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 2020, we generated$586.4 million in total revenue, with a revenue mix of: cloud subscriptions 14%; software license 6%; maintenance 25%; services revenue 52%; and hardware 3%. 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$178.1 million ,$189.1 million and$174.1 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, which represents approximately 30%, 31% and 31% of our total revenue for the years endedDecember 31, 2020 , 2019 and 2018, respectively. International revenue includes all revenue derived from sales to customers outsidethe United States . AtDecember 31, 2020 , we employed approximately 3,400 employees worldwide. We have offices inAustralia ,Chile ,China ,France ,Germany ,India ,Italy ,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
Regarding the impact of the novel coronavirus disease ("COVID-19") pandemic, we remain cautious about the global recovery, which we expect to be slow and protracted. In 2020, we experienced solid demand for our cloud-based supply chain and omnichannel commerce solutions and our competitive win rates remain strong. In May, we launched Manhattan Active® Warehouse Management, the next generation of Warehouse Management solutions. We have rearchitected our warehouse management solution from the ground up as a cloud-native, microservices based, versionless application. The reception has been positive and pipeline opportunities continue to build. Our solutions are mission critical, supporting large and complex, global supply chains. While we are experiencing strong demand and expect continued growth for our Cloud solutions, sales cycles could be extended as customers and prospects continue to evaluate our industry leading, modern solutions, includingManhattan Active Warehouse Management. Our Professional Services revenue for the year endedDecember 31, 2020 is approximately 16% lower, and excluding billed travel, approximately 13% lower than the year endedDecember 31, 2019 , as clients delay projects due to COVID-19. We have had no notable cancellations in 2020. For 2021, we expect Services revenue to grow fueled by Cloud revenue growth. We expect Q1 2021 Services revenue to decrease 24 -------------------------------------------------------------------------------- against an all-time record Q1 2020 comparison. While COVID-19 could create some near-term fluctuations, we are forecasting for improving year over year growth for the remaining balance of 2021. We have taken steps to best protect the health and safety of our employees globally. Our daily execution has evolved largely into a virtual model, but we believe we have been successful in maintaining our ability to effectively communicate with and service our customers and customer prospects during the pandemic period. As previously announced, effectiveApril 1, 2020 , we took temporary actions to manage operating expenses and cash flow, including reduction of officer salaries and board of directors' fees, and suspension of our 401k plan company match. We also temporarily suspended our share repurchase program. These actions did not materially impact our ability to support our customers or make key investments in research and development to further extend our competitive positioning. We continue to monitor and aggressively managing operating expenses globally. We also 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 2021, our five strategic goals continue to be:
•Focus on customer success and drive sustainable long-term growth;
•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, in year 3 of our cloud transition, demand for our cloud solutions is the dominant preference of customers. Our perpetual license solutions are rapidly attritting due to market demand for Cloud with 90% of our pipeline representing cloud. Cloud is our fastest growing revenue line and represents 68% of total software revenue in 2020. We believe the reduction in License and maintenance revenue in favor of our Cloud based offerings is positive for our customers andManhattan Associates .
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 2020, approximately 70% 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. 25 -------------------------------------------------------------------------------- InJanuary 2021 , theInternational Monetary Fund (IMF) provided a World Economic Outlook (WEO) update. The WEO update noted, "the global economy is projected to grow 5.5 percent in 2021 and 4.2 percent in 2022. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies." The WEO update projected that advanced economies, which represent our primary revenue markets, would grow at about 4.3 and 3.1 percent in 2021 and 2022, while the emerging and developing economies would grow at about 6.3 percent in 2021 and 5.0 percent in 2022. 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 associated with the pandemic 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
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, cloud subscriptions and software license revenue were 68% and 32%, respectively, of our total cloud subscriptions 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 2020, cloud subscriptions revenue totaled$79.8 million , or 14% of total revenue. TheAmericas , EMEA, and APAC segments recognized$69.5 million ,$8.4 million and$1.9 million in cloud subscriptions revenue, respectively, in 2020. Cloud subscriptions revenue is recognized ratably over the term of the agreement, typically 36 to 60 months. In 2020, license revenue totaled$38.3 million , or 6% of total revenue, with gross margins of 92.4%. TheAmericas , EMEA, and APAC segments totaled$30.5 million ,$4.3 million , and$3.5 million in license revenue, respectively, in 2020. The percentage mix of new to existing customers for the combination of cloud subscriptions and software license sales was approximately 20/80 in 2020. Cloud subscriptions and software license 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,$0.8 million of either pre-tax profit or expense in 2020 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 and omnichannel 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$147.7 million , or 25% of total revenue. TheAmericas , EMEA and APAC segments recognized$116.3 million ,$22.2 million , and$9.2 million , respectively, in maintenance revenue in 2020. 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. 26 -------------------------------------------------------------------------------- Services Revenue: In 2020, our services revenue totaled$303.6 million , or 52% of total revenue. TheAmericas , EMEA, and APAC segments recognized$232.9 million ,$58.4 million , and$12.3 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 Revenue: Our hardware revenue, which we recognize net of related costs as ofJanuary 1, 2018 , totaled$16.9 million in 2020 representing 3% 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 R&D expenses for the years endedDecember 31, 2020 , 2019 and 2018 were$84.3 million ,$87.6 million , and$71.9 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 2020, we generated cash flow from operating activities of$140.9 million and have generated a cumulative total of$425.1 million for the three years endedDecember 31, 2020 . Our cash atDecember 31, 2020 totaled$204.7 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 2020, we repurchased approximately$25.0 million ofManhattan Associates' outstanding common stock under the share repurchase program approved by our Board of Directors. InApril 2020 , the Company suspended its share repurchase program because of COVID-19-related considerations. Accordingly, during the second, third and fourth quarters of 2020, the Company did not 27
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repurchase any shares of
In 2021, our priorities for use of cash will continue to be investments in product development and in our business supporting the transition to Cloud. 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 2021 for general corporate purposes.
Full Year 2020 Financial Summary
? Diluted earnings per share:
? Consolidated revenue:
2019;
? Cloud subscription revenue:
for 2019;
? License revenue:
? Operating income:
? Operating margins: 19.5% for 2020 compared to operating margins of 18.8% for
2019;
? Cash flow from operations:
for 2019;
? Cash and investments:
million atDecember 31, 2019 ; and ? Share repurchases: During the three months endedMarch 31, 2020 , we
repurchased 337,007 shares of
for approximately
our Board of Directors. In
repurchase program because of COVID-19-related considerations. Accordingly,
during the second, third and fourth quarters of 2020, the Company did not
repurchase any shares of
repurchase program. In
Company to repurchase up to an aggregate of
common stock. Results of Operations
In the following table, we present a selection of certain Statement of Income data for 2020, 2019 and 2018. 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 2020 2019 2018 2020 2019 (in thousands) Revenue: Cloud subscriptions$ 79,830 $ 46,831 $ 23,104 70% 103% Software license 38,284 48,855 45,368 -22% 8% Maintenance 147,748 149,230 147,033 -1% 1% Services 303,569 360,516 329,685 -16% 9% Hardware 16,941 12,517 13,967 35% -10% Total revenue 586,372 617,949 559,157 -5% 11% Costs and expenses: Cost of software license 2,894 2,626 5,297 10% -50% Cost of cloud subscriptions, maintenance and services 266,993 282,341 235,584 -5% 20% Research and development 84,276 87,608 71,896 -4% 22% Sales and marketing 47,758 56,860 51,262 -16% 11%
General and administrative 61,444 64,603 52,618
-5% 23%
Depreciation and amortization 8,946 7,987 8,613
12% -7% Total costs and expenses 472,311 502,025 425,270 -6% 18% Income from operations$ 114,061 $ 115,924 $ 133,887 -2% -13% Operating margin 19.5 % 18.8 % 23.9 % 28
-------------------------------------------------------------------------------- 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 2020, 2019, or 2018, 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
2020 2019 2018 2020 2019 Revenue: (in thousands) Cloud subscriptions Americas$ 69,469 $ 40,927 $ 20,611 70% 99% EMEA 8,465 4,762 2,075 78% 129% APAC 1,896 1,142 418 66% 173%
Total cloud subscriptions 79,830 46,831 23,104
70% 103% Software license Americas 30,509 34,544 28,423 -12% 22% EMEA 4,308 11,518 11,406 -63% 1% APAC 3,467 2,793 5,539 24% -50% Total software license 38,284 48,855 45,368 -22% 8% Maintenance Americas 116,309 118,891 117,489 -2% 1% EMEA 22,208 21,322 20,933 4% 2% APAC 9,231 9,017 8,611 2% 5% Total maintenance 147,748 149,230 147,033 -1% 1% Services Americas 232,954 283,008 265,165 -18% 7% EMEA 58,360 60,618 50,328 -4% 20% APAC 12,255 16,890 14,192 -27% 19% Total services 303,569 360,516 329,685 -16% 9% Hardware Americas 16,698 12,464 13,798 34% -10% EMEA 241 53 2 355% 2550% APAC 2 - 167 NA -100% Total hardware 16,941 12,517 13,967 35% -10% Total Revenue Americas 465,939 489,834 445,486 -5% 10% EMEA 93,582 98,273 84,744 -5% 16% APAC 26,851 29,842 28,927 -10% 3% Total revenue$ 586,372 $ 617,949 $ 559,157 -5% 11% Operating income: Americas$ 81,109 $ 78,624 $ 97,529 3% -19% EMEA 24,637 26,934 26,437 -9% 2% APAC 8,315 10,366 9,921 -20% 4% Total operating income$ 114,061 $ 115,924 $ 133,887 -2% -13%
The consolidated results of our operations for the years ended
29
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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 2020 2019 2018 2020 2019 2020 2019 2018 (in thousands) Cloud subscriptions$ 79,830 $ 46,831 $ 23,104 70 % 103 % 14 % 8 % 4 % Software license 38,284 48,855 45,368 -22 % 8 % 6 % 8 % 8 % Maintenance 147,748 149,230 147,033 -1 % 1 % 25 % 24 % 26 % Services 303,569 360,516 329,685 -16 % 9 % 52 % 58 % 59 % Hardware 16,941 12,517 13,967 35 % -10 % 3 % 2 % 3 % Total revenue$ 586,372 $ 617,949 $ 559,157 -5 % 11 % 100 % 100 % 100 %
Cloud Subscriptions Revenue
Year 2020 compared with year 2019
In 2017, we released Manhattan Active™ Solutions accelerating our business transition to cloud subscriptions. As a result, cloud subscriptions revenue increased$33.0 million to$79.8 million in 2020 compared to 2019 as customers continue 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$28.5 million ,$3.7 million and$0.8 million , respectively.
Year 2019 compared with year 2018
Cloud subscriptions revenue increased$23.7 million 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.
Software License Revenue
Year 2020 compared with year 2019
Software license revenue decreased$10.6 million to$38.3 million in 2020 compared to 2019 as customers continue to purchase our SaaS offerings rather than a traditional perpetual license. Our license revenue performance depends on the number and relative value of large deals we close in the period. License revenue for theAmericas and EMEA segments decreased$4.0 million and$7.2 million , respectively, and license revenue for the APAC segment increased$0.6 million , in 2020 over 2019.
The perpetual license sales percentage mix across our product suite in 2020 was approximately 80% warehouse management solutions.
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.
30
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Maintenance Revenue
Year 2020 compared with year 2019
Maintenance revenue decreased$1.5 million in 2020 compared to 2019. Maintenance revenue for theAmericas segments decreased$2.6 million , while the EMEA and APAC segments increased$0.9 million and$0.2 million compared to 2019, respectively.
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.
Services Revenue
Year 2020 compared with year 2019
Services revenue decreased$56.9 million in 2020 compared to 2019. TheAmericas , EMEA and APAC segments decreased$50.0 million ,$2.3 million and$4.6 million , respectively, compared to 2019. The decline in services revenue was primarily due to some customers delaying project implementation and upgrades as a result of the COVID-19 pandemic.
Year 2019 compared with year 2018
Services revenue increased$30.8 million 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.
Hardware Revenue
Hardware revenue, net increased$4.4 million in 2020 compared to 2019. Hardware revenue, net decreased$1.5 million in 2019 compared to 2018. The majority of hardware sales are derived from ourAmericas segment. Sales of hardware are largely dependent upon customer-specific desires, which fluctuate. Cost of Revenue Year Ended December 31, % Change vs. Prior Year 2020 2019 2018 2020 2019 (in thousands) Cost of software license$ 2,894 $ 2,626 $ 5,297 10% -50% Cost of cloud subscriptions, maintenance and services 266,993 282,341 235,584 -5% 20% Total cost of revenue$ 269,887 $ 284,967 $ 240,881 -5% 18%
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 2020, cost of license increased by$0.3 million , compared to 2019. In 2019, cost of software license decreased$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.
Cost of Cloud Subscriptions, Maintenance and Services
Year 2020 compared with year 2019
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$15.3 million decrease in 2020 compared to 2019 was principally due to a$18.7 million decrease in travel expense, a$7.4 million 31 -------------------------------------------------------------------------------- decrease in performance-based compensation expense and a$0.7 million decrease in facilities expense, offset by a$6.1 million increase in compensation and other personnel-related expense, and a$7.0 million increase in computer infrastructure costs related to cloud business transition.
Year 2019 compared with year 2018
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$8.5 million increase in computer infrastructure costs related to cloud business transition. Operating Expenses Year Ended December 31, % Change vs. Prior Year 2020 2019 2018 2020 2019 (in thousands) Research and development$ 84,276 $ 87,608 $ 71,896 -4% 22% Sales and marketing 47,758 56,860 51,262 -16% 11% General and administrative 61,444 64,603 52,618 -5% 23% Depreciation and amortization 8,946 7,987 8,613 12% -7% Operating expenses$ 202,424 $ 217,058 $ 184,389 -7% 18% Research and Development Our principal research and development (R&D) activities during 2020, 2019 and 2018 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 2020, 2019 and 2018, 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 2020 compared with year 2019
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 2020 decreased by$3.3 million compared to 2019. This decrease is principally due to a$2.0 million decrease in performance-based compensation expense, and a$1.1 million decrease in travel related expense.
Year 2019 compared with year 2018
Research and development expenses in 2019 increased by$15.7 million 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.
Sales and Marketing
Year 2020 compared with year 2019
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 by$9.1 million in 2020 compared to 2019, primarily due to a$3.1 million decrease in marketing and campaign programs, a$2.7 million decrease in performance-based compensation expense, and a$2.6 million decrease in travel expenses. 32
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Year 2019 compared with year 2018
Sales and marketing expenses increased$5.6 million 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.
General and Administrative
Year 2020 compared with year 2019
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 administrative expenses. General and administrative expenses decreased$3.2 million in 2020 primarily due to a$1.5 million decrease in performance-based compensation expense, a$0.5 million decrease in compensation and other personnel-related expenses, and a$0.5 million decrease in corporate event-related expenses.
Year 2019 compared with year 2018
General and administrative expenses increased$12.0 million 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.
Depreciation and Amortization
Depreciation and amortization of intangibles and software expense amounted to$8.9 million ,$8.0 million , and$8.6 million in 2020, 2019 and 2018, respectively. Amortization of intangibles was immaterial in 2020, 2019 and 2018. We have recorded goodwill and other acquisition-related intangible assets as part of the purchase accounting associated with various acquisitions.
Operating Income
Operating income in 2020 decreased$1.8 million to$114.1 million , compared to$115.9 million for 2019. Operating margins were 19.5% for 2020 versus 18.8% for 2019. Operating income has decreased due to lower services revenue as we noticed some delays as a result of the COVID-19 pandemic. In 2020, operating income in theAmericas segment increased by$2.5 million , and decreased in the EMEA and APAC segments by$2.3 million and$2.0 million , respectively. 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$18.9 million and remained relatively flat in the EMEA and APAC segments.
Other Income and Income Taxes
Year Ended December 31, % Change vs. Prior Year 2020 2019 2018 2020 2019 Other (loss) income, net$ (285 ) $ 153 $ 2,344 -286% -93% Income tax provision 26,536 30,315 31,541 -12% -4% Other (Loss) Income, net Other (loss) income, net primarily includes interest income, foreign currency gains and losses, and other non-operating expenses. Interest income was$0.1 million ,$0.7 million and$1.1 million for 2020, 2019 and 2018, respectively. The weighted-average interest rate earned on cash and investments was immaterial for 2020, 2019 and 2018. We recorded net foreign currency losses of$0.4 million and$1.0 million in 2020 and 2019, respectively, and a net foreign currency gain of$1.3 million in 2018. The foreign currency gains 33 -------------------------------------------------------------------------------- and losses mainly resulted from gains or losses on intercompany transactions denominated in foreign currencies with subsidiaries due to the fluctuation of theU.S. dollar relative to other foreign currencies, primarily the Euro and the Indian Rupee. Income Tax Provision Our effective income tax rates were 23.3%, 26.1%, and 23.2% in 2020, 2019 and 2018, 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 2020 decreased from 2019 is mainly due to an increase of excess tax benefits on restricted stock vesting and a decrease in expense for tax contingencies. These benefits were partially offset by a net increase in non-deductible equity-based compensation.
The effective income 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 income tax provision for 2020, 2019 and 2018 included excess tax benefits of
Liquidity and Capital Resources
During 2020, 2019 and 2018, we funded our business through cash generated from operations. Our cash and investments as ofDecember 31, 2020 included$167.0 million held in theU.S. and$37.7 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 further 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 on such earnings due to the enactment of the Tax Cuts and Jobs Act inDecember 2017 , but we could be subject to additional local withholding taxes. Cash flow from operating activities totaled$140.9 million ,$146.9 million , and$137.3 million in 2020, 2019 and 2018, 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 2020 decreased$6.0 million compared to 2019, which is mainly due to an increase in employee bonus payments and the timing of cash collections, partially offset by a decrease in income tax payments. 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. Days sales outstanding was 68, 61 and 64 atDecember 31, 2020 , 2019 and 2018, respectively, reflecting solid cash collections. Investing activities used cash of approximately$2.7 million ,$13.8 million , and$9.8 million in 2020, 2019 and 2018, respectively. Our investing activities for 2020, 2019 and 2018 consisted of capital spending to support company growth and short-term investing. For 2020, 2019 and 2018, capital expenditure was$2.7 million ,$15.2 million , and$7.3 million , respectively. Net investment proceeds in 2019 was$1.4 million . Net investment purchases in 2018 was$2.5 million . Financing activities used cash of approximately$43.6 million ,$121.5 million , and$149.3 million in 2020, 2019 and 2018, respectively. The principal use of cash for financing activities in 2020, 2019 and 2018 was to purchase our common stock, including shares withheld for taxes due upon vesting of restricted stock. Repurchases of our common stock for 2020, 2019 and 2018 totaled$43.6 million ,$121.5 million , and$149.3 million , respectively, including shares withheld for taxes of$18.6 million ,$5.6 million and$6.0 million , respectively. We suspended the share repurchase program, effectiveApril 1, 2020 , to position our Company for uncertainty in the near-term as a result of the COVID-19 pandemic. InJanuary 2021 , our Board of Directors authorized the Company 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. 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. In 2021, 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 repurchase options against cash for acquisitions and investing in the business. At this time, we do not anticipate any borrowing requirements in 2021 for general corporate purposes. 34
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New Accounting Pronouncements Adopted in Fiscal Year 2020
Credit Impairment
InJune 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU No. 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. This guidance is effective for annual reporting periods beginning afterDecember 15, 2019 , with early adoption permitted. OnJanuary 1, 2020 , we adopted ASU 2016-13 using the modified retrospective method applied for all financial assets measured at amortized cost. Our analysis involved utilizing a model of internal historical losses data. In estimating the allowance for credit losses, we considered the age of the accounts receivable, our historical write-offs, and the historical creditworthiness of the customer, among other factors. Should any of these factors change, the estimates made by us will also change accordingly, which could affect the level of our future allowances. We also analyzed future expected credit losses given ever present changes to future risks in projected economic conditions and future risks of customer collection. The net impact of the adoption of ASU 2016-13 was immaterial on our consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
Income Taxes
InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and changes in tax laws or rates, as well as clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company beginningJanuary 1, 2021 , with early adoption permitted. It would require us to recognize a cumulative effect adjustment to the opening balance of reinvested earnings, if applicable. We do not expect our adoption of this guidance to have a material impact on our consolidated financial statements.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Our principal commitments as ofDecember 31, 2020 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 ofDecember 31, 2020 , our cloud infrastructure obligations are approximately$68.0 million over the next 5 years. We also enter into non-cancellable subscriptions in the ordinary course of business for internal software to support our operations. Our obligations, as ofDecember 31, 2020 , are approximately$6.9 million over the next 3 years. We expect to fulfill all of these 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 2029. Rent expense for these leases aggregated$7.9 million ,$8.4 million , and$7.1 million during 2020, 2019 and 2018, respectively.
In the following table, we present a summary of our contractual commitments as
of
Total 2021 2022 2023 2024 2025 Thereafter Operating Lease Obligations$39,981 $7,034 $6,437 $6,594 $6,384 $5,488 $8,044 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 35 -------------------------------------------------------------------------------- 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, 2020 .
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, 2020 .
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. 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. 36
-------------------------------------------------------------------------------- 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. 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 37
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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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