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 nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $95.8 | $85.6 | $280.9 | $245.7 |
| Operating income | $21.7 | $19.4 | $61.0 | $45.2 |
| Operating margin | 22.6% | 22.7% | 21.7% | 18.4% |
| Net income | $13.8 | $14.9 | $39.4 | $34.4 |
| Diluted EPS | $0.69 | $0.70 | $1.93 | $1.59 |
| Operating cash flow | $17.5 | $16.9 | $51.4 | $41.0 |
- Q3 revenue rose 12%; license revenue increased 19% to $16.2, services rose 13% to $71.9, and hardware and other declined 8% to $7.8. Services remained 75% of revenue.
- Nine-month revenue grew 14%, with license revenue up 25% and services up 15%; hardware and other declined 10%. Nine-month operating income rose 35%.
- Q3 operating margin was nearly flat year over year; nine-month margin expanded. The 2011 comparison periods included a $2.5 recovery of a previously impaired investment, which benefited reported operating income and EPS.
- Effective tax rates increased to 35.6% in Q3 and 35.8% year to date, from 26.6% and 25.9%, respectively. Management attributed the increase principally to expiration of the federal R&D tax credit and utilization of foreign net operating loss carryforwards.
- At September 30, cash and cash equivalents were $99.1 and short-term investments were $7.7; there was no debt and no credit facility. Current assets were $195.3 versus current liabilities of $97.3. Shareholders’ equity was $169.6.
- For the first nine months, investing activities used $4.6, including $4.3 of capital expenditures; financing activities used $40.2. The company repurchased 1.42 million shares for $68.5 under its program, as reported in MD&A; cash-flow repurchases were $71.7, including shares withheld for taxes.
Management commentary, outlook, and risks
- Management described large software-deal sales cycles as extended and less predictable amid global economic uncertainty. Nine $1 million-or-greater license deals were completed in the first nine months of 2012; two were completed in Q3. Large deals and their timing can materially affect quarterly results.
- Management expected to prioritize investment in sales and services resources and product development, while evaluating complementary acquisitions and share repurchases. It did not anticipate borrowing for general corporate purposes for the remainder of 2012 or in 2013, and believed available cash and investments would meet working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance is provided.
- Key exposures include macroeconomic conditions and delayed customer capital spending, competition and pricing pressure, concentration in services and related staffing costs, foreign-currency movements, and the timing of license deals. Days sales outstanding rose to 70 days from 63 at June 30, 2012.
- The company reported no material litigation, but noted 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 over financial reporting.
Important facts for investors to verify
- Whether license growth and large-deal closings remain consistent, given management’s warning about volatile deal timing.
- Whether accounts-receivable growth and the increase in DSO affect collections and operating cash generation.
- Whether higher tax rates persist and how they affect net income and EPS.
- How services growth, staffing costs, and margins evolve relative to higher-margin license revenue.
- How management allocates cash among repurchases, acquisitions, and investment; the board raised remaining repurchase authorization to $50 million in October 2012.
- Whether macroeconomic, competitive, currency, and product-liability risks materially change from those described in the filing.