Manhattan Associates, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless stated otherwise. Manhattan Associates develops and implements supply-chain software and reports three geographic segments: Americas, EMEA, and APAC. Amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $96.6 | $91.5 | +6% |
| Software license revenue | $14.2 | $15.6 | -9% |
| Services revenue | $74.9 | $70.4 | +6% |
| Hardware and other revenue | $7.5 | $5.5 | +35% |
| Operating income | $19.7 | $17.9 | +10% |
| Net income | $13.4 | $11.4 | +17% |
| Diluted EPS | $0.68 | $0.55 | +24% |
| Operating margin | 20.4% | 19.6% | +0.8 percentage points |
| Operating cash flow | $20.1 | $13.1 | +$7.0 |
License gross margin was 87.5%, services gross margin 53.2%, and hardware and other gross margin 16.8%. Services represented 77% of revenue; license revenue represented 15%. The effective tax rate declined to 32.6% from 36.0%, principally reflecting reinstatement of the federal R&D tax credit, partly offset by state tax reserves.
Liquidity, balance sheet, and capital allocation
- At March 31, 2013, cash and cash equivalents were $101.1 million and short-term investments were $7.5 million, totaling approximately $108.5 million. The company reported no debt and no credit facilities.
- Total assets were $264.5 million; current liabilities were $90.5 million; shareholders’ equity was $163.0 million. Deferred revenue rose to $57.9 million from $47.9 million at December 31, 2012.
- Operating cash flow was $20.1 million; investing activities used $1.7 million, including $0.6 million of capital expenditures and $1.1 million of net investment purchases. Financing activities used $13.7 million.
- The company repurchased 225,632 shares under its program for $15.9 million and separately withheld shares for taxes on vesting awards. Total common-stock purchases in financing cash flow were $20.5 million, including $4.5 million of tax-withholding shares. In April, the board raised remaining repurchase authority to $50.0 million.
- Cash and investments increased from $103.0 million at year-end 2012. Days sales outstanding was 56 days, compared with 60 days at December 31, 2012.
Material changes and operating trends
- Revenue growth was driven by services and hardware/other, while software license revenue declined. The company closed three software license deals exceeding $1.0 million in Q1 2013; it reported twelve such deals for full-year 2012.
- Services revenue increased with higher professional-services activity and customer support and software enhancements. Services costs rose 11%, principally due to increased services headcount.
- Operating expenses fell 5%, mainly as sales and marketing and general and administrative expenses declined; operating income and margin improved. Management attributed part of the operating improvement to $0.4 million of favorable foreign-currency translation effects.
- Americas revenue increased 9%; EMEA revenue declined 8%, and APAC revenue declined 9%. Operating income declined 32% in EMEA and 44% in APAC, while Americas operating income increased 24%.
- Diluted weighted-average shares declined to 19.7 million from 20.6 million, supporting per-share earnings growth alongside higher net income.
Outlook, risks, and unusual items
- Management said large license sales cycles remained extended and quarter-to-quarter large-deal activity inconsistent amid macroeconomic uncertainty, particularly in the United States and Western Europe. Delays in customers’ strategic spending could materially affect results and intensify competition.
- Management expected to prioritize investment in sales and services resources and product development, while weighing repurchases against business investment and potential complementary acquisitions. It did not anticipate borrowing for general corporate purposes during the remainder of 2013 and believed existing cash and investments would meet working-capital and capital-expenditure needs for at least the next 12 months.
- Key risks include the timing and concentration of large license deals, competition and pricing pressure, customer spending delays, services-margin dilution from the high services mix, foreign-currency movements, and potential product-failure claims. The company reported no material litigation and no material changes to previously disclosed market risks.
- In March, the board approved vesting of a portion of former CEO Peter Sinisgalli’s previously granted equity incentives: 22% of his nonvested employee equity value was preserved and the remaining 78% forfeited. The filing does not quantify the related compensation expense separately.
- The company adopted a new disclosure requirement for amounts reclassified from accumulated other comprehensive income; adoption had no impact on its financial statements. Management reported disclosure controls were effective and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether license revenue and large-deal activity recover, and how much quarterly results depend on a small number of large transactions.
- Whether services growth can continue without further pressure on services and consolidated margins, given rising services costs and the high services share of revenue.
- The persistence of regional weakness in EMEA and APAC and the drivers of their operating-income declines.
- The use of the increased $50.0 million repurchase authority relative to investment in operations, product development, and acquisitions.
- The assumptions underlying management’s cash sufficiency outlook and the effect of customer spending, foreign exchange, and competition on future results.