Manhattan Associates, Inc. — Q3 2015 Form 10-Q
Business and period: The company develops and implements supply-chain, inventory optimization, and omnichannel software, with revenue from licenses, services, and hardware and other. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $142.3 | $125.6 | $414.9 | $361.7 |
| Operating income | $43.7 | $35.5 | $121.9 | $98.1 |
| Operating margin | 30.7% | 28.3% | 29.4% | 27.1% |
| Net income | $27.9 | $22.3 | $77.1 | $61.6 |
| Diluted EPS | $0.38 | $0.30 | $1.04 | $0.81 |
| Operating cash flow | $41.3 | $32.7 | $84.0 | $53.7 |
- Q3 revenue grew 13%; license revenue rose 13% to $19.1 million, services grew 14% to $112.5 million, and hardware and other increased 5% to $10.6 million. For nine months, revenue grew 15%, with license, services, and hardware and other up 12%, 15%, and 16%, respectively.
- Q3 gross margins by revenue type were 88.0% for licenses, 58.5% for services, and 14.3% for hardware and other. Services accounted for 79% of Q3 revenue and 77% for nine months; management noted this lower-margin mix weighs on the company’s overall margin profile.
- At September 30, cash and cash equivalents were $109.0 million and short-term investments were $10.1 million; there was no debt and no credit facility. Current assets were $231.6 million versus current liabilities of $119.7 million. Cash and investments totaled $119.1 million.
- Nine-month investing cash outflow was $11.4 million, including $9.6 million of capital expenditures. Financing cash outflow was $77.9 million, principally reflecting $86.8 million of common-stock purchases, partly offset by option proceeds and excess tax benefits.
Changes and operating trends
- Profitability improved: Q3 operating income rose 23% and nine-month operating income rose 24%, outpacing revenue growth. Management attributed margin improvement to revenue growth and expense management.
- Americas revenue grew 16% in Q3 and 18% for nine months; EMEA grew 18% and 14%, respectively. APAC revenue declined 32% in Q3 and 31% for nine months, and APAC operating income fell in both periods.
- General and administrative expense rose 29% in Q3, primarily from compensation, temporary personnel, and professional fees. Nine-month R&D expense increased 13%, partly reflecting investment in Global Bay, acquired in 2014. Sales and marketing expense declined 5% for nine months.
- At September 30, the company reported 60 days sales outstanding, compared with 54 days at June 30. Cash and investments increased from $108.4 million at June 30 but were below the $124.4 million reported at December 31, 2014.
Outlook, risks, and other matters
- No numeric revenue or earnings guidance is provided. Management expects to continue investing in product development and hiring sales and services personnel, evaluate complementary acquisitions, and weigh repurchases against business investment and acquisitions. It did not anticipate borrowing for general corporate purposes for the remainder of 2015 and believed existing cash and investments would meet working-capital and capital needs for at least 12 months.
- Management described extended and less predictable sales cycles for large software-license deals amid global economic uncertainty. Timing of a few large deals can materially affect quarterly license revenue, profit, margins, and EPS; the company reported 15 new contracts of at least $1 million in the first nine months of 2015, versus 11 in the prior-year period.
- Competition, potential pricing pressure, customer delays in capital spending, foreign-currency fluctuations, and the company’s large services mix are cited business risks. APAC weakness and the higher Q3 DSO merit attention.
- The company repurchased 1.381 million shares under its program for $76.5 million in the first nine months; Q3 program repurchases were 399,315 shares for $25.0 million. The board increased remaining repurchase authority to $50.0 million in October. Cash-flow-statement common-stock purchases of $86.8 million also included $10.3 million of shares withheld for taxes.
- The effective tax rate was 37.0% in Q3 and 37.4% for nine months; the nine-month increase was attributed mainly to higher state tax rates. Foreign earnings were intended to remain permanently reinvested. Foreign-currency translation reduced comprehensive income by $2.0 million for the first nine months.
- The filing reports no legal proceeding believed likely to have a material adverse impact. It cautions that product failures could lead to substantial claims and contractual liability limits may not always be enforceable. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Whether APAC revenue and operating income stabilize, and whether the reported increase in Americas and EMEA activity is sustained.
- Large-deal pipeline, license mix, services utilization and margins, and renewal performance; management stated support-contract renewal rates exceeded 90% over the prior three years.
- Receivables and DSO trends, cash generation, and the effect of continued repurchases on liquidity and share count.
- Foreign-currency exposure, the tax consequences of any future repatriation, and the eventual effects of adopting the new revenue-recognition standard.