# MANHATTAN ASSOCIATES INC (MANH) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MANHATTAN ASSOCIATES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1056696/000095017024011411/manh-20231231.htm
Accession: 0000950170-24-011411
Filing date: 2024-02-06
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MANH/
All MD&A years: /company/MANH/mda/
Previous year: /company/MANH/mda/fy2022/ (FY 2022)
Next year: /company/MANH/mda/fy2024/ (FY 2024)

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

All statements, trend analyses, and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margins, and anticipated expense levels, as well as other statements including words such as “may,” “expect,” “forecast,” “anticipate,” “intend,” “plan,” “believe,” “could,” “seek,” “project,” “estimate,” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, including those discussed under the caption “Risk Factors” in Item 1A of this Form 10-K, and our actual results of operations may differ materially from those contained in the forward-looking statements.

Business Overview

We develop, sell, deploy, service and maintain software solutions designed to manage 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 POS 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”) related to software licenses;

•
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 2023, we generated $928.7 million in total revenue, with a revenue mix of: cloud subscriptions 27%; software license 2%; maintenance 15%; services revenue 53%; and hardware 3%.

We have three geographic reportable segments: the Americas, EMEA, and APAC. Geographic revenue is based on the location of the sale. Our international revenue was approximately $301.4 million, $238.4 million, and $196.4 million for the years ended December 31, 2023, 2022 and 2021, respectively, which represents approximately 32%, 31%, and 30% of our total revenue for the years ended December 31, 2023, 2022 and 2021, respectively. International revenue includes all revenue derived from sales to customers outside the United States. At December 31, 2023, we employed approximately 4,580 employees worldwide. We have offices in Australia, Chile, China, France, Germany, India, Italy, Japan, the Netherlands, Singapore, Spain, and the United Kingdom, as well as representatives in Mexico and reseller partnerships in Latin America, Eastern Europe, the Middle East, South Africa, and Asia.

Future Expectations

While we remain cautious about the global economy, our results for the full year ended 2023 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 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.

Going forward, we are investing in our cloud business, including enterprise investments in innovation, and strategic operating expenses to support growth objectives.

For 2024, our five strategic goals continue to be:

•
Focus on 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;

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•
Develop and grow our cloud business and cloud subscription revenue; and

•
Expand our global sales and marketing teams.

Cloud Subscription

Under our Manhattan Active® Solutions cloud subscription offering, 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. Adoption of our Manhattan Active® cloud solutions continues to increase nicely, with cloud revenue up 44% over 2022. Cloud revenue now represents about 93% of our total software revenue.

Customers on our legacy perpetual license program can convert their maintenance contracts to cloud subscription contracts.

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 2023, we generated approximately 68% of our total revenue in the United States, 18% in EMEA, and the remaining balance in APAC, Canada, and Latin America. In addition, Gartner Inc. (“Gartner”), an information technology research and advisory company, estimates that over 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.

In January 2024, the International Monetary Fund (IMF) provided a World Economic Outlook (WEO) update. The WEO update noted, “global growth is projected at 3.1 percent in 2024 and 3.2 percent in 2025. The forecast for 2024–25 is, however, below the historical (2000–19) average of 3.8 percent, with elevated central bank policy rates to fight inflation, a withdrawal of fiscal support amid high debt weighing on economic activity, and low underlying productivity growth. Inflation is falling faster than expected in most regions, in the midst of unwinding supply-side issues and restrictive monetary policy.”

The WEO update projected that advanced economies, which represent our primary revenue markets, would grow at about 1.5 and 1.8 percent in 2024 and 2025, while the emerging and developing economies would grow at about 4.1 percent in 2024 and 4.2 percent in 2025.

While we are encouraged by our results, we remain cautious regarding the pace of global economic growth. We believe global geopolitical and economic volatility associated with the pandemic likely will continue to shape customers’ and prospects’ enterprise software buying decisions.

Key Performance Metrics

We regularly review metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe cloud subscriptions revenue growth and remaining performance obligation (RPO) growth are the leading indicators of our business performance, primarily derived from cloud subscription fees that customers pay for our Unified Omnichannel Commerce and Digital Supply Chain solutions.

Cloud Subscriptions Revenue Growth

Our cloud revenue growth provides insight into our ability to maintain and grow our cloud customer base. Total cloud revenue increased from $176.5 million in 2022 to $254.6 million in 2023, representing a 44% year-over-year increase. Total cloud revenue increased from $122.2 million in 2021 to $176.5 million in 2022, representing a 44% year-over-year increase. Cloud revenue growth is being driven by strong demand for our cloud offerings.

Remaining Performance Obligations

Transaction price allocated to RPO represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that we expect to invoice and recognize as revenue in future periods. Over 98% of our RPO represent cloud native subscriptions with a non-cancelable term greater than one year. Maintenance contracts typically are for one year and not included in RPO. RPO provides insight into our contracted backlog of future business. As of December 31, 2023, our RPO was approximately $1.4 billion, an increase of 36% over December 31, 2022 on strong demand.

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Revenue

Cloud Subscriptions and Software License revenue: In the full year ended 2023, cloud subscriptions revenue was 93% of total cloud and software license revenue. In 2023, cloud subscriptions revenue totaled $254.6 million, or 27% of total revenue. The Americas, EMEA, and APAC segments recognized $205.6 million, $42.2 million and $6.8 million in cloud subscriptions revenue, respectively, in 2023. Cloud subscriptions revenue is recognized over the term of the agreement, typically five years or 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. Approximately 34% of the total value of new non-cancelable cloud subscriptions (excluding renewals) signed during 2023 was with new customers and 66% was with existing customers. We define new customers as entities from which we either have never earned revenue or have not recognized revenue in the last five years.

In 2023, license revenue totaled $18.2 million, or 2% of total revenue. The Americas, EMEA, and APAC segments totaled $12.0 million, $2.9 million, and $3.2 million in license revenue, respectively, in 2023.

Our Unified Omnichannel Commerce and Digital Supply Chain solutions are focused on core omnichannel operation (e-commerce, retail store operations and POS), 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 totaled $143.9 million, or 15% of total revenue. The Americas, EMEA and APAC segments recognized $115.0 million, $19.7 million, and $9.2 million, respectively, in maintenance revenue in 2023. For maintenance, we offer a comprehensive 24 hours per day, 365 days per year program that provides our customers with software upgrades, when and if available, which include additional or improved functionality and technological advances incorporating emerging supply chain and industry initiatives.

Maintenance relates to our traditional perpetual license sales. We expect maintenance revenues to decline as we continue to develop our cloud offerings, and be offset by additional cloud revenue, including from customers converting their maintenance contracts to cloud subscriptions. The growth of maintenance revenues 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. Substantially all of our customers renew their annual support contracts or convert their maintenance contracts to cloud subscriptions. Maintenance revenue is generally paid in advance and recognized 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 2023, our services revenue totaled $487.9 million, or 53% of total revenue. The Americas, EMEA, and APAC segments recognized $363.0 million, $101.3 million, and $23.6 million, respectively.

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 implementation of a system or service, the conversion and transfer of the customer’s historical data to the new system or service, and ongoing training, education, and system/service 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.

Although our professional services are optional, the majority of our customers use at least some portion of these services for their planning, implementation, or related needs. Professional services are typically rendered under time and materials-based contracts with services typically billed on an hourly basis. Professional services are sometimes rendered under fixed-fee based contracts with payments due on specific dates or milestones.

Services revenue growth is contingent upon 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 $24.1 million in 2023 representing 3% of total revenue. As a convenience for our cloud and software customers, we resell a variety of hardware products developed and manufactured by third parties. These products include computer hardware, radio frequency terminal networks, RFID chip readers, bar code printers and scanners, and other peripherals. We resell all third-party hardware products and related maintenance pursuant to agreements with manufacturers or through distributor-authorized reseller agreements pursuant to which we are entitled to purchase

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hardware products and services at discount prices. We generally purchase hardware from our vendors only after receiving an order from a customer. As a result, we do not maintain hardware inventory.

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 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 POS. Our R&D expenses for the years ended December 31, 2023, 2022 and 2021 were $126.8 million, $111.9 million, and $97.6 million, respectively.

We expect to continue to focus our R&D resources on the development and enhancement of our core supply chain, inventory optimization, omnichannel and POS software solutions. We offer what we believe to be the broadest solutions portfolio in the supply chain solutions marketplace, to address all aspects of inventory optimization, transportation management, distribution management, planning, and omnichannel operations including order management, store inventory & fulfillment, call center and POS.

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 2023, we generated cash flow from operating activities of $246.2 million and have generated a cumulative total of $611.0 million for the three years ended December 31, 2023. Our cash at December 31, 2023 totaled $270.7 million, with no debt on our balance sheet. We currently have no credit facilities. During the past three years, our primary uses of cash have been for funding investments in R&D in our Unified Omnichannel Commerce and Digital Supply Chain solutions to drive revenue and earnings growth. In addition, we repurchased approximately $166.0 million of Manhattan Associates’ outstanding common stock under the share repurchase program approved by our Board of Directors. Our $75.0 million repurchase authority replenished by our Board of Directors in October 2023 remains in effect.

In 2024, our priorities for use of cash will continue to be investments in our Unified Omnichannel Commerce and Digital Supply Chain solutions. We also will prioritize capital allocation in our global teams to fund growth, and accretive share repurchases. We do not anticipate any borrowing requirements in 2024 for general corporate purposes.

Full Year 2023 Financial Summary

•
Diluted earnings per share: $2.82 for 2023 compared to $2.03 for 2022;

•
Consolidated revenue: $928.7 million for 2023 compared to $767.1 million for 2022;

•
Cloud subscription revenue: $254.6 million for 2023 compared to $176.5 million for 2022;

•
License revenue: $18.2 million for 2023 compared to $24.8 million for 2022;

•
Operating income: $209.9 million for 2023 compared to $152.7 million for 2022;

•
Operating margins: 22.6% for 2023 compared to operating margins of 19.9% for 2022;

•
Cash flow from operations: $246.2 million for 2023 compared to $179.6 million for 2022;

•
Cash paid for income taxes: $67.4 million for 2023 compared to $58.0 million for 2022;

•
Cash and investments: $270.7 million at December 31, 2023 compared to $225.5 million at December 31, 2022; and

•
Share repurchases: In 2023, we repurchased 1,024,328 shares of Manhattan Associates’ outstanding common stock for approximately $166.0 million under the share repurchase program approved by our Board of Directors. Our $75.0 million repurchase authority replenished by our Board of Directors in October 2023 remains in effect.

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Results of Operations

In the following table, we present a selection of certain Statement of Income data for 2023, 2022 and 2021.

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[[/GREPCENT_TABLE]]

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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 research and development, certain marketing and general and administrative costs that support the global organization, and the amortization of acquired developed technology. Included in the Americas costs are all research and development costs, including the costs associated with our operations in India. During 2023, 2022, or 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 profit by segment:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The consolidated results of our operations for the years ended December 31, 2023, 2022 and 2021 are discussed below.

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Revenue

Our revenue consists of fees generated from cloud subscriptions, software licensing, maintenance, professional services, and hardware sales.

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[[/GREPCENT_TABLE]]

Cloud Subscriptions Revenue

Year 2023 compared with year 2022

Cloud subscriptions revenue increased $78.2 million to $254.6 million in 2023 compared to 2022 on customers demand for our SaaS offerings. Cloud subscriptions revenue increased $56.7 million, $19.2 million and $2.3 million for the Americas, EMEA, and APAC segments, respectively. Cloud subscriptions revenue recognized from first time cloud customers (defined as customers with no prior cloud subscriptions) during the year in which their initial cloud subscription began was approximately 3% and 7% of total cloud revenue in 2023 and 2022, respectively. Our customers contract for multi-year subscriptions which typically increase in scope and price over the term, and thus revenue recognized during the year when the contract is signed tends to be small relative to the total contract value. Revenue recognized in the initial year excludes revenue from additional solutions sold to the customer in future years and could be skewed by the timing of the start date of the subscription during the year.

Year 2022 compared with year 2021

Cloud subscriptions revenue increased $54.3 million to $176.5 million in 2022 compared to 2021. Cloud subscriptions revenue for the Americas, EMEA and APAC segments increased $45.1 million, $7.6 million and $1.6 million, respectively. Revenue recognized from first time cloud customers (defined as customers with no prior cloud subscriptions) during the year in which their initial cloud subscription began was 7% and 12% of total cloud revenue in 2022 and 2021, respectively.

Software License Revenue

Year 2023 compared with year 2022

Software license revenue decreased $6.6 million to $18.2 million in 2023 compared to 2022 as customers continue to purchase our SaaS offerings rather than a traditional perpetual license. License revenue for the Americas and EMEA segments decreased $4.3 million and $3.5 million, respectively, while license revenue for the APAC segment increased $1.1 million in 2023 over 2022. The majority of our software license revenue relates to our warehouse management product group (approximately 85%) for the year ended December 31, 2023.

Year 2022 compared with year 2021

Software license revenue decreased $12.3 million to $24.8 million in 2022 compared to 2021. License revenue for the Americas segment decreased $13.0 million, while license revenue from the EMEA & APAC segments increased $0.6 million and $0.1 million, in 2022 over 2021. The majority of our software license revenue relates to our warehouse management product group (over 85%) for the year ended December 31, 2022.

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Maintenance Revenue

Year 2023 compared with year 2022

Maintenance revenue increased by $1.7 million in 2023 compared to 2022. The Americas increased $1.7 million, compared to 2022, while the EMEA and APAC segments remained relatively flat.

Year 2022 compared with year 2021

Maintenance revenue decreased $3.6 million in 2022 compared to 2021. Maintenance revenue for the Americas segments increased $0.1 million, while EMEA and APAC segments decreased $3.3 million and $0.4 million compared to 2021, respectively.

Services Revenue

Year 2023 compared with year 2022

Services revenue increased $93.8 million in 2023 compared to 2022. Service revenue for the Americas, EMEA and APAC segments increased $67.0 million, $21.7 million, and $5.1 million, respectively, compared to 2022. Services revenue was driven by adoption and implementation of our cloud solutions. The percentage of professional services revenue that relates to cloud subscriptions in 2023 and 2022 was approximately 70% and 55%, respectively. The remainder of our professional services revenue relates to implementations, ongoing support, and upgrades of licensed software. Professional services revenue recognized from first time cloud customers (defined as customers with no prior cloud subscriptions) during the year in which their initial cloud subscription began was approximately 8% and 12% of total services revenue in 2023 and 2022, respectively. As with our cloud subscriptions, customers often continue to purchase our professional services beyond their initial implementation to roll out additional locations, implement additional features and functionality, and implement additional products, as well as for general support. Professional services revenue recognized from first time cloud customers excludes those services we provided after the year in which the initial cloud subscription began. Further, the professional services revenue attributable to first time cloud customers could be affected by the timing of the start date of the subscription during the year.

Year 2022 compared with year 2021

Services revenue increased $59.3 million in 2022 compared to 2021. The Americas, EMEA, and APAC segments increased $39.6 million, $13.5 million and $6.2 million, respectively, compared to 2021. Services revenue was driven by adoption and implementation of our cloud solutions. The percentage of professional services revenue that relates to cloud subscriptions in 2022 and 2021 was approximately 55% and 40%, respectively. Professional services revenue recognized from first time cloud customers (defined as customers with no prior cloud subscriptions) during the year in which their initial cloud subscription began was approximately 12% and 14% of total services revenue in 2022 and 2021, respectively.

Hardware Revenue

Hardware revenue, net decreased $5.4 million in 2023 compared to 2022. Hardware revenue, net increased $5.8 million in 2022 compared to 2021. The majority of hardware sales are derived from our Americas segment. Sales of hardware are largely dependent upon customer-specific desires, which fluctuate.

Cost of Revenue

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[[/GREPCENT_TABLE]]

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Cost of Cloud Subscriptions, Maintenance and Services

Year 2023 compared with year 2022

Cost of cloud subscriptions, maintenance and services consists primarily of salaries and other personnel-related expenses of employees dedicated to cloud subscriptions; maintenance services related to perpetual software licenses; and professional and technical services as well as hosting fees. The $73.2 million increase in 2023 compared to 2022 was principally due to a $52.0 million increase in compensation and other personnel-related expenses, a $6.3 million increase in travel expense, a $8.3 million increase in performance-based compensation expense, a $4.4 million increase in computer infrastructure cost and a $1.1 million increase in facilities expense.

Year 2022 compared with year 2021

The $60.6 million increase in 2022 compared to 2021 was principally due to a $43.7 million increase in compensation and other personnel-related expenses, a $6.2 million increase in travel expense, a $5.1 million increase in performance-based compensation expense, a $3.7 million increase in computer infrastructure cost and a $0.8 million increase in professional expense.

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. In 2023, cost of license decreased by $0.7 million, compared to 2022. In 2022, cost of software license decreased by $0.2 million compared to 2021.

Operating Expenses

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[[/GREPCENT_TABLE]]

Research and Development

Our principal research and development (R&D) activities during 2023, 2022 and 2021 focused on the expansion and integration of new products and releases, including cloud solutions, while expanding the product footprint of our Unified Omnichannel Commerce and Digital Supply Chain solutions, including Inventory Optimization and point-of-sale.

For 2023, 2022 and 2021, we did not capitalize any R&D costs as the period between determining technological feasibility was established or that it is probable the software product would be used to perform the function intended were insignificant.

Year 2023 compared with year 2022

R&D expenses primarily consist of salaries and other personnel-related costs for personnel involved in our research and development activities. Research and development expenses in 2023 increased by $14.9 million compared to 2022. This increase is principally due to a $10.9 million increase in compensation and other personnel-related expenses, a $3.1 million increase in performance-based compensation expense, and a $0.6 million increase in computer infrastructure costs.

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Year 2022 compared with year 2021

Research and development expenses in 2022 increased by $14.3 million compared to 2021. This increase is principally due to a $12.1 million increase in compensation and other personnel-related expenses and a $1.1 million increase in performance-based compensation expense.

Sales and Marketing

Year 2023 compared with year 2022

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 by $10.0 million in 2023 compared to 2022, primarily due to a $4.3 million increase in compensation and other personnel-related expense, a $3.7 million increase in marketing and campaign expenses, a $1.0 million increase in performance-based compensation expense, and a $0.8 million in travel expense.

Year 2022 compared with year 2021

Sales and marketing expenses increased $6.7 million in 2022 compared to 2021, primarily due to a $2.7 million increase in performance-based compensation expense, a $2.1 million increase in compensation and other personnel-related expenses, a $1.1 million increase in travel expense, and a $0.8 million increase in marketing and campaign programs.

General and Administrative

Year 2023 compared with year 2022

General and administrative 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. General and administrative expenses increased $8.1 million in 2023 primarily due to a $5.3 million increase in compensation and other personnel-related expenses, a $1.3 million increase in performance-based compensation expense, a $0.6 million increase in professional expenses, and a $0.6 million increase in computer infrastructure costs.

Year 2022 compared with year 2021

General and administrative expenses increased $5.0 million in 2022 primarily due to a $4.1 million increase in compensation and other personnel-related expenses and a $0.6 million increase in travel expenses.

Depreciation and Amortization

Depreciation and amortization of intangibles and software expense amounted to $5.8 million, $6.7 million, and $7.9 million in 2023, 2022 and 2021, respectively. Amortization of intangibles was immaterial in 2023, 2022 and 2021. We have recorded goodwill and other acquisition-related intangible assets as part of the purchase accounting associated with various acquisitions.

Operating Income

Operating income in 2023 increased $57.2 million to $209.9 million, compared to $152.7 million for 2022. Operating margins were 22.6% for 2023 versus 19.9% for 2022. Operating income and margin increased primarily due to increased cloud subscriptions and services revenues. In 2023, operating income increased by $35.9 million, $16.7 million, and $4.6 million in the Americas, EMEA and APAC segment, respectively.

Operating income in 2022 increased $18.4 million to $152.7 million, compared to $134.3 million for 2021. Operating margins were 19.9% for 2022 versus 20.2% for 2021. Operating income increased primarily due to increased cloud subscriptions and services revenues. In 2022, operating income increased by $8.1 million, $5.3 million, and $5.0 million in the Americas, EMEA and APAC segments. Operating margin decreased slightly due to our commitment to strategically invest in the business as a cloud first company focused on delivering long term sustainable growth and earnings leverage.

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Other Income and Income Taxes

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[[/GREPCENT_TABLE]]

Other (Loss) Income, net

Other (loss) income, net primarily includes interest income, foreign currency gains and losses, and other non-operating expenses. Interest income was $5.3 million, $0.6 million and $0.1 million for 2023, 2022 and 2021, respectively. The weighted-average interest rate earned on cash and investments was approximately 2% in 2023 and immaterial for 2022 and 2021. We recorded net foreign currency losses of $1.5 million in 2023, gains of $4.7 million in 2022, and losses of $0.2 million in 2021. The foreign currency gains and losses mainly resulted from 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 British Pound Sterling, Euro, and Indian Rupee.

Income Tax Provision

Our effective income tax rates were 17.4%, 18.4%, and 17.6% in 2023, 2022 and 2021, respectively. Our effective income tax rate takes into account the source of taxable income, domestically by state and internationally by country, and available income tax credits.

The effective tax rate in 2023 decreased from 2022 mainly due to a decrease of expense from a favorable tax law change allowing creditability of foreign tax offset by a decrease of net excess tax benefits on restricted stock vesting and adjustments for tax contingencies.

The effective income tax rate in 2022 increased from 2021 mainly due to an increase of expense from an unfavorable tax law change limiting creditability of foreign tax offset by a decrease in expense for tax contingencies.

The income tax provision for 2023, 2022 and 2021 included excess tax benefits of $6.8 million, $7.6 million, and $6.6 million on vesting of restricted stock.

Liquidity and Capital Resources

During 2023, 2022 and 2021, we funded our business through cash generated from operations. Our cash and cash equivalents as of December 31, 2023 included $203.3 million held in the U.S. and $67.4 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 no longer be subject to additional U.S. income taxes on such earnings due to the enactment of the Tax Cuts and Jobs Act in December 2017, but we could be subject to additional local withholding taxes.

Cash flow from operating activities totaled $246.2 million, $179.6 million, and $185.2 million in 2023, 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 2023 increased $66.6 million compared to 2022 on higher earnings. Cash flow from operating activities for 2022 decreased $5.6 million compared to 2021, which is mainly due to an increase in income tax payments from the 2017 U.S. Tax Cuts and Jobs Act elimination of the expensing of research and development costs as incurred for tax purposes beginning in 2022. Days sales outstanding was 70, 77, and 67 for quarter ending December 31, 2023, 2022 and 2021, respectively, reflecting solid cash collections.

Investing activities used cash of approximately $4.7 million, $6.6 million, and $4.0 million in 2023, 2022 and 2021, respectively. Our investing activities for 2023, 2022 and 2021 consisted of capital spending to support company growth and short-term investing. For 2023, 2022 and 2021, capital expenditure was $4.7 million, $6.6 million, and $4.0 million, respectively.

Financing activities used cash of approximately $196.0 million, $204.5 million, and $120.4 million in 2023, 2022 and 2021, respectively. The principal use of cash for financing activities in 2023, 2022 and 2021 was to purchase our common stock, including shares withheld for taxes due upon vesting of restricted stock. Repurchases of our common stock for 2023, 2022 and 2021 totaled $196.0 million, $204.5 million, and $120.4 million, respectively, including shares withheld for taxes of $30.0 million, $29.1 million, and $20.4 million, respectively. Our $75.0 million repurchase authority replenished by our Board of Directors in October 2023 remains in effect.

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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. In 2024, 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 in our business to extend our market leadership. We will evaluate acquisition opportunities that are complementary to our product footprint and technology direction. We will also continue to weigh our share repurchase options against cash for acquisitions and investing in the business. At this time, we do not anticipate any borrowing requirements in 2024 for general corporate purposes.

Aggregate Contractual Obligations

Our principal commitments as of December 31, 2023 consist of multiple non-cancellable contracts for cloud infrastructure services and obligations under operating leases. As of December 31, 2023, our cloud infrastructure obligations are approximately $98.5 million over the next 4 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 December 31, 2023, are approximately $20.0 million over the next 4 years. We expect to fulfill all of these commitments from our working capital.

Lease Commitments

We lease our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2029. Rent expense for these leases aggregated $8.1 million, $7.7 million, and $7.9 million during 2023, 2022 and 2021, respectively.

In the following table, we present a summary of our contractual commitments as of December 31, 2023 (in thousands):

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[[/GREPCENT_TABLE]]

Indemnities

Our customer contracts generally contain infringement indemnity provisions. Under those provisions, we generally agree, subject to certain exceptions, to indemnify, defend, and hold harmless the customer in connection with third party claims against the customer alleging that the customer’s use of our software services and products infringe third party intellectual property rights. Conditions to our obligations generally include that we are provided the right to control the defense of the claims and, in general, to control settlement negotiations. Those provisions generally provide also that, if the customer is prevented from using our services or products because of a third party infringement claim, our sole obligation (in addition to the indemnification, defense, and hold harmless obligation referred to above) is to, at our expense, (i) procure for the customer the right to continue to use the services or products, (ii) replace or modify the services or products so that the customer’s use does not infringe, or, if neither of those options is reasonably feasible, terminate that particular services or products and provide, as applicable, a refund of services fees paid for services not received or a refund of the unamortized portion of the license fees paid for the products (based on a five year amortization period). Our customer contracts sometimes also require us to indemnify, defend, and hold harmless the customer in connection with death, personal injury or property damage claims made by third parties with respect to actions of our personnel or contractors. The indemnity obligations contained in our customer contracts generally have no specified expiration date and no specified monetary limitation on liability, but they do not cover indirect or consequential damages, such as our customers’ lost revenues or profits. We have not previously incurred costs to settle claims or pay awards under these indemnification obligations. We account for these indemnity obligations in accordance with the Financial Accounting Standards Board's guidance on accounting for contingencies and record a liability for these obligations when a loss is probable and reasonably estimable. We have not recorded any liabilities for these indemnification obligations as of December 31, 2023.

Warranties

In general, in our customer contracts for purchase of our cloud SaaS services or license of our on-premises software products, we warrant that our services or software will perform in accordance with our published services or product specifications. Additionally, we may include other warranties such as “no-malware” warranties and warranties that we will perform our SaaS services consistent with generally accepted industry standards or similar standards. In our SaaS services agreements, we also include service level agreements (SLAs) under which we agree to provide service credits to our customers if our services availability drops below certain defined levels. If necessary, we would reserve for the estimated cost of product and service warranties based on specific warranty claims and claims history. However, we have not incurred significant recurring expense under our services or product warranties. As a

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result, we believe the estimated fair value of our warranty obligations is nominal and we have no liabilities recorded for them as of December 31, 2023.

Application of Critical Accounting Policies and Estimates

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based on information available to us at the time that these estimates, judgments, and assumptions are made. To the extent there are material differences between those estimates, judgments, or assumptions and actual results, our financial statements will be affected. The accounting policy that reflect our more significant estimates, judgments, and assumptions is Revenue Recognition.

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 mainly from cloud subscriptions, software licenses, customer support services and software enhancements (“maintenance”), and implementation services. We exclude sales and usage-based taxes from revenue.

Nature of Products and Services

Cloud subscriptions includes software as a service 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 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.

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 over the term of the agreement, typically twelve months.

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.

Significant Judgments

Our customer contracts include the sale of multiple SaaS services or licensed products. Judgment 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 cloud subscriptions and software licenses are highly variable. Thus, we estimate SSP for cloud subscriptions and software licenses using the residual approach, determined based on total transaction price less the SSP of other goods and services promised in the contract.

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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 maintenance, cloud subscriptions and professional services.