Manhattan Associates, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The company develops and implements supply-chain software and related services. Financial amounts below are in U.S. dollars; “million” amounts are rounded.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $91.5 million | $71.7 million | +28% |
| Software license revenue | $15.6 million | $7.8 million | +101% |
| Services revenue | $70.4 million | $56.1 million | +25% |
| Hardware and other revenue | $5.5 million | $7.9 million | -30% |
| Operating income | $17.9 million | $7.6 million | +138% |
| Operating margin | 19.6% | 10.5% | +9.1 percentage points |
| Net income | $11.4 million | $7.2 million | +59% |
| Diluted EPS | $0.55 | $0.32 | +72% |
| Operating cash flow | $13.1 million | $8.1 million | +$5.0 million |
License, services, and hardware/other gross margins were 88.6%, 54.9%, and 19.5%, respectively. Services accounted for 77% of revenue. International revenue was approximately $25.5 million, or about 30% of total revenue.
Liquidity, balance sheet, and capital allocation
- Cash, cash equivalents, and investments totaled $97.5 million at March 31, 2012, versus $99.1 million at December 31, 2011. Cash and cash equivalents alone were $92.3 million.
- The company reported no debt and no credit facilities. Management said existing cash and investments should meet working-capital and capital-expenditure needs for at least 12 months; it did not anticipate borrowing for general corporate purposes during the remainder of 2012.
- Current assets were $175.4 million and current liabilities $85.9 million. Deferred revenue was $52.5 million. Days sales outstanding improved to 57 days from 62 at year-end.
- Q1 financing activities used $13.7 million net. Cash-flow reporting shows $33.5 million of common-stock purchases, partly offset by $16.1 million in option-exercise proceeds and $3.6 million in excess tax benefits. The company separately reported 652,757 shares repurchased under its program for $30.6 million; total purchases also included shares withheld for taxes.
- In April 2012, the board raised remaining share-repurchase authority to $50.0 million. Management cited product development and sales and services resources as priorities, while also evaluating acquisitions and future repurchases.
Material changes and management commentary
- Revenue and operating income rose substantially year over year. Management attributed stronger operating income and margin mainly to revenue growth and expense management.
- License revenue benefited from five recognized software-license deals exceeding $1 million. Large-deal flow remained inconsistent, and management said macroeconomic uncertainty was extending sales cycles and complicating forecasts.
- Regional revenue increased 22% in the Americas, 49% in EMEA, and 84% in APAC. APAC moved from a $0.4 million operating loss to $1.7 million operating income.
- Services revenue growth reflected customer initiatives, upgrades, and large license deals. Customer-support renewals had exceeded 90% annually over the prior three years, according to management.
- Basic and diluted weighted-average shares declined year over year, alongside the company’s ongoing repurchases. The company changed new restricted-stock grants to restricted stock units in January 2012.
Outlook, risks, and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Management expressed caution about the pace of global recovery and the timing of large license deals.
- Key risks include extended customer purchasing decisions, dependence on large transactions, intense competition and potential pricing pressure, and the comparatively lower margins of the services-heavy revenue mix. Product failures could expose the company to substantial claims despite contractual liability limits.
- The effective tax rate was 36.0%, versus 5.4% in Q1 2011. The prior-year rate included a $2.0 million benefit from reducing an Indian tax-related valuation allowance; the 2012 rate also reflected expiration of the federal R&D tax credit and foreign net operating loss benefits.
- In April 2012, the company settled the Sky Technologies patent-infringement lawsuit. It said the settlement terms would not materially adversely affect its business, financial position, results, or cash flows. The company reported no other material litigation.
- The company held a Level 3 auction-rate security carried at $0.9 million, with a $1.0 million par value and 2037 maturity. Its valuation relies on significant unobservable inputs; future impairment remains possible.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether license growth and large-deal activity persist, given the filing’s warning about uneven deal timing and extended sales cycles.
- How the services-heavy revenue mix affects margins, and whether services capacity and costs remain aligned with demand.
- The sustainability of earnings growth after accounting for the unusually low prior-year tax rate and the higher 2012 effective tax rate.
- Repurchase activity, remaining authorization, and the balance between buybacks, acquisitions, and investment in the business.
- The valuation and impairment status of the Level 3 auction-rate security, and developments in product-liability or other legal exposure.