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MANH > SEC Filings for MANH > Form 10-K on 3-Feb-2017All Recent SEC Filings

Show all filings for MANHATTAN ASSOCIATES INC

Form 10-K for MANHATTAN ASSOCIATES INC


3-Feb-2017

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 "anticipate," "believe," "plan," "estimate," "expect," and "intend" 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 omni-channel 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 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 2016, we generated $604.6 million in total revenue, with a revenue mix of:
license revenue 14%; services revenue 77%; and hardware and other revenue 9%.

The Company has three geographic reportable segments: the Americas, EMEA, and APAC. Geographic revenue is based on the location of the sale. Our international revenue was approximately $144.8 million, $131.3 million and $134.6 million for the years ended December 31, 2016, 2015 and 2014, respectively, which represents approximately 24%, 24% and 27% of our total revenue for the years ended December 31, 2016, 2015 and 2014, respectively. International revenue includes all revenue derived from sales to customers outside the United States. At December 31, 2016, we employed approximately 3,020 employees worldwide, of which 1,470 employees are based in the Americas, 210 employees in EMEA, and 1,340 employees in APAC (including India). We have offices in Australia, China, France, India, Japan, the Netherlands, Singapore, and the United Kingdom, 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 2016, approximately 76% of our total revenue was generated in the United States, 11% in EMEA, and the remaining balance in APAC, Canada, and Latin 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 in North America and Western Europe; consequently, the health of the U.S. and the 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 sales 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 January 2017, the International Monetary Fund (IMF) provided a World Economic Outlook (WEO) update maintaining its previous 2017 world economic growth forecast issued in October 2016 at 3.4 percent. The WEO update noted "After a lackluster outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies. However, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications."


The WEO update projected that advanced economies, which represent our primary revenue markets, would grow at about 1.9 percent in 2017 and 2.0 percent in 2018, while the emerging and developing economies would grow at about 4.5 percent in 2017 and 4.8 percent in 2018.

During the past three years, the overall trend has been steady for our large license sales, with recognized license revenue of $1.0 million or greater on 18, 21 and 15 new contracts for 2016, 2015 and 2014, respectively. While we are encouraged by our 2016 and 2015 results, we, along with many of our customers, still remain cautious regarding the pace of global economic growth. 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 sales.

Revenue

License revenue: License revenue, a leading indicator of our business performance, is primarily derived from software license fees customers pay for supply chain solutions. In 2016, license revenue totaled $85.0 million, or 14% of total revenue, with gross margins of 87.3%. For the year ended December 31, 2016, Americas, EMEA, and APAC recognized $71.1 million, $9.2 million, and $4.7 million in license revenue, respectively. For the year ended December 31, 2016, the percentage mix of new to existing customers was approximately 35/65.

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. In addition, the timing of the closing of a few large license transactions can have a material impact on our license revenues, operating profit, operating margins and earnings per share. For example, $1.1 million of license revenue in 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"). In 2016, our services revenue totaled $467.3 million, or 77% of total revenue, with gross margins of 57.7%. The Americas, EMEA, and APAC recognized $392.7 million, $55.2 million, and $19.4 million, respectively, in services revenue for the year ended December 31, 2016. Professional services totaled $333.4 million in 2016, accounted for approximately 71% of total services revenue and approximately 55% of total revenue. 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. While we believe our services margins are very strong, they do lower our overall operating margin profile as services margins are inherently lower than license revenue margins.

At December 31, 2016, our professional services organization totaled approximately 2,010 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 is 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 $133.9 million in 2016, representing approximately 29% of services revenue and approximately 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 through acquisitions; 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 recognized over the renewal period and recognition is not initiated until payment is received from the customer.

Hardware and other revenue: Our hardware and other revenue totaled $52.3 million in 2016 representing 9% of total revenue with gross margins of 20.5%. 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.

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 $18.3 million, $20.2 million, and $18.9 million for 2016, 2015 and 2014, respectively.

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 ended December 31, 2016, 2015 and 2014 were $54.7 million, $53.9 million, and $49.0 million, respectively. At December 31, 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 2016, we generated cash flow from operating activities of $139.3 million and have generated a cumulative total of $353.7 million for the three years ended December 31, 2016. Our cash and investments at December 31, 2016 totaled $95.6 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 funding investment in R&D and operations to drive earnings growth and repurchases of common stock.

During 2016, we repurchased approximately $158.4 million of Manhattan Associates' outstanding common stock under the share repurchase program approved by our Board of Directors throughout the year.

In 2017, we anticipate that our priorities for use of cash will be in hiring, developing sales and services resources and continued investment in product development 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. We do not anticipate any borrowing requirements in 2017 for general corporate purposes.


Full Year 2016 Financial Summary

Diluted earnings per share for the twelve months ended December 31, 2016 was $1.72, compared to $1.40 for the twelve months ended December 31, 2015;

Consolidated revenue for the twelve months ended December 31, 2016 was $604.6 million, compared to $556.4 million for the twelve months ended December 31, 2015. License revenue was $85.0 million for the twelve months ended December 31, 2016, compared to $78.6 million for the twelve months ended December 31, 2015;

Operating income was $194.3 million for the twelve months ended December 31, 2016, compared to $161.4 million for the twelve months ended December 31, 2015;

Operating margins for 2016 were 32.1% compared to operating margins of 29.0% in 2015;

Cash flow from operations totaled $139.3 million for the full year 2016 compared to $120.2 million in 2015;

Cash and investments on hand at December 31, 2016 was $95.6 million compared to $128.8 million at December 31, 2015;

During the twelve months ended December 31, 2016, the Company repurchased approximately 2.8 million shares of Manhattan Associates common stock, reducing common shares outstanding by 3%, under the share repurchase program authorized by our Board of Directors, for a total investment of $158.4 million; and

In January 2017, our Board of Directors authorized the Company to repurchase up to an aggregate of $50 million of the Company's common stock.

Results of Operations

The following table summarizes selected Statement of Income data for the years ended December 31, 2016, 2015 and 2014.

                                                         Year Ended December 31,
                                                                              % Change vs. Prior Year
                                  2016          2015          2014           2016                2015
                                          (in thousands)
Revenue:
Software license                $  84,996     $  78,615     $  71,583           8%                  10%
Services                          467,286       428,078       376,023           9%                  14%
Hardware and other                 52,275        49,678        44,498           5%                  12%
Total revenue                     604,557       556,371       492,104           9%                  13%
Costs and expenses:
Cost of license                    10,820         9,938         7,110           9%                  40%
Cost of services                  197,475       184,349       169,140           7%                  9%
Cost of hardware and other         41,584        41,141        36,328           1%                  13%
Research and development           54,736        53,859        48,953           2%                  10%
Sales and marketing                48,223        48,615        52,617           -1%                 -8%
General and administrative         48,322        49,259        44,455           -2%                 11%
Depreciation and amortization       9,090         7,764         6,377           17%                 22%
Total costs and expenses          410,250       394,925       364,980           4%                  8%
Income from operations          $ 194,307     $ 161,446     $ 127,124           20%                 27%
Operating margin                   32.1%         29.0%         25.8%


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 2016, 2015, or 2014, 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:

                                                    Year Ended December 31,
                                                                           % Change vs. Prior Year
                              2016           2015           2014           2016              2015
Revenue:                                (in thousands)
Software license
Americas                   $   71,134     $   65,307     $   59,502           9%               10%
EMEA                            9,187          9,566          7,505          -4%               27%
APAC                            4,675          3,742          4,576          25%               -18%
Total software license         84,996         78,615         71,583           8%               10%

Services
Americas                      392,675        352,665        301,025          11%               17%
EMEA                           55,240         58,030         51,440          -5%               13%
APAC                           19,371         17,383         23,558          11%               -26%
Total services                467,286        428,078        376,023           9%               14%

Hardware and Other
Americas                       49,775         46,504         41,437           7%               12%
EMEA                            1,855          2,480          1,910          -25%              30%
APAC                              645            694          1,151          -7%               -40%
Total hardware and other       52,275         49,678         44,498           5%               12%

Total Revenue
Americas                      513,584        464,476        401,964          11%               16%
EMEA                           66,282         70,076         60,855          -5%               15%
APAC                           24,691         21,819         29,285          13%               -25%
Total revenue              $  604,557     $  556,371     $  492,104           9%               13%

Operating income:
Americas                   $  164,947     $  133,823     $  101,936          23%               31%
EMEA                           22,060         22,310         15,313          -1%               46%
APAC                            7,300          5,313          9,875          37%               -46%
Total operating income     $  194,307     $  161,446     $  127,124          20%               27%

The consolidated results of our operations for the years ended December 31, 2016, 2015 and 2014 are discussed below.


Revenue

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 radio frequency and
computer equipment; and other revenue representing amounts associated with
reimbursements from customers for out-of-pocket expenses.



                                                                 Year Ended December 31,
                                                                    % Change vs. Prior Year                 % of Total Revenue
                       2016          2015          2014           2016                  2015           2016        2015        2014
                                (in thousands)
Software license     $  84,996     $  78,615     $  71,583              8 %                   10 %         14 %        14 %        15 %
Services               467,286       428,078       376,023              9 %                   14 %         77 %        77 %        76 %
Hardware and other      52,275        49,678        44,498              5 %                   12 %          9 %         9 %         9 %
Total revenue        $ 604,557     $ 556,371     $ 492,104              9 %                   13 %        100 %       100 %       100 %

License revenue

Year 2016 compared with year 2015

License revenue increased $6.4 million, or 8%, to $85.0 million in 2016 compared to 2015. We completed eighteen and twenty-one large new deals greater than $1.0 million in 2016 and 2015, respectively. Our Americas and APAC license revenue increased $5.8 million and $0.9 million, respectively, while EMEA license revenue decreased $0.3 million over 2015.

The license sales percentage mix across our product suite in 2016 was approximately 60% warehouse management solutions and 40% non-warehouse management solutions. Our warehouse management solutions decreased $1.8 million, or 4%, in 2016 compared to 2015, and non-warehouse management solutions increased $8.2 million, or 29%, in 2016 over 2015.

Year 2015 compared with year 2014

License revenue increased $7.0 million, or 10%, to $78.6 million in 2015 compared to 2014. We completed twenty-one and fifteen large new deals greater than $1.0 million in 2015 and 2014, respectively. Our Americas and EMEA license revenue increased $5.8 million and $2.0 million, respectively, while APAC license revenue decreased $0.8 million over 2014.

The license sales percentage mix across our product suite in 2015 was approximately 65% warehouse management solutions and 35% non-warehouse management solutions. Our warehouse management solutions increased $10.0 million, or 25%, in 2015 compared to 2014, and non-warehouse management solutions decreased $3.0 million, or 9%, in 2015 over 2014.

Services revenue

Year 2016 compared with year 2015

Services revenue increased $39.2 million, or 9%, in 2016 compared to 2015 due to a $28.8 million, or 9%, increase in professional services revenue and a $10.4 million, or 8%, increase in CSSE revenue. The Americas and APAC segments increased $40.0 million and $2.0 million, respectively, while the EMEA segment decreased $2.8 million, compared to 2015. The increase in services revenue is primarily due to a combination of license deals signed and customer-specific initiatives in conjunction with customer upgrade activity.

Year 2015 compared with year 2014

Services revenue increased $52.1 million, or 14%, in 2015 compared to 2014 due to a $44.6 million, or 17%, increase in professional services revenue and a $7.5 million, or 6%, increase in CSSE revenue. The Americas and EMEA segments increased $51.6 million and $6.6 million, respectively, while the APAC segment decreased $6.1 million, compared to 2014. The increase in services revenue is primarily due to a combination of license deals signed and customer-specific initiatives in conjunction with customer upgrade activity.


Hardware and other

Sales of hardware increased $4.5 million to $34.0 million in 2016 compared to $29.5 million in 2015. Sales of hardware increased $3.9 million to $29.5 million in 2015 compared to $25.6 million in 2014. 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 $18.3 . . .

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