Manhattan Associates, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods unless noted. The company develops and implements supply-chain software and earns revenue from licenses, services, and hardware and other sales. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $125.6 | $107.8 | $361.7 | $306.9 |
| Software license revenue | $16.9 | $14.8 | $52.0 | $45.1 |
| Services revenue | $98.5 | $85.0 | $279.0 | $238.1 |
| Hardware and other revenue | $10.1 | $8.0 | $30.7 | $23.7 |
| Operating income | $35.5 | $30.8 | $98.1 | $76.6 |
| Operating margin | 28.3% | 28.5% | 27.1% | 25.0% |
| Net income | $22.3 | $19.7 | $61.6 | $50.5 |
| Diluted EPS | $0.30 | $0.25 | $0.81 | $0.65 |
| Operating cash flow | $32.7 | $32.7 | $53.7 | $66.4 |
Q3 revenue grew 17%, operating income 15%, net income 13%, and diluted EPS 20%. Nine-month revenue grew 18%, operating income 28%, net income 22%, and diluted EPS 25%. Services were 78% of Q3 revenue and 77% for the nine-month period; management noted that services’ lower margins weigh on the overall margin profile. Q3 license gross margin was 90.1%, services 55.7%, and hardware and other 16.3%.
Liquidity, capital and balance sheet
- At September 30, cash and cash equivalents were $101.1 million and short-term investments were $10.4 million, totaling $111.5 million in cash and investments. The company reported no debt and no credit facilities.
- Cash and cash equivalents declined from $124.4 million at December 31, 2013. Nine-month operating cash flow was lower year over year, which management attributed primarily to timing: higher receivables and estimated tax payments. Receivables increased $16.9 million from year-end; days sales outstanding rose to 64 from 61.
- Nine-month investing cash use was $11.3 million, including $6.7 million of capital expenditures and $2.8 million for the Global Bay acquisition. Financing cash use was $65.3 million. The company repurchased 1.98 million shares for $65.7 million under its program; reported common-stock purchases of $73.7 million also included $8.0 million of shares withheld for taxes.
- Current assets were $216.9 million and current liabilities $106.8 million. Total assets were $304.6 million and shareholders’ equity $184.5 million.
Changes, outlook and risks
- Growth was broad-based: Q3 revenue increased 18% in the Americas, 12% in EMEA, and 11% in APAC. For nine months, growth was 17%, 27%, and 15%, respectively. Q3 license revenue rose 15%; the nine-month increase was also 15%.
- Management cited customer-specific initiatives, upgrades, and large license deals as drivers of services growth. The company completed four license deals above $1 million in Q3 and eleven in the first nine months, versus nine in the comparable 2013 period.
- Management said large-deal sales cycles remained protracted amid global economic uncertainty and cautioned that deal timing can materially affect quarterly license revenue, operating results, and EPS. Competition, pricing pressure, customer spending delays, and foreign-currency movements are additional risks.
- Management expected to prioritize investment in sales and services resources, product development, and share repurchases, while evaluating complementary acquisitions. It believed existing cash and investments would meet working-capital and capital-expenditure needs for at least 12 months and did not anticipate borrowing for general corporate purposes during the remainder of 2014. No specific revenue or EPS guidance was provided.
- In October 2014, the board raised remaining share-repurchase authorization to $50 million. The August 2014 acquisition of substantially all Global Bay Mobile Technologies assets cost approximately $2.8 million; substantially all consideration was allocated to acquired intangible assets.
- The nine-month effective tax rate increased to 37.1% from 35.8%, principally because the federal research and development tax credit expired. Foreign earnings were intended to remain permanently reinvested; repatriation could incur additional taxes. Management reported no legal proceeding it believed likely to have a material adverse effect, but noted potential claims related to failures of products used in customers’ critical operations.
Investor verification priorities
- Check whether license growth and the pace and size of large deals continued, given management’s warning about extended and variable sales cycles.
- Monitor receivables, DSO, and operating cash flow conversion after the year-over-year cash-flow decline.
- Assess whether services growth and hiring support revenue without further pressure on operating margins.
- Track share repurchases against the $50 million authorization and balance them against investment and acquisition needs.
- Review the effect of the expired tax credit, any potential foreign-earnings repatriation, and currency movements on future results.