Manhattan Associates, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparative figures are for the same 2015 periods. Unaudited. The company develops and implements supply-chain, inventory-management and omnichannel software solutions, with revenue from software licenses, services, and hardware and other items.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $154.9m | $139.1m | $304.8m | $272.6m |
| Operating income | $52.3m | $41.4m | $95.4m | $78.2m |
| Operating margin | 33.7% | 29.7% | 31.3% | 28.7% |
| Net income | $33.3m | $26.0m | $60.8m | $49.2m |
| Diluted EPS | $0.46 | $0.35 | $0.84 | $0.66 |
| Operating cash flow | $19.1m | $27.5m | $59.5m | $42.7m |
Q2 revenue mix: Software licenses $20.6m (+4% year over year), services $119.8m (+12%), and hardware and other $14.4m (+20%). Services represented 78% of revenue. Reported gross margins were 88.9% for licenses, 59.6% for services, and 17.9% for hardware and other. First-half revenue grew 12%; operating income grew 22% and net income grew 24% year over year.
Liquidity and capital allocation: At June 30, cash, cash equivalents and short-term investments totaled $95.2m, down from $128.8m at December 31, 2015. Current assets were $200.0m and current liabilities $110.1m. The company reported no debt and no credit facilities. First-half investing activities provided $4.0m, including $8.1m of net investment maturities, offset by $4.1m of capital spending. Financing activities used $87.7m; the company repurchased 1.44m shares under its program for $83.5m during the half. The cash-flow statement reports $92.8m of common-stock purchases, including shares withheld for taxes. In July, the board set remaining repurchase authority at $50m.
Material changes and management commentary
- Growth was led by services, particularly professional services, supported by prior license deals and customer upgrade activity. License growth was modest; the company recognized three new contracts of at least $1m in Q2 and six in the first half.
- Management attributed higher operating income and margins to revenue growth, lower performance-based compensation, and expense management. Services costs rose with staffing to support growth.
- International sales were about 24% of revenue in both Q2 and the first half. Americas revenue grew 12% in Q2; EMEA grew 6% and APAC 19%. First-half EMEA revenue declined 5%.
- Cash from operations increased for the first half, but declined year over year in Q2. Days sales outstanding was 55 at June 30, versus 51 at March 31.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. For the remainder of 2016, management expected to invest in hiring sales and services staff, product development and marketing, while weighing buybacks against business investment and potential acquisitions. It did not anticipate borrowing for general corporate purposes.
- Management cautioned that uncertain economic conditions and extended sales cycles for large software deals make deal timing and forecasts difficult. Large license transactions can materially affect quarterly results; competition may pressure prices, margins and market share.
- The filing added Brexit-related risk: uncertainty, currency volatility and potential customer spending restraint could adversely affect results. EMEA accounted for approximately 11% of first-half 2016 revenue.
- Other disclosed risks include execution of complex implementations, product failures or software defects, cybersecurity, retaining skilled employees, international operations and currency movements. No legal proceeding was identified as likely to have a material adverse effect.
- General and administrative expense included a $0.8m reserve for transaction-tax exposure. The effective tax rate fell to 37.0% from 37.7% in Q2, primarily reflecting the U.S. research and development credit. Foreign earnings were intended to remain permanently reinvested abroad.
- Management was evaluating the impact of new revenue-recognition, lease and stock-compensation standards. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether license growth and the number and size of large deals sustain the faster growth in services.
- Whether services staffing, utilization and margins keep pace with revenue growth; services are the dominant revenue source.
- Cash generation and receivables trends, including the increase in days sales outstanding and the effect of continued share repurchases.
- The scope and use of the $50m remaining repurchase authorization approved in July, and the distinction between program repurchases and tax-withholding share purchases.
- Potential customer spending, currency and regulatory effects from Brexit, plus the eventual financial-statement impact of the new accounting standards.