UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-23999
MANHATTAN ASSOCIATES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Georgia
58-2373424
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
2300 Windy Ridge Parkway, Tenth Floor
Atlanta, Georgia
30339
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (770) 955-7070
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common stock
MANH
Nasdaq Global Select Market
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the Registrant’s class of capital stock outstanding as of October 21, 2022, the latest practicable date, is as follows: 62,396,842 shares of common stock, $0.01 par value per share.
Quarter Ended September 30, 2022
TABLE OF CONTENTS
PART I
Financial Information
Item 1.
Financial Statements.
Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021
3
Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2022 and 2021 (unaudited)
4
Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2022 and 2021 (unaudited)
5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)
6
Condensed Consolidated Statements of Stockholders’ Equity for the three months and nine months ended September 30, 2022 and 2021 (unaudited)
7
Notes to Condensed Consolidated Financial Statements (unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
27
Item 4.
Controls and Procedures.
28
PART II
OTHER INFORMATION
Legal Proceedings.
29
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
30
Signatures.
31
2
FINANCIAL INFORMATION
Item 1. Financial Statements
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30, 2022
December 31, 2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
197,055
263,706
Accounts receivable, net of allowance of $3,296 and $2,419, at September 30, 2022 and December 31, 2021, respectively
143,504
124,420
Prepaid expenses and other current assets
26,136
20,293
Total current assets
366,695
408,419
Property and equipment, net
12,265
13,889
Operating lease right-of-use assets
21,169
27,272
Goodwill, net
62,218
62,239
Deferred income taxes
28,231
7,650
Other assets
24,141
20,239
Total assets
514,719
539,708
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
27,360
19,625
Accrued compensation and benefits
62,560
53,104
Accrued and other liabilities
22,507
22,741
Deferred revenue
169,390
153,196
Income taxes payable
2,153
376
Total current liabilities
283,970
249,042
Operating lease liabilities, long-term
17,186
23,157
Other non-current liabilities
15,429
16,865
Shareholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized, no shares issued or outstanding in 2022 and 2021
-
Common stock, $0.01 par value; 200,000,000 shares authorized; 62,394,460 and 63,154,494 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
624
631
Retained earnings
226,119
269,841
Accumulated other comprehensive loss
(28,609
)
(19,828
Total shareholders' equity
198,134
250,644
Total liabilities and shareholders' equity
See accompanying Notes to Condensed Consolidated Financial Statements.
Item 1. Financial Statements (continued)
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
Revenue:
Cloud subscriptions
45,267
32,196
124,767
87,434
Software license
6,386
8,461
19,869
25,122
Maintenance
35,820
34,479
107,115
108,370
Services
103,425
88,172
294,284
253,234
Hardware
7,203
5,877
22,946
17,989
Total revenue
198,101
169,185
568,981
492,149
Costs and expenses:
Cost of software license
467
690
1,749
1,802
Cost of cloud subscriptions, maintenance and services
95,691
70,813
266,482
214,394
Research and development
29,375
23,372
84,754
70,845
Sales and marketing
15,742
14,057
47,881
41,203
General and administrative
18,392
15,928
54,963
50,579
Depreciation and amortization
1,664
1,917
5,157
6,136
Total costs and expenses
161,331
126,777
460,986
384,959
Operating income
36,770
42,408
107,995
107,190
Other income (loss), net
1,612
(42
4,593
(29
Income before income taxes
38,382
42,366
112,588
107,161
Income tax provision
8,708
5,712
21,497
17,271
Net income
29,674
36,654
91,091
89,890
Basic earnings per share
0.47
0.58
1.45
1.42
Diluted earnings per share
0.57
1.43
1.40
Weighted average number of shares:
Basic
62,592
63,363
62,917
63,514
Diluted
63,165
64,238
63,483
64,339
Consolidated Statements of Comprehensive Income
(in thousands)
Foreign currency translation adjustment
(3,566
(294
(8,781
(1,251
Comprehensive income
26,108
36,360
82,310
88,639
Condensed Consolidated Statements of Cash Flows
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Equity-based compensation
44,209
31,333
(Gain) loss on disposal of equipment
(20
14
(20,736
(213
Unrealized foreign currency gain
(2,933
(949
Changes in operating assets and liabilities:
Accounts receivable, net
(23,384
(7,296
(9,190
(8,328
Accounts payable, accrued and other liabilities
20,743
13,429
Income taxes
(730
(2,965
20,195
24,029
Net cash provided by operating activities
124,402
145,080
Investing activities:
Purchase of property and equipment
(4,152
(2,158
Net cash used in investing activities
Financing activities:
Purchase of common stock
(179,029
(100,242
Net cash used in financing activities
Foreign currency impact on cash
(7,872
(940
Net change in cash and cash equivalents
(66,651
41,740
Cash and cash equivalents at beginning of period
204,705
Cash and cash equivalents at end of period
246,445
Condensed Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
Accumulated
Additional
Other
Total
Common Stock
Paid-In
Retained
Comprehensive
Shareholders'
Shares
Amount
Capital
Earnings
Loss
Equity
For the Three Months Ended September 30, 2022
Balance, June 30, 2022 (unaudited)
62,718,513
627
233,151
(25,043
208,735
Repurchase of common stock
(354,711
(3
(14,533
(36,706
(51,242
Restricted stock units issuance
30,658
14,533
Balance, September 30, 2022 (unaudited)
62,394,460
For the Nine Months Ended September 30, 2022
Balance, December 31, 2021 (audited)
63,154,494
(1,361,605
(13
(44,203
(134,813
601,571
(6
For the Three Months Ended September 30, 2021
Balance, June 30, 2021 (unaudited)
63,397,603
634
231,035
(19,219
212,450
(128,043
(1
(10,573
(10,182
(20,756
12,197
10,573
Balance, September 30, 2021 (unaudited)
63,281,757
633
257,507
(19,513
238,627
For the Nine Months Ended September 30, 2021
Balance, December 31, 2020 (audited)
63,527,186
635
236,524
(18,262
218,897
(759,057
(7
(31,328
(68,907
513,628
(5
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Manhattan Associates, Inc. and its subsidiaries (the “Company,” “we,” “us,” “our,” or “Manhattan”) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these condensed consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of our financial position at September 30, 2022, the results of operations for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other interim period. These statements should be read in conjunction with our audited consolidated financial statements and management’s discussion and analysis included in our annual report on Form 10-K for the year ended December 31, 2021.
Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
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 cloud subscriptions, software licenses, 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
Cloud subscriptions includes software as a service (SaaS) and arrangements which provide customers with the right to use our software within a cloud 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. Managed services account for less than 3% of our Cloud subscription contracts.
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. 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. Perpetual software license revenue accounts for approximately 3.5% of total revenue.
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, radio frequency identification (RFID) chip readers, bar code printers and scanners, and other peripherals. As we do not physically control the hardware that we sell, we are acting as an agent in the transaction and recognize our hardware revenue net of related cost. We recognize hardware revenue when control is transferred to the customer upon shipment.
Significant Judgments
Our customer contracts include the sale of multiple SaaS services or licensed products. Judgement is required to determine whether each service or product sold is a distinct performance obligation that should be accounted for separately. We allocate the transaction price to the distinct performance obligations based on relative standalone selling price (“SSP”). We estimate SSP based on the prices we charge our customers or by using other 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. We typically bill our professional services 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 cloud subscriptions, maintenance, and professional services. In the three and nine months ended September 30, 2022, we recognized $25.8 million and $133.8 million of revenue that was included in the deferred revenue balance as of December 31, 2021. In the three months ended September 30, 2022, we recognized $74.9 million of revenue that was included in the deferred revenue balance as of June 30, 2022.
Remaining Performance Obligations
As of September 30, 2022, approximately $969.6 million of revenue, over 97% of which is cloud-native subscriptions, is expected to be recognized from remaining performance obligations (“RPO”) with a non-cancelable term greater than 1 year (including deferred revenue as well as amounts that will be invoiced and recognized as revenue in future periods). We expect to recognize revenue on approximately 40% of these remaining performance obligations over the next 24 months with the balance recognized thereafter. We have elected not to provide disclosures regarding remaining performance obligations for contracts with a term of 1 year or less.
Returns and Allowances
We have not experienced significant returns or warranty claims to date and, as a result, have not recorded a provision for the cost of returns and product warranty claims.
9
We record an allowance for credit losses based on historical experience of write-offs and a detailed assessment of accounts receivable. Additions to the allowance for credit losses generally represent a sales allowance on services revenue, which are recorded to operations as a reduction to services revenue. The total amount charged to operations was $0.9 million and immaterial for the three months ended September 30, 2022 and 2021, respectively, and $2.1 million for both the nine months ended September 30, 2022 and 2021.
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.
Deferred Commissions
We consider sales commissions to be incremental costs of obtaining a contract with a customer. We defer and recognize an asset for sales commissions related to performance obligations with an expected period of benefit of more than one year. We apply the practical expedient to expense sales commissions when the amortization period would have been one year or less. Deferred commissions were $28.8 million as of September 30, 2022, of which $21.2 million is included in other assets and $7.6 million is included in prepaid expenses. Sales commission expense is included in Sales and Marketing expense in the accompanying Consolidated Statements of Income. Amortization of sales commissions was $1.8 million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively, and $5.5 million and $3.7 million for the nine months ended September 30, 2022 and 2021, respectively. No impairment losses were recognized during the periods.
We measure our investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of asset or liability and its characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:
Investments with maturities of 90 days or less from the date of purchase are classified as cash equivalents; investments with maturities of greater than 90 days from the date of purchase but less than one year are generally classified as short-term investments; and investments with maturities of one year or greater from the date of purchase are generally classified as long-term investments. Unrealized holding gains and losses are reflected as a net amount in a separate component of shareholders’ equity until realized. For the purposes of computing realized gains and losses, cost is determined on a specific identification basis.
At September 30, 2022, our cash and cash equivalents were $183.2 million and $13.9 million, respectively. We had neither short-term investments nor long-term investments at September 30, 2022. Cash equivalents consist of highly liquid money market funds. For money market funds, we use quoted prices from active markets that are classified at Level 1, the highest level of observable input in the disclosure hierarchy framework. We had no investments classified at Level 2 or Level 3 at September 30, 2022.
We lease our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2029. For a few of our facility leases, we have certain options to extend the lease term for up to 10 years, at our sole discretion. We have no finance leases.
10
We present below the operating lease right-of-use assets and lease liabilities as of September 30, 2022 (in thousands):
LIABILITIES
Operating lease liabilities, current (included in accrued and other liabilities)
6,405
Total operating lease liabilities
23,591
Aggregate future minimum lease payments under noncancelable operating leases as of September 30, 2022 are as follows (in thousands):
Year Ending December 31,
2022 (excluding the nine months ended September 30, 2022)
1,947
2023
6,983
2024
6,082
2025
5,310
2026
2,453
Thereafter
4,447
Total minimum payments required
27,222
Less short-term leases
(133
Less imputed interest
(3,498
The total lease cost for the three and nine months ended September 30, 2022 was $1.9 million and $5.8 million, respectively. Total lease cost for the three months ended September 30, 2022 consisted of $1.8 million of operating lease costs, and $0.1 million of short-term lease costs. For the nine months ended September 30, 2022, total lease cost consisted of $5.5 million of operating lease costs, and $0.3 million of short-term lease costs.
Total lease cost for the three and nine months ended September 30, 2021 was $2.0 million and $6.0 million, respectively. Total lease cost for the three months ended September 30, 2021 consisted of $1.9 million of operating lease costs, and $0.1 million of short-term lease costs. For the nine months ended September 30, 2021, total lease cost consisted of $5.7 million of operating lease cost, and $0.3 million of short-term lease costs.
Our variable lease costs for the three and nine months ended September 30, 2022 and 2021 were immaterial.
Other information related to operating leases are as follows:
Weighted average remaining lease term
4.5
Weighted average discount rate
%
Supplemental cash flow information - operating cash flows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases
5,103
We granted 2,411 and 123,245 restricted stock units (RSUs) during the three months ended September 30, 2022 and 2021, respectively, and granted 679,540 and 500,073 RSUs during the nine months ended September 30, 2022 and 2021, respectively. Equity-based compensation expense related to RSUs was $14.5 million and $10.6 million during the three months ended September 30, 2022 and 2021, respectively, and $44.2 million and $31.3 million during the nine months ended September 30, 2022 and 2021, respectively.
11
We present below a summary of changes during the nine months ended September 30, 2022 in our unvested units of restricted stock:
Number of shares/units
Outstanding at December 31, 2021
1,388,467
Granted
679,540
Vested
(601,571
Forfeited
(35,555
Outstanding at September 30, 2022
1,430,881
Our effective tax rate was 22.7% and 13.5% for the three months ended September 30, 2022 and 2021, respectively, and 19.1% and 16.1% for the nine months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate for three months ended September 30, 2022 is due to decreases of statute of limitations expiry on tax reserves and favorable prior year provisional tax estimate true-ups. The increase in the effective tax rate for the nine months ended September 30, 2022 is due to the same decrease of statute of limitation expiry on tax reserves, decrease of favorable prior year provisional tax estimate true-ups, and income earned in higher tax jurisdictions.
We apply the provisions for income taxes related to, among other things, accounting for uncertain tax positions and disclosure requirements in accordance with Accounting Standards Classification (ASC) 740, Income Taxes. For the three months ended September 30, 2022, our uncertain tax positions increased by a net $0.3 million due to accrual of tax audit reserves and unfavorable prior year provisional tax estimate true-ups, offset by statute of limitations expiry. There has been no change to our policy that recognizes potential interest and penalties related to uncertain tax positions within our global operations in income tax expense.
We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, Manhattan is subject to examination by taxing authorities throughout the world. We are no longer subject to U.S. federal, substantially all state and local income tax examinations and substantially all non-U.S. income tax examinations for years before 2010.
Under the Inflation Reduction Act of 2022, we will be subject to a 1% excise tax on stock repurchases, net of stock issuances, beginning in 2023. We expect to include the tax in the cost of our stock repurchases as a reduction of shareholders' equity.
Basic net income per share is computed using net income divided by the weighted average number of shares of common stock outstanding (“Weighted Shares”) for the period presented.
Diluted net income per share is computed using net income divided by Weighted Shares and the treasury stock method effect of common equivalent shares (CESs) outstanding for each period presented.
In the following table, we present a reconciliation of earnings per share and the shares used in the computation of earnings per share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share data):
(in thousands, except per share data)
Earnings per share:
Effect of CESs
(0.01
(0.02
573
875
566
825
The number of anti-dilutive CESs during the three and nine months ended September 30, 2022 and 2021 was immaterial.
12
From time to time, we may be involved in litigation relating to claims arising out of the ordinary course of business, and occasionally legal proceedings not in the ordinary course. Many of our installations involve products that are critical to the operations of our clients’ businesses. Any failure in one of our products could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Although we attempt to limit contractually our liability for damages arising from product failures or negligent acts or omissions, there can be no assurance that the limitations of liability set forth in our contracts will be enforceable in all instances. We are not currently a party to any legal proceedings in the ordinary course of business or other legal proceedings the result of which we believe is likely to have a material adverse impact on our business, financial position, results of operations, or cash flows. We expense legal costs associated with loss contingencies as such legal costs are incurred.
We manage our business by geographic region and have three geographic reportable segments: North and Latin America (the “Americas”); Europe, the Middle East and Africa (EMEA); and Asia Pacific (APAC). All segments derive revenue from the sale and implementation of our supply chain commerce solutions. The individual products sold by the segments are similar in nature and are all designed to help companies manage the effectiveness and efficiency of their supply chain commerce. We use the same accounting policies for each reportable segment. The chief executive officer and chief financial officer evaluate performance based on revenue and operating results for each reportable segment.
The Americas segment charges royalty fees to the other segments based on software licenses and cloud subscriptions sold by those reportable segments. The royalties, which totaled approximately $2.1 million and $1.5 million for the three months ended September 30, 2022 and 2021, respectively, and $6.6 million and $4.4 million for the nine months ended September 30, 2022, respectively, are included in costs of revenue for each segment with a corresponding reduction in the Americas segment’s cost of revenue. The revenues represented below are from external customers only. The geography-based costs consist of costs for professional services personnel, direct sales and marketing expenses, infrastructure costs to support the employee and customer base, billing and financial systems, management and general and administrative support. Certain corporate expenses included in the Americas segment are not charged to the other segments. Such expenses include research and development, certain marketing and general and administrative costs that support the global organization, and the amortization of acquired developed technology. Costs in the Americas segment include all research and development costs, including the costs associated with our operations in India.
13
In accordance with the segment reporting topic of the FASB Accounting Standards Codification, we present below certain financial information by reportable segment for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Americas
EMEA
APAC
Consolidated
38,451
5,695
1,121
27,355
4,182
659
4,686
708
992
7,065
1,024
372
27,901
5,657
2,262
26,551
5,639
2,289
78,479
19,737
5,209
68,421
16,521
3,230
7,157
46
5,841
36
156,674
31,843
9,584
135,233
27,402
6,550
Costs and Expenses:
Cost of revenue
73,787
18,117
4,254
96,158
55,213
13,185
3,105
71,503
Operating expenses
58,475
3,731
1,303
63,509
48,594
3,554
1,209
53,357
1,498
144
22
1,699
178
40
133,760
21,992
5,579
105,506
16,917
4,354
22,914
9,851
4,005
29,727
10,485
2,196
106,064
15,544
3,159
74,498
10,947
1,989
12,147
5,969
1,753
18,646
5,018
1,458
84,984
15,288
6,843
84,000
17,409
6,961
222,206
58,670
13,408
195,391
49,482
8,361
22,809
137
17,819
170
448,210
95,608
25,163
390,354
83,026
18,769
203,592
52,552
12,087
268,231
163,625
42,861
9,710
216,196
171,179
12,799
3,620
187,598
146,862
12,092
3,673
162,627
4,625
466
66
5,434
571
131
379,396
65,817
15,773
315,921
55,524
13,514
68,814
29,791
9,390
74,433
27,502
5,255
Cloud subscriptions revenue primarily relates to our Manhattan Active omnichannel, warehouse management solutions, and transportation management solutions for the nine months ended September 30, 2022. The majority of our software license revenue relates to our warehouse management product group (over 85%) for the three and nine months ended September 30, 2022.
At September 30, 2022, total assets for the Americas, EMEA and APAC segments were $440.8 million, $56.5 million and $17.4 million, respectively.
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, 2022 and 2021, 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, 2021. 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 Unified Omnichannel Commerce and Digital Supply Chain, 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:
In the three and nine months ended September 30, 2022, we generated $198.1 million and $569.0 million in total revenue, respectively. The revenue mix for the three months ended September 30, 2022 was: cloud subscriptions 23%; software license 3%; maintenance 18%; services 52%; and hardware 4%. The revenue mix for the nine months ended September 30, 2022 was: cloud subscriptions 22%; software license 3%; maintenance 19%; services 52%; and hardware 4%.
During this quarter, the US dollar strengthened materially against certain foreign currencies in markets in which we operate, particularly the Pound Sterling and the Euro, which negatively impacted total revenue and our remaining performance obligations (“RPO”) balance. Foreign currency negatively impacted total revenue by approximately 4% in the three months ended September 30, 2022, compared to what we would have reported based on the exchange rates for the three months ended September 30, 2021. Currency volatility also negatively impacted our RPO growth by approximately 7% from September 30, 2021 to September 30, 2022, compared to what we would have reported had the exchange rates remained the same from 2021 to 2022. Despite the negative currency impact, we continued to deliver solid revenue growth.
While the majority of our contracts are in US dollars, as we continue to grow our Cloud subscription business in EMEA and APAC, fluctuations in foreign exchange rates may add variability to, and could have a material adverse impact on our financial results.
We have three geographic reportable segments: North 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 $60.7 million and $176.6 million for the three and nine months ended September 30, 2022, respectively, which represents approximately 31% of our total revenue for both three and nine months ended September 30, 2022. International revenue includes all revenue derived from sales to customers outside the United States. At September 30, 2022, we employed approximately 4,080 employees worldwide. We have offices in Australia, Chile, China, France, Germany, India, Italy, Japan, the Netherlands, Singapore, Spain, 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.
Future Expectations
Our results for the first nine months of 2022 exceeded our expectations due to solid demand for our cloud solutions. Our solutions are mission critical, supporting complex global supply chains. We believe that favorable secular tailwinds, such as the digital transformation of businesses in manufacturing, wholesale and retail, coupled with our commitment to investing in organic innovation to deliver leading cloud supply chain, inventory and omnichannel commerce solutions is in synergistic alignment with current market
demand. We believe that this alignment is contributing to our strong financial results, higher demand and strong win rates for our solutions for the period.
We remain committed to investing in our business to drive customer success and expand our total addressable market, which we believe will position us well to achieve long-term sustainable growth and earnings. We have taken steps to best ensure the health and safety of our employees globally. Our daily execution has evolved into a hybrid (office and virtual) model, and we continue to find innovative ways to engage with employees, customers and prospects, ensuring that they are supported as they navigate their way through this period.
Going forward, we are investing in our cloud business, including enterprise investments in innovation, and strategic operating expenses to support growth objectives. The pace at which the market adopts our 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, impacting our ability to accurately forecast bookings and revenues from quarter to quarter and over the longer term.
For the remainder of 2022, our five strategic goals remain:
Cloud Subscription
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 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.
In the fifth year of our cloud transition, demand for our cloud solutions is the dominant preference of customers. Cloud solutions are our fastest growing revenue line and represents 86% of total software revenue in the first nine months of 2022. We believe the reduction in license and maintenance revenue in favor of our cloud offerings is positive for our customers and Manhattan 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 the three and nine months ended September 30, 2022, both approximately 69% of our total revenue was generated in the United States, 16% and 17% in EMEA, respectively, 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 75% 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 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 mission critical nature of our software, combined with a challenging global macro environment, our current sales cycles for large cloud subscriptions in our target markets could be extended. While demand for our solutions is solid, the current business climate within the United States and geographic regions in which we operate may affect customers’ and prospects’ decisions regarding timing of strategic capital expenditures.
While we are encouraged by our results, we remain cautious regarding the pace of global economic growth. We believe global geopolitical and economic volatility likely will continue to shape customers’ and prospects’ enterprise software buying decisions.
16
Revenue
Cloud Subscriptions and Software License Revenue. Cloud subscriptions revenue and remaining performance obligation (“RPO”) growth are the leading indicators of our business performance, primarily derived from cloud native subscription fees that customers pay for our Unified Omnichannel Commerce and Digital Supply Chain solutions.
In the nine months ended September 30, 2022, cloud subscriptions revenue was 86% of total cloud and software license revenue. RPO increased 69% over prior year on strong demand. As of September 30, 2022, approximately $969.6 million of revenue, over 97% of which is cloud native subscriptions, is expected to be recognized from RPO with a non-cancelable term greater than 1 year (including deferred revenue as well as amounts that will be invoiced and recognized as revenue in future periods).
In the three months ended September 30, 2022, cloud subscriptions revenue totaled $45.3 million or 23% of total revenues. In the nine months ended September 30, 2022, cloud subscriptions revenue totaled $124.8 million or 22% of total revenues.
Cloud subscriptions revenue is recognized ratably over the term of the agreement, typically five years and more. Cloud subscription 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 the three and nine months ended September 30, 2022, the percentage mix of new to existing customers for the combination of software license and cloud subscriptions sales was approximately 35/65 and 47/53, respectively.
In the three months ended September 30, 2022, software license revenue totaled $6.4 million, or 3% of total revenue. In the nine months ended September 30, 2022, software license revenue totaled $19.9 million or 3% of total revenue.
Our Unified Omnichannel Commerce and Digital Supply Chain solutions are focused on core omnichannel operation (e-commerce, retail store operations and point-of-sale), supply chain commerce operations (Warehouse Management, Transportation Management and Labor Management), and Inventory Optimization, which are intensely competitive markets characterized by rapid technological change. We are a market leader in the supply chain management and omnichannel software solutions market as defined by industry analysts such as ARC Advisory Group and Gartner. Our goal is to extend our position as a leading global supply chain solutions provider by growing our cloud subscriptions and software license revenues faster than our competitors through investment in innovation.
Maintenance Revenue. Our maintenance revenue for the three months ended September 30, 2022 totaled $35.8 million, or 18% of total revenue. For the nine months ended September 30, 2022, maintenance revenue totaled $107.1 million or 19% of total revenue. For maintenance, we offer a comprehensive 24 hours per day, 365 days per year program that provides our perpetual software license customers with software upgrades, when and if available, which include additional or improved functionality and technological advances incorporating emerging supply chain and industry initiatives.
Maintenance revenue 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. 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.
Services Revenue. In the three months ended September 30, 2022, our services revenue totaled $103.4 million, or 52% of total revenue. In the nine months ended September 30, 2022, our services revenue totaled $294.3 million, or 52% of total revenue.
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.
Services revenue growth is contingent upon cloud sales 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.
Hardware Revenue. Our hardware revenue, which we recognize net of related costs, totaled $7.2 million in the three months ended September 30, 2022 representing 4% of total revenue. For the nine months ended September 30, 2022, hardware revenue totaled $22.9 million, or 4% 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.
17
Product Development
We continue to invest significantly in research and development (R&D) to provide leading Unified Omnichannel Commerce and Digital Supply Chain solutions to enable global retailers, manufacturers, wholesalers, distributors, and logistics providers to 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 points of sale. Our R&D expenses were $29.4 million and $84.8 million for the three and nine months ended September 30, 2022.
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, addressing 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 the three and nine months ended September 30, 2022, we generated cash flow from operating activities of $39.9 million and $124.4 million, respectively. Our cash and cash equivalents at September 30, 2022 totaled $197.1 million, with no debt on our balance sheet. We currently have no credit facilities. Our primary uses of cash have been for funding investments in R&D in our Unified Omnichannel Commerce and Digital Supply Chain solutions to drive revenue and earnings growth. In addition, during the nine months ended September 30, 2022, we repurchased approximately $150.1 million of Manhattan Associates’ outstanding common stock under the share repurchase program approved by our Board of Directors. In October 2022, our Board of Directors approved replenishing the Company’s remaining share repurchase authority to an aggregate of $75.0 million of our common stock.
For the remainder of 2022, we expect our first priority for use of cash will continue to be investments in our Unified Omnichannel Commerce and Digital Supply Chain solutions. We also expect to prioritize capital allocation in our global teams to fund growth, and share repurchases. We do not anticipate any borrowing requirements in 2022 for general corporate purposes.
Results of Operations
In the following table, we present a summary of our consolidated results for the three and nine months ended September 30, 2022 and 2021.
Costs and expenses
Diluted weighted average number of shares
18
We have 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 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 the Americas segment that we do not charge to the other segments, including R&D, 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 R&D costs, including the costs associated with our operations in India. During the three and nine months ended September 30, 2022 and 2021, we derived the majority of our revenues from sales to customers within our Americas segment. In the following table, we present a summary of revenue and operating income by segment:
% Change vs.Prior Year
41
42
70
59
Total cloud subscriptions
43
-34
-35
-31
19
167
20
Total software license
-25
-21
1
0
-12
-1
-2
Total maintenance
61
60
Total services
23
-19
Total hardware and other
Total Revenue
34
Operating income:
-23
-8
-6
82
79
Total operating income
-13
Condensed Consolidated Financial Summary - Third Quarter 2022
Below we discuss our consolidated results of operations for the third quarters of 2022 and 2021.
% Change vs.
% of Total Revenue
Prior Year
52
100
Cloud Subscriptions Revenue. In the third quarter of 2022, cloud subscriptions revenue increased $13.1 million compared to the same quarter in the prior year. Our customers have demonstrated a clear preference for cloud-based solutions, including existing customers that are migrating from on-premise to cloud-based offerings. Cloud subscriptions revenue for the Americas, EMEA and APAC segments increased $11.1 million, $1.5 million and $0.5 million in the third quarter of 2022, respectively.
Software License Revenue. Software license revenue decreased $2.1 million in the third quarter of 2022 compared to the same quarter in the prior year on strong market preference for our cloud-native solutions. The perpetual license sales percentage mix across our product suite in the third quarter ended September 30, 2022 was over 90% warehouse management solutions.
Maintenance Revenue. Maintenance revenue increased $1.3 million in the third quarter of 2022 compared to the same quarter in the prior year. The majority of our maintenance revenue is derived from our Americas segment.
Services Revenue. Services revenue increased $15.3 million in the third quarter of 2022 compared to the same quarter in the prior year. Services revenue for the Americas, EMEA and APAC segments increased $10.1 million, $3.2 million, and $2.0 million, respectively, compared to the same quarter in the prior year, primarily driven by the increase in cloud subscriptions.
Hardware Revenue. Hardware sales increased $1.3 million in the third quarter of 2022 compared to the same quarter in the prior year. The majority of our hardware revenue is derived from our Americas segment. Sales of hardware is largely dependent upon customer-specific desires, which fluctuate.
21
Cost of Revenue
-32
35
Total cost of revenue
Cost of Software License. Cost of software license consists of the costs associated with software reproduction; media, packaging and delivery; documentation, and other related costs; and royalties on third-party software sold with or as part of our products. Cost of software license decreased by $0.2 million in the third quarter of 2022 compared with the same quarter in the prior year.
Cost of Cloud Subscriptions, Maintenance and Services. Costs of cloud subscriptions, maintenance and services consist primarily of salaries and other personnel-related expenses of employees dedicated to cloud subscriptions; maintenance services; and professional and technical services as well as hosting fees. The $24.9 million increase in the quarter ended September 30, 2022 compared to the same quarter in the prior year was principally due to a $12.3 million increase in compensation and other personnel-related expenses, a $8.9 million increase in performance-based compensation, a $1.6 million increase in travel expenses, and a $1.3 million increase in computer infrastructure costs.
Operating Expenses
26
65,173
55,274
Research and Development. Our principal R&D activities have focused on the expansion and integration of new products and releases, including cloud-based solutions, while expanding the product footprint of our software solution suites in Supply Chain, Inventory Optimization, Omnichannel and point-of-sale.
For each of the quarters ended September 30, 2022 and 2021, 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.
R&D expenses primarily consist of salaries and other personnel-related costs for personnel involved in our R&D activities. R&D expenses for the quarter ended September 30, 2022 increased by $6.0 million, compared to the same quarter of 2021 principally due to a $2.8 million increase in compensation and other personnel-related expenses, and a $2.7 million increase in performance-based compensation.
Sales and Marketing. Sales and marketing expenses include salaries, commissions, travel and other personnel-related costs and the costs of our marketing and alliance programs and related activities. Sales and marketing expenses increased $1.7 million in the quarter ended September 30, 2022 compared to the same quarter in the prior year primarily due to a $1.3 million increase in performance-based compensation expense.
General and Administrative (G&A). G&A expenses consist primarily of salaries and other personnel-related costs of executive, financial, human resources, information technology, and administrative personnel, as well as facilities, legal, insurance, accounting, and other administrative expenses. G&A expenses increased $2.5 million, in the current year quarter compared to the same quarter in the prior year, primarily due to a $1.4 million increase in compensation and other personnel-related expenses, and a $0.9 million increase in performance-based compensation.
Depreciation and Amortization. Depreciation and amortization of intangibles and software expense for the third quarter of 2022 and 2021 was $1.7 million and $1.9 million, respectively.
Operating Income
Operating income in the third quarter of 2022 was $36.8 million compared to $42.4 million in the same quarter in the prior year. Operating margin was 18.6% for the third quarter of 2022 versus 25.1% for the same quarter in the prior year. Operating income and margin decreased primarily due to our commitment to strategically invest in a business as 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 impacts operating income and margins until new resources ramp to full utilization.
Other Income and Income Taxes
-3938
Other income (loss), net. Other income (loss), net primarily includes interest income, foreign currency gains and losses, and other non-operating expenses. Other income (loss), net increased $1.7 million in the third quarter of 2022 compared to the same quarter in the prior year primarily due to gains or losses on intercompany transactions denominated in foreign currencies with subsidiaries due to the fluctuation of the U.S. dollar relative to other foreign currencies, primarily the Indian Rupee. We recorded net foreign currency gains of $1.6 million in the third quarter of 2022, and an immaterial amount of net foreign currency gains in the same quarter in the prior year.
Income tax provision. Our effective income tax rate was 22.7% and 13.5% for the quarters ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate for the three months ended September 30, 2022 due to decreases of statute of limitations expiry on tax reserves and favorable prior year provisional tax estimate true-ups.
Condensed Consolidated Financial Summary – First Nine Months of 2022
Below we discuss our consolidated results of operations for the nine months ended September 30, 2022 and 2021.
51
Cloud Subscription Revenue. Cloud subscriptions revenue increased $37.3 million in the nine months ended September 30, 2022 compared to the same period in the prior year, as customers continued to purchase our SaaS offerings rather than a traditional perpetual license. Our customers have demonstrated a clear preference for cloud-based solutions, including existing customers that are migrating from on-premise to cloud-based offerings. Cloud subscriptions revenue for the Americas, EMEA and APAC segments increased $31.5 million, $4.6 million and $1.2 million, respectively, in the nine months ended September 30, 2022.
Software License Revenue. Software license revenue decreased $5.2 million in the nine months ended September 30, 2022 compared to the same period in the prior year. We believe the decrease reflects a strong market preference for our cloud-native solutions.
The license sales percentage mix across our product suite in the nine months ended September 30, 2022 was over 85% warehouse management solutions.
Maintenance Revenue. Maintenance revenue decreased $1.3 million in the nine months ended September 30, 2022 compared to the same period in the prior year. Maintenance revenue for the EMEA and APAC segments decreased $2.2 million and $0.1 million, respectively, in the nine months ended September 30, 2022 , while the Americas segment increased $1.0 million.
Services Revenue. Services revenue increased $41.1 million in the nine months ended September 30, 2022 compared to the same period in the prior year. Services revenue for the Americas, EMEA and APAC segments increased $26.8 million, $9.2 million and $5.1 million in the nine months ended September 30, 2022, respectively, compared with the same period in the prior year, primarily driven by the increase in cloud subscriptions.
Hardware Revenue. Hardware sales increased $5.0 million in the nine months ended September 30, 2022 compared to the same period in the prior year.
-3
24
Cost of Software License. Cost of software license slightly decreased by $0.1 million in the nine months ended September 30, 2022 compared with the same period in the prior year.
Cost of Cloud Subscriptions, Maintenance and Services. Costs of cloud subscriptions, maintenance and services consist primarily of salaries and other personnel-related expenses of employees dedicated to cloud operations; maintenance services; and professional and technical services as well as hosting fees. The $52.1 million increase in the nine months ended September 30, 2022 compared to the same period in the prior year was principally due to a $33.9 million increase in compensation and other
personnel-related expenses, a $9.5 million increase in performance-based compensation expense, a $4.5 million increase in travel expense, and a $2.7 million increase in computer infrastructure cost.
-16
192,755
168,763
Research and Development. R&D expenses for the nine months ended September 30, 2022 increased $13.9 million compared to the same period in the prior year principally due to a $10.4 million increase in compensation and other personnel-related expenses, and a $2.8 million increase in performance-based compensation expense. For the same reasons included in the quarterly R&D discussion above, no R&D costs were capitalized during the nine months ended September 30, 2022 and 2021.
Sales and Marketing. Sales and marketing expenses increased $6.7 million in the nine months ended September 30, 2022 compared to the same period in the prior year primarily due to a $2.9 million increase in performance-based compensation expense, a $1.6 million increase in compensation and other personnel related expenses, a $1.4 million increase in marketing and campaign programs, and a $0.8 million increase in travel expense.
General and Administrative. General and administrative expenses increased $4.4 million in the nine months ended September 30, 2022 compared to the same period in the prior year, primarily due to a $3.3 million increase in compensation and other personnel related expenses, and a $0.6 million increase in performance-based compensation expense.
Depreciation and Amortization. Depreciation and amortization of intangibles and software expense for the nine months ended September 30, 2022 and 2021 was $5.2 million and $6.1 million, respectively.
Operating income for the nine months ended September 30, 2022 was $108.0 million compared to $107.2 million for the same period in the prior year. Operating margin was 19.0% the first nine months of 2022 versus 21.8% for the same period in the prior year. Operating income was relatively flat and operating margin decreased primarily due to our commitment to strategically invest in a business as 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 impacts operating income and margins until new resources ramp to full utilization.
-15938
Other income (loss), net. Other income (loss), net increased $4.6 million in the nine months ended September 30, 2022 compared to the same period in the prior year primarily due to gains or losses on intercompany transactions denominated in foreign currencies with subsidiaries due to the fluctuation of the U.S. dollar relative to other foreign currencies, primarily the Indian Rupee. We recorded net foreign currency gains of $4.3 million in the first nine months of 2022, and an immaterial amount of net foreign currency gains in the first nine months of 2021.
Income tax provision. Our effective income tax rate was 19.1% and 16.1% for the nine months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate for the nine months ended September 30, 2022 is due to the decrease of
25
statute of limitation expiry on tax reserves, decrease of favorable prior year provisional tax estimate true-ups, and income earned in higher tax jurisdictions.
Liquidity and Capital Resources
During the first nine months of 2022, we funded our business exclusively through cash generated from operations. Our cash and cash equivalents as of September 30, 2022 included $157.6 million held in the U.S. and $39.5 million held by our foreign subsidiaries. We believe that our cash balances in the U.S. are sufficient to fund our U.S. operations. In the future, if we elect to repatriate the unremitted earnings of our foreign subsidiaries, we would not be subject to additional U.S. income taxes on such earnings, but we could be subject to additional local withholding taxes.
Cash flow from operating activities totaled $124.4 million and $145.1 million in the nine months ended September 30, 2022 and 2021, 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 the nine months ended September 30, 2022 decreased $20.7 million compared to the same period in the prior year, which is mainly due to increase in tax payments associated with the U.S. Tax Cuts and Jobs Act that requires capitalization of R&D costs for tax purposes beginning in 2022.
Cash flow used in investing activities totaled $4.2 million and $2.2 million in the nine months ended September 30, 2022 and 2021, respectively. Our investing activities for both the nine months ended September 30, 2022 and 2021 consisted of capital spending to support company growth.
Financing activities used cash of $179.0 million and $100.2 million for the nine months ended September 30, 2022 and 2021, respectively. The principal use of cash for financing activities in both periods was to purchase our common stock, including shares withheld for taxes due upon vesting of restricted stock. Repurchases of our common stock for the nine months ended September 30, 2022 and 2021 totaled $179.0 million and $100.2 million, respectively, including shares withheld for taxes of $28.9 million and $20.4 million, respectively.
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 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. We continue to focus on managing liquidity, while investing in and growing our headcount capacity to support our customers and grow our business. For the remainder of 2022, 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 investing in our business to extend our market leadership. We will continue to weigh our share repurchase options against cash for acquisitions and investing in the business. We will also continue to evaluate acquisition opportunities that are complementary to our product footprint and technology direction. At this time, we do not anticipate any borrowing requirements for the remainder of 2022 for general corporate purposes.
Aggregate Contractual Obligations
Our principal commitments consist of multiple non-cancellable contracts for cloud infrastructure services and obligations under operating leases. As of September 30, 2022, our cloud infrastructure obligations are approximately $122.9 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 of September 30, 2022, are approximately $19.8 million over the next 5 years. We expect to fulfill all these commitments from our working capital.
Critical Accounting Policies and Estimates
In the first nine months of 2022, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2021.
Forward-Looking Statements
Certain statements contained in this filing are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to expectations about global macroeconomic trends and industry developments, plans for future business development activities, anticipated costs of revenues, product mix and service revenues, research and development, selling, general and administrative activities, and liquidity and capital needs and resources. When used in this quarterly report, the words “may,” “expect,” “forecast,” “anticipate,” “intend,” “plan,” “believe,” “could,” “seek,” “project,” “estimate,” and similar expressions are generally intended to identify forward-looking statements. Undue reliance should not be placed on these forward-looking statements, which reflect opinions only as of the date of this quarterly report. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Investors are cautioned that forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Some of the factors that could cause actual results to differ materially from the results discussed in forward-looking statements include:
We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There were no material changes to the Quantitative and Qualitative Disclosures about Market Risk previously disclosed in our annual report on Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures however are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
As of the end of the period covered by this report, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions with regard to material weaknesses.
Item 1. Legal Proceedings.
From time to time, we may be a party to legal proceedings arising in the ordinary course of business, and we could be a party to legal proceedings not in the ordinary course of business. We are not currently a party to any legal proceeding the result of which we believe could have a material adverse impact upon our business, financial position, results of operations, or cash flows.
Many of our product installations involve software products that are critical to the operations of our customers’ businesses. Any failure in our products could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Although we attempt to contractually limit our liability for damages arising from product failures or negligent acts or omissions, there can be no assurance that the limitations of liability set forth in our contracts will be enforceable in all instances.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information regarding common stock purchases under our publicly announced repurchase program for the quarter ended September 30, 2022.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - July 31, 2022
75,000,000
August 1 - August 31, 2022
207,030
146.58
44,653,177
September 1 - September 30, 2022
139,590
140.79
25,000,009
346,620
Item 3. Defaults Upon Senior Securities.
No events occurred during the quarter covered by this report that would require a response to this item.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit 31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH
Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, has been formatted in Inline XBRL.
* In accordance with Item 601(b)(32)(ii) of the SEC’s Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
October 28, 2022
/s/ Eddie Capel
Eddie Capel
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Dennis B. Story
Dennis B. Story
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)