Manhattan Associates, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions. The company develops and implements supply-chain, inventory, and omnichannel software and related services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Revenue | $152.2 | $142.3 | $457.0 | $414.9 |
| Operating income | $53.6 | $43.7 | $149.0 | $121.9 |
| Operating margin | 35.2% | 30.7% | 32.6% | 29.4% |
| Net income | $33.5 | $27.9 | $94.3 | $77.1 |
| Diluted EPS | $0.47 | $0.38 | $1.30 | $1.04 |
| Operating cash flow | $42.0 | $41.3 | $101.5 | $84.0 |
- Q3 revenue grew 7%; operating income grew 23%; net income grew 20%. For the first nine months, revenue rose 10%, operating income 22%, and net income 22%.
- Q3 revenue mix was software licenses 14% ($21.6 million), services 79% ($119.3 million), and hardware and other 7% ($11.3 million). License revenue grew 13% year over year; services and hardware and other each grew 6%.
- For the first nine months, license revenue grew 8%, services 11%, and hardware and other 9%. Services remained the largest revenue source, at 78% of total.
- Q3 gross margins by revenue category: licenses 86.3%, services 58.6%, hardware and other 18.0%. Nine-month margins were 86.6%, 57.9%, and 20.3%, respectively.
Financial position and capital allocation
- At September 30, 2016, cash and cash equivalents were $110.8 million, total assets $316.1 million, and shareholders’ equity $187.0 million. The company reported no debt or credit facilities.
- Current assets were $222.2 million and current liabilities $119.3 million. Cash declined from $118.4 million at December 31, 2015; short-term investments fell from $10.3 million to zero as investments matured or were sold.
- Nine-month investing activities provided $4.7 million, including $10.2 million from net investment maturities, partly offset by $5.5 million in capital expenditures. Financing activities used $112.8 million, principally for common-stock repurchases.
- The company repurchased 1.86 million shares for approximately $108.5 million during the first nine months, including 420,412 shares for $25.0 million in Q3. The board raised remaining repurchase authority to $50 million in October 2016. Outstanding shares were about 71.2 million at September 30.
- Cash and cash equivalents included $58.1 million held in the U.S. and $52.7 million held by foreign subsidiaries. Management intends to permanently reinvest remaining foreign earnings; repatriation could trigger additional taxes.
Changes, outlook, and risks
- Operating margin improved year over year, which management attributed to revenue growth, lower performance-based compensation, and expense management. Q3 general and administrative expense declined 20%, partly due to lower equity-based and performance-based compensation.
- Management said it expects to prioritize hiring and developing sales and services staff and continued product development and marketing for the remainder of 2016. It expects to consider acquisitions complementary to its products and technology, while weighing them against repurchases and investment in the business. It anticipated no borrowing for general corporate purposes in the remainder of 2016. The filing provides no specific revenue or EPS guidance.
- Management noted that uncertain global conditions and extended sales cycles for large software deals can make the timing of license revenue difficult to predict. Large transactions can materially affect quarterly results; the company recognized five new contracts of at least $1 million in Q3 and eleven in the first nine months, versus fifteen in the comparable 2015 nine-month period.
- Other stated risks include competition and pricing pressure, reliance on license revenue and a single business line, implementation and product-failure claims, attracting and retaining skilled employees, cybersecurity, international and foreign-currency exposure, and uncertainty related to Brexit. Management reported no current legal proceeding expected to have a material adverse effect and no material change in market-risk disclosures.
- The effective tax rate was 37.7% in Q3 versus 37.0% a year earlier; management attributed the increase primarily to additional uncertain-tax-position reserves. The company added $0.3 million to those reserves in Q3. The nine-month effective rate was 37.3%, slightly below 37.4% in 2015, primarily reflecting the U.S. research and development credit.
- The company adopted deferred-tax balance-sheet presentation guidance retrospectively in 2016. It was evaluating the effects of new revenue-recognition, lease, and stock-compensation standards; no quantified impact was provided.
- Management assessed disclosure controls as effective at quarter-end and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether license growth and large-deal activity remain consistent, given deal concentration and extended sales cycles.
- Whether services growth can be sustained while managing staffing costs and services margins.
- Cash generation, working-capital movements, and the effect of repurchases on cash and share count.
- Future repurchase activity and how management balances buybacks against product investment and acquisitions.
- Potential impacts of adopting the new revenue, lease, and stock-compensation accounting standards.
- Developments in uncertain tax positions, foreign earnings, and the risks identified in the filing.