance with their license infringe the third party's patent, copyright, or other intellectual property rights. Conditions to our obligations generally include that we are provided the right to control the defense of the claims and, in general, to control settlement negotiations. Those provisions generally provide also that, if the customer is prevented from using our software because of a third party infringement claim, our sole obligation (in addition to the indemnification, defense, and hold harmless obligation referred to above) is to, at our expense, (i) procure for the customer the right to continue to use the software, (ii) to replace or modify the product so that its use by the customer does not infringe, or, if either of the foregoing are not reasonably feasible, to terminate the customer contract and provide a refund of the unamortized portion of the customer's license fee (based on a five year amortization period). Our customer contracts sometimes also require us to indemnify, defend, and hold harmless the customer in connection with death, personal injury, or property damage claims made by third parties with respect to actions of our personnel or contractors. The indemnity obligations contained in our customer contracts generally have no specified expiration date and no specified monetary limitation on liability. We have not previously incurred costs to settle claims or pay awards under these indemnification obligations. We account for these indemnity obligations in accordance with the FASB guidance on accounting for contingencies, and record a liability for these obligations when a loss is probable and reasonably estimable. We have not recorded any liabilities for these contracts as ofDecember 31, 2019 .
Warranties
In general, in our customer software license contracts, we warrant to our customers that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products to the customer for six months after first use of the licensed products, but no more than 24 months after execution of the license agreement. We also generally warrant in our cloud subscription agreements that we will perform the Cloud services in all material respects as defined in the agreement during the service period. Additionally, we warrant to our customers that our services will be performed consistent with generally accepted industry standards or specific service levels through completion of the agreed upon services. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claims history. However, we have not incurred significant recurring expense under our product or service warranties. As a result, we believe the estimated fair value of these agreements is nominal. Accordingly, we have no liabilities recorded for these agreements as ofDecember 31, 2019 .
Application of Critical Accounting Policies and Estimates
TheSEC defines "critical accounting policies" as those that require application of management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our Consolidated Financial Statements are prepared in accordance withU.S. GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based on information available to us at the time that these estimates, judgments, and assumptions are made. To the extent there are material differences between those estimates, judgments, or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions are: Revenue Recognition and Accounting for Income Taxes.
Revenue Recognition
We recognize revenue when we transfer control of the promised products or
services to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those products or services. We derive
our revenue from software licenses, cloud subscriptions, customer support
services and software enhancements ("maintenance"), implementation and training
services, and sales of hardware. We exclude sales and usage-based taxes from
revenue.
Nature of Products and Services
Our perpetual software licenses provide the customer with a right to use the
software as it exists at the time of purchase. We recognize revenue for distinct
software licenses once the license period has begun and we have made the
software available to the customer.
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Cloud subscriptions includes software as a service and arrangements which
provide customers with the right to use our software within a cloud-based
environment that we provide and manage where the customer does not have the
right to take possession of the software without significant penalty. SaaS and
hosting revenues are recognized ratably over the contract period. For contracts
that include a perpetual license and hosting services, we generally consider the
arrangement as an overall service, recognized over the initial hosting term. The
software license fee typically due at the outset of the arrangement is not
payable again if the customer renews the hosting services, so that the
customer's option to renew the hosting services is a material right, the revenue
from which, if the option is exercised, we will recognize over the applicable
renewal period.
Our perpetual software licenses are typically sold with maintenance under which
we provide a comprehensive 24 hours per day, 365 days per year program that
provides customers with software upgrades, when and if available, which include
additional or improved functionality and technological advances incorporating
emerging supply chain and industry initiatives. Revenue related to maintenance
is generally paid in advance and recognized ratably over the term of the
agreement, typically twelve months.
Our services revenue consists of fees generated from implementation, training
and application managed services, including reimbursements of out-of-pocket
expenses in connection with our implementation services. Implementation services
include system planning, design, configuration, testing, and other software
implementation support, and are typically optional and distinct from our
software. Following implementation, customers may purchase application managed
services to support and maintain our software. Fees for our services are
separately priced and are generally billed on an hourly basis, and revenue is
recognized over time as the services are performed. In certain situations, we
render professional services under agreements based upon a fixed fee for
portions of or all of the engagement. Revenue related to fixed-fee-based
services contracts is recognized over time based on the proportion performed.
As part of a complete solution, our customers periodically purchase hardware
products developed and manufactured by third parties from us for use with the
software licenses purchased from us. These products include computer hardware,
radio frequency terminal networks, RFID chip readers, bar code printers and
scanners, and other peripherals. As we do not physically control the hardware
which we sell, we are acting as an agent in the transaction and recognize our
hardware revenue net of the related costs. We recognize hardware revenue when
control is transferred to the customer upon shipment.
Significant Judgements
Our contracts with customers typically contain promises to transfer multiple
products and services to a customer. Judgement is required to determine whether
each product and service is considered to be a distinct performance obligation
that should be accounted for separately under the contract. We allocate the
transaction price to the distinct performance obligations based on relative
standalone selling price ("SSP"). We estimate SSP based on the prices charged to
customers, or by using information such as market conditions and other
observable inputs. However, the selling price of our software licenses is highly
variable. Thus, we estimate SSP for software licenses using the residual
approach, determined based on total transaction price less the SSP of other
goods and services promised in the contract.
Contract Balances
Timing of invoicing to customers may differ from timing of revenue recognition. Payment terms for our software licenses vary. We have an established history of collecting under the terms of our software license contracts without providing refunds or concessions to our customers. Cloud subscriptions and maintenance are typically billed annually in advance. Services are typically billed monthly as performed. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with predictable ways to purchase our software and services, not to provide or receive financing. Additionally, we are applying the practical expedient to exclude from consideration any contracts with payment terms of one year or less as we rarely offer terms extending beyond one year.
Deferred revenue mainly represents amounts collected prior to having completed performance of maintenance, cloud subscriptions and professional services.
Accounting for Income Taxes
We provide for the effect of income taxes on our financial position and results
of operations in accordance with the Income Taxes Topic of the ASC. Under this
accounting pronouncement, income tax expense is recognized for the amount of
income taxes payable or refundable for the current year and for the change in
net deferred tax assets or liabilities resulting from events that are recorded
for financial reporting purposes in a different reporting period than recorded
in the tax return. Management must make significant assumptions, judgments, and
estimates to determine our current provision for income taxes and also our
deferred tax assets and liabilities and any valuation allowance to be recorded
against our net deferred tax asset.
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Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, allowable deductions, projected tax credits, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We do not recognize a tax benefit unless we conclude that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than 50 percent likely to be realized. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our statement of financial position and our statements of income. Our assumptions, judgments, and estimates relative to the value of our net deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates of recoverable net deferred taxes inaccurate, thus materially impacting our financial position and results of operations.
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