Business context and reporting period
Manhattan Associates, Inc. develops and implements supply-chain planning and execution software, with revenue from software licenses, services, and hardware and other items. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Revenue | $102.5m | $93.6m | $199.1m | $185.0m |
| Operating income | $26.2m | $21.3m | $45.8m | $39.3m |
| Operating margin | 25.5% | 22.8% | 23.0% | 21.2% |
| Net income | $17.4m | $14.2m | $30.8m | $25.6m |
| Diluted EPS | $0.89 | $0.70 | $1.57 | $1.25 |
| Operating cash flow | $13.6m | $20.9m | $33.7m | $34.0m |
Q2 revenue comprised software license $16.1m (+5%), services $78.2m (+13%), and hardware and other $8.2m (-8%). H1 amounts were $30.4m (-2%), $153.1m (+10%), and $15.6m (+8%), respectively. Services represented 76% of Q2 and 77% of H1 revenue. Q2 gross margins were 88.0% for licenses, 55.2% for services, and 14.1% for hardware and other; H1 gross margins were 87.8%, 54.2%, and 15.4%.
At June 30, cash and cash equivalents were $98.6m and short-term investments $7.9m, or $106.5m combined; the company reported no debt and no credit facilities. Current assets were $190.4m and current liabilities $90.8m. Cash from operations was $33.7m for H1; investing activities used $3.7m and financing activities used $26.2m. The company repurchased $34.9m of stock in H1 and reported 19.3m shares outstanding at quarter-end.
Material changes versus prior period
- Q2 revenue increased 10%, operating income 23%, and net income 23% year over year. H1 revenue rose 8%, operating income 17%, and net income 20%.
- License revenue was slightly lower for H1 despite Q2 growth. Management reported seven deals above $1m in H1 2013, the same count as H1 2012; four were completed in Q2 2013.
- Services growth reflected implementation work, customer initiatives, and upgrades. Services costs rose with higher headcount and compensation.
- Operating margin improved, but Q2 and H1 operating income included a $1.6m reversal of a previously expensed transaction tax after the related audit statute expired.
- H1 diluted weighted-average shares declined to 19.6m from 20.5m, alongside substantial share repurchases.
Outlook, commentary, and risks
No specific revenue or earnings guidance is provided. Management expected to prioritize share repurchases, sales and services resources, and product development for the remainder of 2013; it also planned to evaluate complementary acquisitions and did not anticipate borrowing for general corporate purposes. Management said existing cash and investments should meet working-capital and capital-expenditure needs for at least the next 12 months, while noting this was not assured.
Management cited macroeconomic uncertainty and extended, less predictable sales cycles for large license deals, particularly in the U.S. and Western Europe. Large-deal timing can materially affect quarterly license revenue, profit, margins, and EPS. Other risks include intense competition, pricing and margin pressure, customer spending delays, foreign-currency movements, and possible claims arising from failures of software critical to customers’ operations. The company reported no material litigation and stated disclosure controls were effective.
Of the $106.5m in cash and investments, $38.3m was held by foreign subsidiaries. Management intended to indefinitely reinvest $34.9m of undistributed foreign earnings; repatriation could result in additional U.S. income taxes. Customer-support renewals had exceeded 90% over the preceding three years.
Important facts for investors to verify
- Whether license growth and large-deal conversion continue, given H1 license revenue declined and management highlighted uncertain sales timing.
- How much of operating-profit growth reflects underlying performance versus the $1.6m tax reversal and favorable currency effects.
- Whether services expansion supports revenue growth without weakening services or overall margins.
- Cash conversion, receivables and days sales outstanding, which were 61 days at June 30 versus 56 days at March 31.
- The pace and pricing of further repurchases, and the balance between buybacks, business investment, and acquisitions.
- Potential tax costs if foreign earnings are repatriated, and exposure to foreign-currency and customer-product liability risks.