Manhattan Associates, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Manhattan Associates develops and implements supply-chain software, with revenue from software licenses, services, and hardware and other sales. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance and liquidity
- Q2 revenue: $93.6 million, up 6% from $88.4 million. License revenue was $15.3 million, down 6%; services revenue was $69.3 million, up 9%; hardware and other revenue was $8.9 million, up 7%.
- Q2 earnings: Operating income was $21.3 million versus $18.2 million; operating margin was 22.8% versus 20.6%. Net income was $14.2 million versus $12.3 million, and diluted EPS was $0.70 versus $0.57. The effective tax rate was 36.0%, up from 33.5%.
- First-half revenue and earnings: Revenue was $185.0 million, up 16%; operating income was $39.3 million versus $25.8 million, with operating margin of 21.2% versus 16.1%. Net income was $25.6 million versus $19.5 million; diluted EPS was $1.25 versus $0.89. First-half license revenue rose 28% to $30.9 million, services rose 17% to $139.7 million, and hardware and other declined 11% to $14.4 million.
- Cash flow: Operating cash flow was $20.9 million in Q2 versus $16.0 million a year earlier; first-half operating cash flow was $34.0 million versus $24.1 million. First-half capital expenditures were $3.3 million. Cash and cash equivalents totaled $95.1 million at June 30; cash, cash equivalents, and investments totaled $100.9 million.
- Balance sheet: The company reported no debt and no credit facilities. Current assets were $180.4 million and current liabilities $89.7 million. Deferred revenue was $52.7 million. Accounts receivable was $64.4 million; days sales outstanding was 63 days at June 30, compared with 57 days at March 31.
- Margins by revenue type: Management reported Q2 license gross margin of 90.3%, services gross margin of 56.3%, and hardware and other gross margin of 15.3%. The services-heavy revenue mix weighs on the overall margin profile.
Material changes versus comparable periods
- Q2 services growth and lower operating expenses supported higher operating income and margin, despite lower license revenue. The company closed two Q2 software license deals exceeding $1 million.
- For the first half, growth in license and services revenue drove higher earnings. Management attributed improved operating results partly to expense management and favorable foreign-currency translation, including an estimated $1.5 million benefit in the first half.
- The first-half effective tax rate increased to 36.0% from 25.3%. The company cited expiration of the federal R&D tax credit and utilization of foreign net operating loss carryforwards; the 2011 comparison also included a $2.0 million tax benefit related to Indian deferred tax assets.
- First-half financing activities included $50.2 million of common-stock purchases, partly offset by option exercise proceeds and equity-compensation tax benefits. The company repurchased 999,273 shares under its program for a reported $47.3 million investment during the first half.
Outlook, commentary, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management said it expects to prioritize investment in sales and services resources and product development, continue evaluating complementary acquisitions, and weigh repurchases against business investment and acquisitions. It did not anticipate borrowing for general corporate purposes during the remainder of 2012.
- Management described continued global economic uncertainty and extended, less predictable sales cycles for large license deals. The timing of a few large transactions can materially affect quarterly revenue, operating results, margins, and EPS. The company noted seven deals above $1 million in the first half of 2012.
- Other risks discussed include intense competition, potential pricing and margin pressure, reliance on services and customer upgrade activity, foreign-exchange exposure, and potential claims arising from product failures. Management reported no material litigation and no material changes to previously disclosed market risks.
- In Q2, the company sold its remaining auction-rate security at par for $1.0 million and reported no long-term investments at June 30. The Board approved raising remaining share-repurchase authority to $50.0 million in July 2012.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the first half.
Important facts for investors to verify
- Whether license-deal timing and the broader economy support continued growth, given Q2 license revenue declined while first-half license revenue increased.
- Whether services growth can be sustained while managing personnel costs and preserving services margins.
- The persistence of the higher 36.0% tax rate and the effect of expired tax credits and used tax carryforwards.
- Cash conversion and receivables trends, including the increase in days sales outstanding, alongside planned investment and share repurchases.
- The future use of the $50.0 million repurchase authorization and the balance between buybacks, acquisitions, and investment in the business.