Manhattan Associates, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company develops and implements supply-chain and commerce software, with revenue from licenses, services, and hardware and other.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $149.9 | $133.5; up 12% |
| Software license revenue | $20.6 | $19.3; up 7% |
| Services revenue | $116.3 | $101.2; up 15% |
| Hardware and other revenue | $13.0 | $13.0; essentially flat |
| Operating income / margin | $43.1 / 28.8% | $36.9 / 27.6% |
| Net income | $27.5 | $23.2 |
| Diluted EPS | $0.38 | $0.31 |
| Operating cash flow | $40.4 | $15.2 |
Reported gross margins were 84.7% for licenses, 55.4% for services, and 24.9% for hardware and other. The effective tax rate was 37.0%, versus 37.5%, with the lower rate attributed primarily to the U.S. R&D tax credit.
At March 31, cash, cash equivalents, and short-term investments totaled $114.7 million; cash and cash equivalents were $105.8 million. The company reported no debt and no credit facilities. Total assets were $303.2 million, current liabilities $119.1 million, and shareholders’ equity $175.0 million. Days sales outstanding declined to 51 from 63 at December 31, 2015.
Cash declined by $12.6 million during the quarter, mainly reflecting $52.8 million of net financing cash outflow, including $57.8 million of common-stock purchases (this figure includes shares withheld for taxes). The company separately reported 892,283 open-market program repurchases for $48.5 million, at an average $54.35 per share. Capital expenditures were $1.9 million.
Material changes versus Q1 2015
- Revenue growth was led by services, including professional services of $84.5 million, up from $72.7 million, and customer support and enhancements of $31.8 million, up from $28.5 million.
- License revenue increased 7%, although the company closed three new deals above $1 million versus seven in Q1 2015. Warehouse-related license revenue rose to $13.5 million from $10.9 million; non-warehouse licenses fell to $7.2 million from $8.4 million.
- Operating income rose 17% and operating margin expanded 1.2 percentage points. Costs and expenses increased 10%, with higher service staffing and compensation among the drivers.
- Operating cash flow increased substantially, which management attributed to strong global collections. Cash and investments fell from $128.8 million at year-end to $114.7 million at quarter-end, principally amid repurchases.
- Americas revenue grew 17%; EMEA revenue fell 14% and EMEA operating income fell 20%. APAC revenue increased 2%.
Outlook, commentary, and risks
- No specific full-year revenue or earnings guidance is provided. Management expects cash to fund hiring and development of sales and services resources, product development, and marketing; it will weigh repurchases against business investment and potential complementary acquisitions. It does not anticipate general-purpose borrowing needs for the remainder of 2016 and believes existing cash and investments should meet working-capital and capital-expenditure needs for at least 12 months.
- Management described customers as cautious amid global economic uncertainty. Large software deals have long sales cycles, and delays in customers’ strategic spending could affect results. The company noted three Q1 2016 new contracts with license revenue of at least $1 million, compared with 21 during all of 2015.
- Services accounted for 77% of revenue; management notes that services margins are lower than license margins. Competition, pricing pressure, attracting and retaining skilled employees, implementation performance, software defects, cybersecurity, international operations and currency exposure, and dependence on license revenue are identified risks.
- The company intends to indefinitely reinvest remaining undistributed foreign earnings; repatriation could result in additional U.S. and foreign withholding taxes. Foreign subsidiaries held $49.6 million of cash and investments at quarter-end.
- No legal proceeding was identified as likely to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting. Deferred-tax presentation guidance was adopted retrospectively; the company was evaluating the effects of new revenue-recognition, lease, and stock-compensation standards.
Most important facts for investors to verify
- Whether services-led growth converts into sustainable license growth, particularly given the lower count of large Q1 deals and the extended sales-cycle risk.
- Whether services staffing and compensation growth can be absorbed while maintaining operating-margin gains.
- The composition and sustainability of operating cash flow, including working-capital timing and customer collections.
- The pace, authorization, and cash impact of repurchases; distinguish open-market program purchases from total cash-flow purchases that also include tax-withholding shares.
- Potential effects of customer spending delays, EMEA weakness, foreign currency movements, and any future repatriation of foreign earnings.