Manhattan Associates Inc: Form 10-Q for the period ended Sep 30, 2022

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:

• cloud subscriptions, including software as a service (SaaS) and hosting of software;
• licenses of our software;
• customer support services and software enhancements (collectively, “maintenance”);
• professional services, including solutions planning and implementation, related consulting, customer training, and reimbursements from customers for out-of-pocket expenses (collectively, “services”); and
• hardware sales.

In 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:

• Focus on employees, customer success and drive sustainable long-term growth;
• Invest in innovation to expand our products and total addressable market;
• Expand our Manhattan Active Suite of Cloud Solutions;
• Develop and grow our cloud business and cloud subscription revenue; and
• Expand our global sales and marketing teams.

Cloud Subscription

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.

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.

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.

(in thousands, except per share data)

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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:

(in thousands)

(in thousands)

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Condensed Consolidated Financial Summary - Third Quarter 2022

• Consolidated total revenue: $198.1 million for the third quarter of 2022, compared to $169.2 million for the third quarter of 2021;
• Cloud subscription revenue: $45.3 million for the third quarter of 2022, compared to $32.2 million for the third quarter of 2021;
• Software license revenue: $6.4 million for the third quarter of 2022, compared to $8.5 million for the third quarter of 2021;
• Operating income: $36.8 million for the third quarter of 2022, compared to $42.4 million for the third quarter of 2021;
• Operating margins: 18.6% for the third quarter of 2022, compared to 25.1% for the third quarter of 2021;
• Diluted earnings per share: $0.47 for the third quarter of 2022 compared to $0.57 for the third quarter of 2021;
• Cash flow from operations: $39.9 million in the third quarter of 2022, compared to $59.7 million in the third quarter of 2021;
• Days sales outstanding: 67 days at September 30, 2022, compared to 63 days at June 30, 2022;
• Cash: $197.1 million at September 30, 2022, compared to $213.8 million at June 30, 2022;
• Share repurchases: In the three months ended September 30, 2022, we reduced our common shares outstanding by approximately 0.5%, primarily through the repurchase of approximately 0.3 million shares of our common stock, under the share repurchase program authorized by our board of directors for a total investment of $50.0 million. 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 outstanding common stock.

Below we discuss our consolidated results of operations for the third quarters of 2022 and 2021.

Revenue

(in thousands)

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.

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

(in thousands)

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

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

• Consolidated revenue: $569.0 million for the nine months ended September 30, 2022 compared to $492.1 million for the nine months ended September 30, 2021.
• Cloud subscription revenue: $124.8 million for the nine months ended September 30, 2022 compared to $87.4 million for the nine months ended September 30, 2021.
• Software license revenue: $19.9 million for the nine months ended September 30, 2022, compared to $25.1 million for the nine months ended September 30, 2021.
• Operating income: $108.0 million for the nine months ended September 30, 2022, compared to $107.2 million for the nine months ended September 30, 2021.
• Operating margins: 19.0% for the nine months ended September 30, 2022, compared to 21.8% for the nine months ended September 30, 2021.
• Diluted earnings per share: $1.43 for the nine months ended September 30, 2022 compared to $1.40 for the nine months ended September 30, 2021.
• Cash flow from operations: $124.4 million for the nine months ended September 30, 2022, compared to $145.1 million for the nine months ended September 30, 2021.
• Cash: $197.1 million at September 30, 2022, compared to $263.7 million at December 31, 2021.
• Share repurchases: During the nine months ended September 30, 2022, we reduced our common shares outstanding by approximately 1.2% primarily through the repurchase of approximately 1.1 million shares of our common stock, under the share repurchase program authorized by our board of directors, for a total investment of $150.1 million.

Below we discuss our consolidated results of operations for the nine months ended September 30, 2022 and 2021.

(in thousands)

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.

Cost of Revenue

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.

Operating Expenses

(in thousands)

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

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.

Other Income and Income Taxes

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 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:

• the duration and severity of the coronavirus disease (COVID-19) pandemic and of measures taken to combat its spread, and the effects of both on our employees, customers, partners and the global economy;
• ongoing disruption and transformation in our vertical markets, including the aggravating effects of the COVID-19 pandemic on the sector;
• the operational and financial effects of our business transition to cloud subscription-based solutions;
• economic, political and market conditions, including inflation;
• our ability to attract and retain highly skilled employees;
• competition;
• our dependence on a single line of business;
• our dependence on generating revenue from software licenses and cloud subscriptions to drive business;
• undetected errors or “bugs” in our software;
• the risk of defects, delays or interruptions in our cloud subscription services;
• possible compromises of our data protection and IT security measures;
• risks associated with large system implementations;
• possible liability to customers if our products fail;
• the requirement to maintain high quality professional service capabilities;
• the risks of international operations, including foreign currency exchange risk;
• the war in Ukraine;
• the possibility that research and development investments may not yield sufficient returns;
• the long sales cycle associated with our products;
• the difficulty of predicting operating results;
• the need to continually improve our technology;
• risks associated with managing growth;
• reliance on third party and open source software;
• the need for our products to interoperate with other systems;
• the need to protect our intellectual property, and our exposure to intellectual property claims of others;
• the possible effects on international commerce of new or increased tariffs, or a “trade war”;
• other risks described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as these may be updated from time to time in subsequent quarterly reports.

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.

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.

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.

PART II

OTHER INFORMATION

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.