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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, 2018

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

 

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 22, 2018, the latest practicable date, is as follows: 65,378,469 shares of common stock, $0.01 par value per share.

 

 

 

 


MANHATTAN ASSOCIATES, INC.

FORM 10-Q

Quarter Ended September 30, 2018

TABLE OF CONTENTS

PART I

 

 

Financial Information

 

 

 

 

Item 1.

Financial Statements.

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

3

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017 (unaudited)

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (unaudited)

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)

6

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2018 (unaudited) and for the twelve months ended December 31, 2017

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

31

 

 

 

Item 4.

Controls and Procedures.

31

 

 

 

 

PART II

 

 

 

 

 

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings.

31

 

 

 

Item 1A.

Risk Factors.

32

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

32

 

 

 

Item 3.

Defaults Upon Senior Securities.

32

 

 

 

Item 4.

Mine Safety Disclosures.

32

 

 

 

Item 5.

Other Information.

32

 

 

 

Item 6.

Exhibits.

33

 

 

 

Signatures.

36

 

 

 

 

2


PART I

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, 2018

 

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

89,749

 

 

$

125,522

 

Short-term investments

 

 

4,148

 

 

 

-

 

Accounts receivable, net of allowance of $2,792 and $2,692 at September 30, 2018 and December 31, 2017, respectively

 

 

92,966

 

 

 

92,231

 

Prepaid expenses and other current assets

 

 

16,292

 

 

 

10,320

 

Total current assets

 

 

203,155

 

 

 

228,073

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

14,501

 

 

 

15,493

 

Goodwill, net

 

 

62,243

 

 

 

62,248

 

Deferred income taxes

 

 

1,424

 

 

 

1,877

 

Other assets

 

 

9,685

 

 

 

7,304

 

Total assets

 

$

291,008

 

 

$

314,995

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,273

 

 

$

14,028

 

Accrued compensation and benefits

 

 

26,711

 

 

 

15,826

 

Accrued and other liabilities

 

 

11,247

 

 

 

12,105

 

Deferred revenue

 

 

83,020

 

 

 

75,068

 

Income taxes payable

 

 

1,355

 

 

 

7,228

 

Total current liabilities

 

 

136,606

 

 

 

124,255

 

 

 

 

 

 

 

 

 

 

Other non-current liabilities

 

 

14,724

 

 

 

15,784

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, no par value; 20,000,000 shares authorized, no shares issued or outstanding in 2018 and 2017

 

 

-

 

 

 

-

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 65,378,469 and 67,776,138 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

654

 

 

 

678

 

Retained earnings

 

 

156,912

 

 

 

186,117

 

Accumulated other comprehensive loss

 

 

(17,888

)

 

 

(11,839

)

Total shareholders' equity

 

 

139,678

 

 

 

174,956

 

Total liabilities and shareholders' equity

 

$

291,008

 

 

$

314,995

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

3


Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software license

 

$

11,526

 

 

$

16,260

 

 

$

32,054

 

 

$

57,601

 

Cloud subscriptions

 

 

6,455

 

 

 

2,534

 

 

 

16,301

 

 

 

6,408

 

Maintenance

 

 

37,177

 

 

 

36,338

 

 

 

110,567

 

 

 

105,673

 

Services

 

 

84,136

 

 

 

84,211

 

 

 

245,160

 

 

 

249,319

 

Hardware

 

 

3,057

 

 

 

13,540

 

 

 

10,709

 

 

 

31,512

 

Total revenue

 

 

142,351

 

 

 

152,883

 

 

 

414,791

 

 

 

450,513

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of license

 

 

1,211

 

 

 

1,316

 

 

 

4,615

 

 

 

4,106

 

Cost of cloud subscriptions, maintenance and services

 

 

59,975

 

 

 

51,103

 

 

 

173,446

 

 

 

159,111

 

Cost of hardware

 

 

-

 

 

 

10,653

 

 

 

-

 

 

 

23,789

 

Research and development

 

 

18,453

 

 

 

14,747

 

 

 

53,688

 

 

 

43,074

 

Sales and marketing

 

 

10,726

 

 

 

10,739

 

 

 

37,419

 

 

 

34,260

 

General and administrative

 

 

13,711

 

 

 

11,031

 

 

 

39,396

 

 

 

34,290

 

Depreciation and amortization

 

 

2,179

 

 

 

2,275

 

 

 

6,616

 

 

 

6,863

 

Restructuring charge

 

 

-

 

 

 

(77

)

 

 

-

 

 

 

2,945

 

Total costs and expenses

 

 

106,255

 

 

 

101,787

 

 

 

315,180

 

 

 

308,438

 

Operating income

 

 

36,096

 

 

 

51,096

 

 

 

99,611

 

 

 

142,075

 

Other income (loss), net

 

 

1,538

 

 

 

207

 

 

 

3,245

 

 

 

(232

)

Income before income taxes

 

 

37,634

 

 

 

51,303

 

 

 

102,856

 

 

 

141,843

 

Income tax provision

 

 

9,179

 

 

 

18,704

 

 

 

24,081

 

 

 

49,876

 

Net income

 

$

28,455

 

 

$

32,599

 

 

$

78,775

 

 

$

91,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.43

 

 

$

0.47

 

 

$

1.18

 

 

$

1.33

 

Diluted earnings per share

 

$

0.43

 

 

$

0.47

 

 

$

1.18

 

 

$

1.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

65,658

 

 

 

68,928

 

 

 

66,539

 

 

 

69,389

 

Diluted

 

 

65,901

 

 

 

69,135

 

 

 

66,717

 

 

 

69,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

4


Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Net income

 

$

28,455

 

 

$

32,599

 

 

$

78,775

 

 

$

91,967

 

Foreign currency translation adjustment

 

 

(2,478

)

 

 

376

 

 

 

(6,049

)

 

 

3,148

 

Comprehensive income

 

$

25,977

 

 

$

32,975

 

 

$

72,726

 

 

$

95,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

5


 

Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

78,775

 

 

$

91,967

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,616

 

 

 

6,863

 

Equity-based compensation

 

 

14,573

 

 

 

11,041

 

Loss on disposal of equipment

 

 

56

 

 

 

34

 

Deferred income taxes

 

 

(244

)

 

 

741

 

Unrealized foreign currency (gain) loss

 

 

(1,373

)

 

 

93

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,995

)

 

 

5,095

 

Other assets

 

 

(5,296

)

 

 

(940

)

Accounts payable, accrued and other liabilities

 

 

11,059

 

 

 

(2,273

)

Income taxes

 

 

(7,488

)

 

 

(2,151

)

Deferred revenue

 

 

8,635

 

 

 

6,169

 

Net cash provided by operating activities

 

 

103,318

 

 

 

116,639

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(5,536

)

 

 

(3,897

)

Net purchases of investments

 

 

(5,196

)

 

 

(4,487

)

Net cash used in investing activities

 

 

(10,732

)

 

 

(8,384

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Purchase of common stock

 

 

(124,558

)

 

 

(81,700

)

Net cash used in financing activities

 

 

(124,558

)

 

 

(81,700

)

 

 

 

 

 

 

 

 

 

Foreign currency impact on cash

 

 

(3,801

)

 

 

2,648

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(35,773

)

 

 

29,203

 

Cash and cash equivalents at beginning of period

 

 

125,522

 

 

 

95,615

 

Cash and cash equivalents at end of period

 

$

89,749

 

 

$

124,818

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

6


Item 1.

Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

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) Income

 

 

Equity

 

Balance, December 31, 2016 (audited)

 

 

70,233,955

 

 

$

702

 

 

$

-

 

 

$

184,558

 

 

$

(15,894

)

 

$

169,366

 

Repurchase of common stock

 

 

(2,829,850

)

 

 

(28

)

 

 

(18,050

)

 

 

(113,629

)

 

 

-

 

 

 

(131,707

)

Restricted stock units issuance

 

 

372,033

 

 

 

4

 

 

 

(4

)

 

 

-

 

 

 

-

 

 

 

-

 

Equity-based compensation

 

 

-

 

 

 

-

 

 

 

16,229

 

 

 

-

 

 

 

-

 

 

 

16,229

 

Adjustment due to adoption of ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting

 

 

-

 

 

 

-

 

 

 

1,825

 

 

 

(1,293

)

 

 

-

 

 

 

532

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,055

 

 

 

4,055

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

116,481

 

 

 

-

 

 

 

116,481

 

Balance, December 31, 2017 (audited)

 

 

67,776,138

 

 

 

678

 

 

 

-

 

 

 

186,117

 

 

 

(11,839

)

 

 

174,956

 

Repurchase of common stock

 

 

(2,744,126

)

 

 

(27

)

 

 

(14,570

)

 

 

(109,961

)

 

 

-

 

 

 

(124,558

)

Restricted stock units issuance

 

 

346,457

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

-

 

 

 

-

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

14,573

 

 

 

 

 

 

 

-

 

 

 

14,573

 

Adjustment due to adoption of ASC 2014-09 Revenue from Contracts with Customers (Topic 606)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,981

 

 

 

-

 

 

 

1,981

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,049

)

 

 

(6,049

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78,775

 

 

 

 

 

 

 

78,775

 

Balance, September 30, 2018 (unaudited)

 

 

65,378,469

 

 

$

654

 

 

$

-

 

 

$

156,912

 

 

$

(17,888

)

 

$

139,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

7


 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

Basis of Presentation and Principles of Consolidation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Manhattan Associates, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “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, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The results for the three and nine months ended September 30, 2018 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, 2017.

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.

Reclassifications

Certain line items in prior period financial statements have been reclassified to conform to the current period presentation in the condensed consolidated statements of income due to our business transition from perpetual software license to cloud subscriptions. We believe separate disclosures of our software license, cloud subscription, maintenance and service revenue are meaningful to investors and provide important measures of our business performance. The line items in prior period financial statements that have been reclassified to conform to the current period presentation in the condensed consolidated statements of income, include: all revenue line items; cost of license; cost of cloud subscriptions, maintenance and services; and cost of hardware. Such reclassifications did not affect total revenues, operating income or net income.

 

New Accounting Pronouncements Adopted in Fiscal Year 2018

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue Recognition – Revenue from Contracts with Customers (Topic 606), which, along with its subsequent amendments, replaced substantially all revenue recognition guidance. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other standards.

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results of reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the previous revenue recognition standard (Topic 605).  Historical hardware sales prior to the adoption of Accounting Standards Codification (ASC) 606 were recorded on a gross basis, as we were the principal in the transaction in accordance with ASC 605-45. Under the new standard, we are an agent in the transaction as we do not physically control the hardware which we sell; accordingly, we recognize our hardware revenue net of related cost which reduces both hardware revenue and cost of sales as compared to our accounting prior to 2018. Otherwise, the adoption of ASC 606 does not have a material impact on the measurement or recognition of revenue in any prior or current reporting periods.

However, based on expected renewals of maintenance and multi-year cloud subscriptions, we must defer a portion of our sales commission expense and amortize it over time as the corresponding services are transferred to the customer under the new standard.  As a result, we recorded a net increase to opening retained earnings of $2.0 million, net of tax, as of January 1, 2018 for commissions expense required to be deferred on contracts not completed as of that date.

Had we presented the results for the three and nine months ended September 30, 2018 under Topic 605, we would have presented hardware revenue gross which would have increased hardware revenue and cost of hardware each by $7.5 million and $27.3

 

8


 

million, respectively. We would have also expensed all sales commissions upon contract completion which would have increased sales and marketing expense by $0.6 million and $1.4 million for the three and nine months ended September 30, 2018, respectively.

Stock Compensation

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07).  The new guidance expands the scope of ASC 718, Compensation – Stock Compensation, to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s operations, and supersedes the guidance in ASC 505-50, Equity-Based Payments to NonEmployees. Once adopted, the fair value of awards granted to nonemployees will be determined as of the grant date and recognized, in expense, over the service period. Previous guidance required the fair value of awards granted to nonemployees to be remeasured at intervals in determining the expense to be recognized.  ASU 2018-07 is effective for public business entities in annual periods beginning after December 15, 2018 (first quarter 2019 for us).  We early adopted ASU 2018-07 in the third quarter of 2018, and the adoption did not impact our financial statements.

New Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU 2016-02, Leases, which established new ASC Topic 842 (ASC 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new standard will require both types of leases to be recognized on the balance sheet. ASC 842 also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.

ASC 842 was previously required to be adopted using the modified retrospective approach.  However, in July 2018, the FASB issued ASU 2018-11, which allows for retrospective application with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  Under this option, entities would not need to apply ASC 842 (along with its disclosure requirements) to the comparative prior periods presented.

ASC 842 is effective for us in the first quarter of 2019 and we expect that most of our operating leases (primarily office space) will be recognized as operating lease liabilities and right of use assets on our balance sheet. We are continuing to evaluate the impact that the adoption of this standard will have on our financial statements but currently believe it is likely that we will elect to adopt certain of the optional practical expedients, including the package of practical expedients, which, among other things, gives us the option to not reassess: 1) whether expired or existing contracts are or contain leases; 2) the lease classification for expired or existing leases; and 3) initial direct costs for existing leases.

 

2.

Revenue Recognition

We recognize revenue when we transfer control of the promised products or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. We derive our revenue from software licenses, cloud subscriptions, customer support services and software enhancements (“maintenance”), implementation and training services, and sales of hardware. We exclude sales and usage-based taxes from revenue.

Nature of Products and Services

Our perpetual software licenses provide the customer with a right to use the software as it exists at the time of purchase. We recognize revenue for distinct software licenses once the license period has begun and we have made the software available to the customer.

Cloud subscriptions includes software as a service (“SaaS”) and arrangements which provide customers with the right to use our software within a cloud-based environment that we provide and manage where the customer does not have the right to take possession of the software without significant penalty. SaaS and hosting revenues are recognized ratably over the contract period. For contracts that include a perpetual license and hosting services, we generally consider the arrangement as an overall service, recognized over the initial hosting term.  The software license fee typically due at the outset of the arrangement is not payable again if the

 

9


 

customer renews the hosting services, so that the customer’s option to renew the hosting services is a material right, the revenue from which, if the option is exercised, we will recognize over the applicable renewal period.

Our perpetual software licenses are typically sold with maintenance under which we provide a comprehensive 24 hours per day, 365 days per year program that provides customers with software upgrades, when and if available, which include additional or improved functionality and technological advances incorporating emerging supply chain and industry initiatives. Revenue related to maintenance is generally paid in advance and recognized ratably over the term of the agreement, typically twelve months.

Our services revenue consists of fees generated from implementation and training services, including reimbursements of out-pocket expenses in connection with our services. Services include system planning, design, configuration, testing, and other software implementation support, and are typically optional and distinct from 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. The total amount of expense reimbursement included in services revenue was $4.4 million and $5.0 million for the three months ended September 30, 2018 and 2017, respectively, and $12.1 million and $13.8 million for the nine months ended September 30, 2018 and 2017, respectively.

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 Judgements

Our contracts with customers typically contain promises to transfer multiple products and services to a customer. Judgement is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. We allocate the transaction price to the distinct performance obligations based on relative standalone selling price (“SSP”). We estimate SSP based on the prices charged to customers, or by using information such as market conditions and other observable inputs. However, the selling price of our software licenses is highly variable. Thus, we estimate SSP for software licenses using the residual approach, determined based on total transaction price less the SSP of other goods and services promised in the contract.

Contract Balances

Timing of invoicing to customers may differ from timing of revenue recognition. Payment terms for our software licenses vary. We have an established history of collecting under the terms of our software license contracts without providing refunds or concessions to our customers. Cloud subscriptions and maintenance are typically billed annually in advance. Services are typically billed monthly as performed. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with predictable ways to purchase our software and services, not to provide or receive financing. Additionally, we are applying the practical expedient to exclude from consideration any contracts with payment terms of one year or less as we rarely offer terms extending beyond one year.  

Deferred revenue mainly represents amounts collected prior to having completed performance of maintenance, cloud subscriptions and professional services. $13.4 million and $66.8 million of revenue that was included in the deferred revenue balance as of  December 31, 2017 was recognized during the three and nine months ended September 30, 2018, respectively. $38.4 million of revenue that was included in the deferred revenue balance as of June 30, 2018 was recognized during the three months ended September 30, 2018.

There was no revenue recognized during the three and nine months ended September 30, 2018  from performance obligations that were satisfied in prior periods.

Remaining Performance Obligations

As of September 30, 2018, approximately $64.2 million of revenue is expected to be recognized from remaining performance obligations for cloud subscriptions and maintenance contracts 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

 

10


 

approximately two-thirds 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.

We record an allowance for doubtful accounts based on the historical experience of write-offs and a detailed assessment of accounts receivable. Additions to the allowance for doubtful accounts 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 $0.4 million and $3.2 million for the three and nine months ended September 30, 2018, respectively. In estimating the allowance for doubtful accounts, we consider the age of the accounts receivable, our historical write-offs, and the 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. Uncollectible accounts are written off when it is determined that the specific balance is not collectible.  

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 $3.2 million as of September 30, 2018, of which $2.2 million is included in other assets and $1.0 million is included in prepaid expenses and other current assets. Sales commission expense is included in Sales and Marketing expense in the accompanying consolidated statement of operations. Amortization of sales commissions was $0.3 million and $0.7 million for the three and nine months ended September 30, 2018, respectively. No impairment losses were recognized during the periods.

 

3.

Fair Value Measurement

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:

 

Level 1–Quoted prices in active markets for identical instruments.

 

Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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, 2018, our cash, cash equivalents, and short-term investments were $71.8 million, $18.0 million, and $4.1 million, respectively. We currently have no long-term investments. Cash equivalents consist of highly liquid money market funds and certificates of deposit. Short-term investments consist of certificates of deposit. 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. At September 30, 2018 and December 31, 2017, we had $9.6 million and $10.5 million, respectively, in money market funds, which are classified at Level 1 and are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets. We have no investments classified at Level 2 or Level 3.

 

 

4.

Equity-Based Compensation

 

We granted 13,665 and 97,458 restricted stock units (“RSUs”) during the three months ended September 30, 2018 and 2017, respectively, and granted 522,672 and 458,449 RSUs, during the nine months ended September 30, 2018 and 2017, respectively.

 

11


 

Equity-based compensation expense related to RSUs was $5.3 million and $3.8 million during the three months ended September 30, 2018 and 2017, respectively, and $14.6 million and $11.0 million during the nine months ended September 30, 2018 and 2017, respectively.

A summary of changes in unvested shares/units for the nine months ended September 30, 2018 is as follows:

 

 

 

Number of shares/units

 

Outstanding at December 31, 2017

 

 

1,036,635

 

Granted

 

 

522,672

 

Vested

 

 

(379,312

)

Forfeited

 

 

(180,956

)

Outstanding at September 30, 2018

 

 

999,039

 

 

 

5.

Income Taxes

 

Our effective tax rate was 24.4% and 36.5% for the three months ended September 30, 2018 and 2017, respectively, and 23.4% and 35.2% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in the effective tax rate for the three months ended September 30, 2018 is a result of the reduction of the U.S. statutory tax rate from 35% to 21%.  The decrease in the effective tax rate for the nine months ended September 30, 2018 primarily relates to the reduction of the U.S. statutory tax rate from 35% to 21%, partially offset by a decrease of $1.1 million in excess tax benefits on restricted stock vesting.  We also reduced our provisional one-time estimate for the impact of tax reform discussed below by $0.3 million.

U.S. Tax Reform

On December 22, 2017, the United States enacted tax reform legislation pursuant to the Tax Cuts and Jobs Act (the Act). The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  We are applying the guidance in Staff Accounting Bulletin (SAB) 118 when accounting for the enactment-date effects of the Act. At September 30, 2018, we have made a reasonable estimate of the effects of the Act. We will continue to make and refine our calculations as we complete additional analysis. Our estimates may also be affected as we gain a more thorough understanding of the tax law, as more guidance/technical corrections are released by the Internal Revenue Service (IRS) and/or Congress. These changes could be material to income tax expense.

In December 2017, we recorded a provisional estimate of $3.3 million for the one-time deemed repatriation transition tax on unrepatriated foreign earnings. The one-time transition tax is based on our total earnings and profits (E&P) which we deferred from the U.S. income taxes under the previous U.S. law. As we continue to refine our E&P analysis, we will refine our calculations of the one-time transition tax, which could affect the measurement of this liability.  We have not provided additional income taxes for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in our foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations.

In December 2017, we also recorded a provisional write-down to deferred tax assets of $0.7 million related to changes in section 162(m), Internal Revenue Code of 1986, regarding deductions for excessive employee compensation. We continue to gather and analyze information, including the definition of an employee contract for stock grants not vested as of the enactment date of the Act and the potential impact of Notice 2018-68 released by the Internal Revenue Service during the quarter, which provided initial guidance on the application of Code section 162(m) after Tax Reform.  We reduced this estimate by $0.3 million during the nine months ended September 30, 2018.

The Act also subjects a U.S. shareholder to tax on global intangible low taxed income (GILTI) earned by certain foreign subsidiaries.  The Staff of the FASB provided additional guidance to address the accounting for the effects of the provisions related to the taxation of GILTI, noting that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period cost only.  Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At September 30, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current-year operations only in our effective tax rate and have not provided additional GILTI on deferred items.

 

12


 

We apply the provisions for income taxes related to, among other things, accounting for uncertain tax positions and disclosure requirements in accordance with ASC 740, Income Taxes. For the three months ended September 30, 2018, there were no material changes to our uncertain tax positions. 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 the U.S. federal, substantially all state and local income tax examinations and substantially all non-U.S. income tax examinations for years before 2012.

 

6.

Net Earnings Per Share

Basic net earnings per share is computed using net income divided by the weighted average number of shares of common stock outstanding (“Weighted Shares”) for each period presented. Diluted net earnings per share is computed using net income divided by the sum of Weighted Shares and common equivalent shares (CESs) outstanding for each period presented using the treasury stock method.

The following is a reconciliation of the net income and share amounts used in the computation of basic and diluted net earnings per common share for the three and nine months ended September 30, 2018 and 2017 (in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands, except per share data)

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

28,455

 

 

$

32,599

 

 

$

78,775

 

 

$

91,967

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

 

$

0.47

 

 

$

1.18

 

 

$

1.33

 

Effect of CESs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(0.01

)

Diluted

 

$

0.43

 

 

$

0.47

 

 

$

1.18

 

 

$

1.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares: