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MANH > SEC Filings for MANH > Form 10-Q on 21-Oct-2016All Recent SEC Filings

Show all filings for MANHATTAN ASSOCIATES INC

Form 10-Q for MANHATTAN ASSOCIATES INC


21-Oct-2016

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the condensed consolidated financial statements for the three and nine months ended September 30, 2016 and 2015, including the notes to those statements, included elsewhere in this quarterly report. We also recommend the following discussion be read in conjunction with management's discussion and analysis and consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2015. Statements in the following discussion that are not statements of historical fact are "forward-looking statements." Actual results may differ materially from the results predicted in such forward-looking statements, for a variety of factors. See "Forward-Looking Statements" below.

References in this filing to the "Company," "Manhattan," "Manhattan Associates," "we," "our," and "us" refer to Manhattan Associates, Inc., our predecessors, and our wholly-owned and consolidated subsidiaries.

Business Overview

We develop, sell, deploy, service and maintain software solutions designed to manage supply chains, inventory and omni-channel operations for retailers, wholesalers, manufacturers, logistics providers and other organizations. Our customers include many of the world's premier and most 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 three principal sources of revenue:

licenses of our software;

professional services, including solutions planning and implementation, related consulting, customer training, and customer support services and software enhancements (collectively, "services"); and

hardware sales and other revenue.

In the three and nine months ended September 30, 2016, we generated $152.2 million and $457.0 million in total revenue, respectively, with a revenue mix of: license revenue 14%; services revenue 79%; and hardware and other revenue 7% for the three months ended September 30, 2016, and license revenue 14%; services revenue 78%; and hardware and other revenue 8% for the nine months ended September 30, 2016.

The Company has three geographic reportable segments: North America and Latin America (the "Americas"), Europe, the Middle East and Africa (EMEA), and Asia-Pacific (APAC). Geographic revenue is based on the location of the sale. Our international revenue was approximately $34.9 million and $106.6 million for the three and nine months ended September 30, 2016, respectively, which represents approximately 23% of our total revenue for both the three and nine months ended September 30, 2016, respectively. International revenue includes all revenue derived from sales to customers outside the United States. At September 30, 2016, we employed approximately 3,050 employees worldwide, of which 1,480 employees are based in the Americas, 210 in EMEA, and 1,360 in APAC (including India). We have offices in Australia, China, France, India, Japan, the Netherlands, Singapore, the United Kingdom, and the United States, as well as representatives in Mexico and reseller partnerships in Latin America, Eastern Europe, the Middle East, South Africa, and Asia.

Global Economic Trends and Industry Factors

Global macro-economic trends, technology spending, and supply chain management market growth are important barometers for our business. In the three and nine months ended September 30, 2016, approximately 77% of our total revenue was generated in both periods in the United States, 10% and 11%, respectively, in EMEA, and the remaining balance in APAC, Canada, and Latin America. In addition, Gartner Inc. ("Gartner"), an information technology research and advisory company, estimates that nearly 80% of every supply chain software solutions dollar invested is spent in the United States (56%) and Western Europe (24%); consequently, the health of the U.S. and Western European economies has 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 often is 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, the current sales cycles for large license deals of $1.0 million or greater in our target markets have been extended. The current business climate within the 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.

In October 2016, the International Monetary Fund (IMF) provided a World Economic Outlook (WEO) update maintaining its previous 2016 and 2017 world economic growth forecast at 3.1% and 3.4%, respectively. The WEO update noted that:

Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June U.K. vote in favor of leaving the European Union (Brexit) and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer. Although the market reaction to the Brexit shock was reassuringly orderly, the ultimate impact remains very unclear, as the fate of institutional and trade arrangements between the United Kingdom and the European Union is uncertain.

The WEO update projected that advanced economies, which represent our primary revenue markets, would grow at about 1.6 percent in 2016 and 1.8 percent in 2017, respectively, while the emerging and developing economies would grow at about 4.2 percent in 2016 and 4.6 percent in 2017.

During 2015 and continuing into 2016, the overall trend has been steady for our large license deals, with recognized license revenue of $1.0 million or greater on twenty-one new contracts during 2015 as well as eleven new contracts in the nine months ended September 30, 2016. While we are encouraged by our results, we, along with many of our customers, still remain cautious regarding the pace of global economic recovery. We believe global 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 deals.

Revenue

License revenue. License revenue, a leading indicator of our business, is primarily derived from software license fees customers pay for supply chain solutions. License revenue totaled $21.6 million, or 14% of total revenue, with gross margins of 86.3% for the three months ended September 30, 2016, and $62.9 million, or 14% of total revenue, with gross margin of 86.6% for the nine months ended September 30, 2016. For the three and nine months ended September 30, 2016, the percentage mix of new to existing customers was approximately 30/70 and 35/65, respectively.

License revenue growth is influenced by the strength of general economic and business conditions and the competitive position of our software products. Our license revenue generally has long sales cycles and the timing of the closing of a few large license transactions can have a material impact on our quarterly license revenues, operating profit, operating margins, and earnings per share. For example, $1.2 million of license revenue in the third quarter of 2016 equates to approximately one cent of diluted earnings per share impact.

Our software solutions are focused on core supply chain commerce operations (Warehouse Management, Transportation Management, Labor Management), Inventory optimization and Omni-channel 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 as ARC Advisory Group and Gartner. Our goal is to extend our position as a leading global supply chain solutions provider by growing our license revenues faster than our competitors through investment in innovation. We expect to continue to face increased competition from Enterprise Resource Planning (ERP) and Supply Chain Management applications vendors and business application software vendors that may broaden their solution 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.

Services revenue. Our services business consists of professional services (consulting and customer training) and customer support services and software enhancements (CSSE). Services revenue totaled $119.3 million, or 79% of total revenue, with gross margins of 58.6% for the three months ended September 30, 2016, and $355.4 million, or 78% of total revenue, with gross margins of 57.9% for the nine months ended September 30, 2016. Professional services accounted for approximately 71% and 72% of total services revenue in the three and nine months ended September 30, 2016, respectively. While we believe our services margins are very strong, our consolidated operating margin profile may be lower than those of various other technology companies due to our large services revenue mix as a percentage of total revenue as services margins are inherently lower than license revenue margins.

At September 30, 2016, our professional services organization totaled approximately 2,040 employees, accounting for 67% of our total employees worldwide. 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 solution, 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 license revenue 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.

For CSSE, 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. Our CSSE revenues totaled $34.4 million and $99.0 million for the three and nine months ended September 30, 2016, respectively, representing approximately 29% and 28% of services revenue, respectively, and approximately 23% and 22% of total revenue, respectively. The growth of CSSE revenues is influenced by: (1) new license revenue growth; (2) annual renewal of support contracts; (3) increase in customers; and (4) fluctuations in currency rates. 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%. CSSE revenue is generally paid in advance and recognized ratably over the term of the agreement, typically twelve months. CSSE renewal revenue is not recognized unless payment is received from the customer.

Hardware and other revenue. Our hardware and other revenue totaled $11.3 million, representing 7% of total revenue with gross margins of 18.0% for the three months ended September 30, 2016, and $38.7 million, representing 8% of total revenue with gross margin of 20.3% for the nine months ended September 30, 2016. 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 discounted prices. We generally purchase hardware from our vendors only after receiving an order from a customer. As a result, we generally do not maintain hardware inventory.

Other revenue represents amounts associated with reimbursements from customers for out-of-pocket expenses. The total amount of expense reimbursement recorded to hardware and other revenue was $4.8 million and $13.9 million for the three and nine months ended September 30, 2016, respectively.

Product Development

We continue to invest significantly in research and development (R&D) to provide leading solutions that help global manufacturers, wholesalers, distributors, retailers, 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 were $13.4 million and $41.6 million for the three and nine months ended September 30, 2016, respectively. At September 30, 2016, our R&D organization totaled approximately 680 employees, located in the U.S. and India.

We expect to continue to focus our R&D resources on the development and enhancement of our core supply chain, inventory optimization, omni-channel and point of sale software solutions. We offer what we believe to be the broadest solution portfolio in the supply chain solutions marketplace, to address all aspects of inventory optimization, transportation management, distribution management, planning, and omni-channel 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 on 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 the three and nine months ended September 30, 2016, we generated cash flow from operating activities of $42.0 million and $101.5 million, respectively. Our cash and cash equivalents at September 30, 2016 totaled $110.8 million, with no debt on our balance sheet. We currently have no credit facilities. Our primary uses of cash continue to be funding investment in R&D and operations to drive earnings growth and repurchases of our common stock.

We repurchased 1,864,018 shares of Manhattan Associates' outstanding common stock under our repurchase program during the nine months ended September 30, 2016. In October 2016, our Board of Directors approved raising the Company's remaining share repurchase authority to $50.0 million of Manhattan Associates' outstanding common stock.

For the remainder of 2016, we anticipate that our priorities for the use of cash will be in hiring and developing sales and services resources and continued investment in product development and marketing to extend our market leadership and awareness. We expect to continue to evaluate acquisition opportunities that are complementary to our product footprint and technology direction. We also expect to continue to weigh our share repurchase options against cash for acquisitions and investing in the business. We do not anticipate any borrowing requirements in the remainder of 2016 for general corporate purposes.

Results of Operations

The following table summarizes our consolidated results for the three and nine
months ended September 30, 2016 and 2015.



                                            Three Months Ended September 30,       Nine Months Ended September 30,
                                               2016                2015              2016                2015
                                                             (in thousands, except per share data)

Revenue                                     $  152,213       $        142,304     $  456,965       $        414,936
Costs and expenses                              98,629                 98,624        308,014                293,018
Operating income                                53,584                 43,680        148,951                121,918
Other income, net                                  210                    604          1,384                  1,225
Income before income taxes                      53,794                 44,284        150,335                123,143
Net income                                  $   33,496       $         27,897     $   94,317       $         77,105
Diluted earnings per share                  $     0.47       $           0.38     $     1.30       $           1.04
Diluted weighted average number of shares       71,743                 73,761         72,340                 74,162


The Company has three geographic reportable segments: the Americas, EMEA, and APAC. Geographic revenue information is based on the location of sale. The revenues represented below are from external customers only. The geographical-based expenses include costs of personnel, direct sales, and marketing expenses, and general and administrative costs to support the business. There are certain corporate expenses included in the Americas segment that are not charged 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 the Americas costs are all research and development costs, including the costs associated with the Company's India operations. During the three and nine months ended September 30, 2016 and 2015, we derived the majority of our revenues from sales to customers within our Americas segment. The following table summarizes revenue and operating profit by segment:

                            Three Months Ended September 30,                       Nine Months Ended September 30,
                                                         % Change vs.                                         % Change vs.
                       2016                2015           Prior Year           2016               2015         Prior Year
Revenue:                      (in thousands)                                         (in thousands)
Software license
Americas           $      18,050       $      16,977                 6 %   $      54,343       $   49,754                 9 %
EMEA                       1,843               1,347                37 %           4,815            6,995               -31 %
APAC                       1,740                 806               116 %           3,713            1,453               156 %
Total software
license                   21,633              19,130                13 %          62,871           58,202                 8 %

Services
Americas                 101,344              93,513                 8 %         298,715          264,288                13 %
EMEA                      12,787              14,700               -13 %          42,656           43,404                -2 %
APAC                       5,136               4,336                18 %          13,992           13,404                 4 %
Total services           119,267             112,549                 6 %         355,363          321,096                11 %

Hardware and
Other
Americas                  10,705               9,628                11 %          36,866           33,189                11 %
EMEA                         448                 782               -43 %           1,478            1,910               -23 %
APAC                         160                 215               -26 %             387              539               -28 %
Total hardware
and other                 11,313              10,625                 6 %          38,731           35,638                 9 %

Total Revenue
Americas                 130,099             120,118                 8 %         389,924          347,231                12 %
EMEA                      15,078              16,829               -10 %          48,949           52,309                -6 %
APAC                       7,036               5,357                31 %          18,092           15,396                18 %
Total revenue      $     152,213       $     142,304                 7 %   $     456,965       $  414,936                10 %

Operating
income:
Americas           $      46,213       $      36,407                27 %   $     127,793       $  102,803                24 %
EMEA                       4,822               5,909               -18 %          16,115           15,947                 1 %
APAC                       2,549               1,364                87 %           5,043            3,168                59 %
Total operating
income             $      53,584       $      43,680                23 %   $     148,951       $  121,918                22 %

Summary of the Third Quarter 2016 Condensed Consolidated Financial Results

Diluted earnings per share was $0.47 in the third quarter of 2016, compared to $0.38 in the third quarter of 2015.

Consolidated total revenue was $152.2 million in the third quarter of 2016, compared to $142.3 million in the third quarter of 2015. License revenue was $21.6 million in the third quarter of 2016, compared to $19.1 million in the third quarter of 2015.

Operating income was $53.6 million in the third quarter of 2016, compared to $43.7 million in the third quarter of 2015.

Cash flow from operations was $42.0 million in the third quarter of 2016, compared to $41.3 million in the third quarter of 2015. Days sales outstanding was 60 days at September 30, 2016, compared to 55 days at June 30, 2016.

Cash and investments on-hand was $110.8 million at September 30, 2016, compared to $95.2 million at June 30, 2016.


During the three months ended September 30, 2016, we repurchased 420,412 shares of Manhattan Associates common stock under the share repurchase program authorized by our Board of Directors, for a total investment of $25.0 million. In October 2016, our Board of Directors approved raising our share repurchase authority to an aggregate of $50.0 million of our outstanding common stock.

The consolidated results of our operations for the third quarters of 2016 and 2015 are discussed below.

Revenue



                                           Three Months Ended September 30,
                                                    % Change vs.         % of Total Revenue
                          2016          2015         Prior Year         2016            2015
                            (in thousands)

   Software license     $  21,633     $  19,130                13 %          14 %            13 %
   Services               119,267       112,549                 6 %          79 %            79 %
   Hardware and other      11,313        10,625                 6 %           7 %             8 %
   Total revenue        $ 152,213     $ 142,304                 7 %         100 %           100 %

Our revenue consists of fees generated from the licensing and hosting of software; fees from professional services, customer support services and software enhancements; hardware sales of complementary equipment; and other revenue representing amounts associated with reimbursements from customers for out-of-pocket expenses.

License revenue. License revenue increased $2.5 million, or 13%, in the third quarter of 2016 compared to the same quarter in the prior year. Our license revenue performance depends on the number and relative value of large deals we close in the period. We recognized license revenue of $1.0 million or greater on five new separate contracts in the third quarter of 2016. The license sales percentage mix across our product suite in the third quarter ended September 30, 2016 was approximately 51% warehouse management solutions and 49% non-warehouse management solutions.

Services revenue. Services revenue increased $6.7 million, or 6%, in the third quarter of 2016 compared to the same quarter in the prior year due to a $3.8 million increase in professional services revenue and a $2.9 million increase in customer support and software enhancements. The increase in services revenue was primarily due to a combination of license deals signed and customer-specific initiatives in conjunction with customer upgrade activity. Services revenue for the Americas and APAC segments increased $7.8 million and $0.8 million, respectively, but services revenue for the EMEA segment decreased $1.9 million in the third quarter of 2016 compared to the same quarter of 2015.

Hardware and other. Hardware sales increased by $1.0 million to $6.5 million in the third quarter of 2016 compared to $5.5 million for the third quarter of 2015. The majority of hardware sales are derived from our Americas segment. Sales of hardware are largely dependent upon customer-specific desires, which fluctuate. Other revenue represents reimbursements for professional service travel expenses that are required to be classified as revenue and are included in hardware and other revenue. Reimbursements by customers for out-of-pocket expenses were approximately $4.8 and $5.2 million for the quarters ended September 30, 2016 and 2015, respectively.

Cost of Revenue


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