Business context and reporting period
Manhattan Associates, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company develops and implements supply-chain, inventory-management and omni-channel software. Revenue comes from software licenses, services and hardware/other; services accounted for 76% of quarterly revenue. Approximately 29% of revenue was international.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $143.5 million | $149.9 million; down 4% |
| Software license revenue | $22.8 million | $20.6 million; up 11% |
| Services revenue | $108.8 million | $116.3 million; down 6% |
| Hardware and other revenue | $11.9 million | $13.0 million; down 9% |
| Operating income and margin | $41.7 million; 29.1% | $43.1 million; 28.8% |
| Net income | $28.2 million | $27.5 million |
| Diluted EPS | $0.40 | $0.38 |
| Operating cash flow | $61.3 million | $40.4 million |
- Reported gross margins were 90.2% for licenses, 54.3% for services and 18.9% for hardware and other.
- At March 31, cash and cash equivalents were $89.2 million and short-term investments were $12.1 million, or $101.3 million combined. Total assets were $287.3 million; current liabilities were $129.8 million. The company reported no debt and no credit facilities.
- Cash and cash equivalents declined from $95.6 million at year-end 2016. The company repurchased 1,003,868 shares; $56.6 million of financing cash use included approximately $6.6 million of shares withheld for employee tax obligations, while open-market program purchases were approximately $50.0 million.
Material changes versus the prior comparable period
- Total revenue fell $6.4 million, primarily as services revenue declined $7.4 million. Professional services decreased $9.0 million, partly offset by $1.6 million growth in customer support and software enhancements. Management attributed the professional-services decline mainly to implementation delays, particularly in retail.
- License revenue rose $2.2 million. The company recognized at least $1 million of license revenue on four new contracts, compared with the prior-year period’s lower license revenue. Americas license revenue fell while EMEA license revenue increased substantially.
- Operating income declined $1.4 million, but operating margin increased to 29.1% from 28.8%. Net income and diluted EPS increased despite lower revenue, helped in part by a lower effective tax rate.
- Operating cash flow increased $20.9 million, reflecting strong collections and changes in working capital, including receivables, taxes and deferred revenue. Days sales outstanding improved to 53 days from 63 days at December 31, 2016.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said large-deal sales cycles remain extended and customer decisions on strategic spending are difficult to forecast amid global economic uncertainty. Four new contracts with at least $1 million of recognized license revenue closed in Q1.
- Management expects existing cash and investments to cover working-capital and capital-expenditure needs for at least the next 12 months and does not anticipate borrowing for general corporate purposes during the remainder of 2017. Priorities include product development, hiring and developing sales and services resources, and marketing; acquisitions and further share repurchases remain under consideration.
- The company adopted ASU 2016-09 for stock compensation. A $2.0 million excess tax benefit reduced the Q1 2017 tax provision, contributing to an effective tax rate of 31.7%, versus 37.0% a year earlier. The company also elected to recognize forfeitures as they occur.
- The company expects to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method and was still assessing effects, including accounting for sales commissions. It was also evaluating the future lease-accounting standard.
- Key risks include economic and political uncertainty, competition, dependence on license revenue and large transactions, implementation delays or failures, retaining skilled staff, cybersecurity and software defects, foreign-currency exposure, and international operations. Management reported no current legal proceeding believed likely to have a material adverse effect, while noting potential customer claims if critical products fail.
Important facts for investors to verify
- Whether implementation delays persist and whether services revenue and utilization recover.
- Whether license growth continues across regions and customer types, given the impact of a small number of large deals.
- How adoption of the new revenue standard affects reported revenue, contract costs and comparability.
- The sustainability of cash generation and buybacks, including the distinction between open-market repurchases and employee tax-withholding share purchases.
- The treatment and availability of foreign-held funds: the company said it intends to permanently reinvest undistributed foreign earnings, and repatriation could trigger additional taxes.