Manhattan Associates, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2015, with comparative results for Q1 2014. Manhattan Associates develops and implements supply-chain, inventory-management, and omni-channel software. Revenue comes from software licenses, services, and hardware and other sales. Services represented 76% of Q1 revenue; about 25% of revenue was international.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $133.5m | $113.6m | +18% |
| Software license revenue | $19.3m | $17.1m | +13% |
| Services revenue | $101.2m | $86.9m | +16% |
| Hardware and other revenue | $13.0m | $9.5m | +36% |
| Operating income | $36.9m | $30.1m | +23% |
| Net income | $23.2m | $18.7m | +24% |
| Diluted EPS | $0.31 | $0.24 | +29% |
| Cash from operations | $15.2m | $19.1m | Down $4.0m |
- Operating margin was 27.6%, compared with 26.5% a year earlier. Reported gross margins were 85.0% for licenses, 55.7% for services, and 18.9% for hardware and other.
- Effective tax rate was 37.5%, versus 37.2%. Management attributed the increase primarily to higher state tax rates.
- At March 31, cash and cash equivalents were $97.1m and short-term investments were $10.2m, totaling $107.2m. The company reported no debt and no credit facilities.
- Current assets were $211.1m and current liabilities were $107.0m. Cash and investments were down from $124.4m at year-end 2014.
- Operating cash flow was lower year over year, primarily reflecting changes in accrued and other liabilities, taxes, and deferred revenue. Investing activities used $4.4m, including $3.1m of capital expenditures. Financing activities used $29.2m; common-stock purchases were a principal use of cash.
Material changes and operating trends
- Revenue and operating income grew, with services and hardware/other contributing more dollar growth than licenses. License revenue was 14% of total revenue, compared with 15% in Q1 2014.
- Regional revenue increased 20% in the Americas and 17% in EMEA, but declined 19% in APAC. APAC operating income fell 38%.
- Professional services revenue increased $13.2m and customer support and software enhancements increased $1.1m. The company said growth reflected customer initiatives, upgrade activity, and large license deals.
- Seven software license deals above $1.0m were completed in Q1 2015. Management noted large-deal timing can materially affect quarterly results and that sales cycles for large deals remain extended amid economic uncertainty.
- Operating expenses increased 7%, including a 15% increase in research and development, attributed in part to investment in Global Bay Mobile Technologies, acquired in 2014.
- The company repurchased 523,663 shares in the open market for $26.3m under its program. Cash-flow financing purchases of common stock totaled $36.0m and also included shares withheld for employee taxes. In April, the board approved $50.0m of remaining repurchase authority.
Outlook, commentary, and risks
- No specific revenue or earnings guidance was provided. Management expected to prioritize investment in product development and sales and services resources, evaluate complementary acquisitions, and balance repurchases against business investment and acquisition needs. It did not anticipate borrowing for general corporate purposes during the remainder of 2015.
- Management believed existing cash and investments would be sufficient for working-capital and capital-expenditure needs for at least 12 months, while cautioning that this was not assured. It also noted $40.9m of cash and investments held by foreign subsidiaries and an intent to keep undistributed foreign earnings invested abroad.
- Risks cited include prolonged or uncertain sales cycles for large deals, customer delays in strategic spending, intense competition and possible pricing pressure, and lower margins associated with the services-heavy revenue mix. Product failures could also trigger substantial customer claims; the company said contractual liability limits may not always be enforceable.
- The company reported no legal proceedings it believed likely to have a material adverse effect. It also reported no material changes to market-risk disclosures or internal controls; management concluded disclosure controls were effective.
- The company was evaluating the potential effects of new revenue-recognition guidance (ASC 606) and cloud-computing accounting guidance. The filing states that the FASB had proposed delaying ASC 606’s effective date; the company had not yet determined the impact of adoption.
Important facts for investors to verify
- Whether license growth and large-deal activity continue, given management’s warning about extended sales cycles and deal timing.
- Whether services growth converts into stronger operating cash flow; Q1 operating cash flow fell despite higher earnings.
- How APAC’s revenue and operating-income declines develop relative to growth in the Americas and EMEA.
- The pace and funding of future share repurchases, and how repurchases compare with investment and acquisition priorities.
- The eventual financial and disclosure effects of adopting new revenue-recognition and cloud-computing accounting standards.