Manhattan Associates, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. The company develops and implements supply-chain planning and execution software. This unaudited filing covers the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $107.8 | $95.8 | $306.9 | $280.9 |
| Operating income | $30.8 | $21.7 | $76.6 | $61.0 |
| Operating margin | 28.5% | 22.6% | 25.0% | 21.7% |
| Net income | $19.7 | $13.8 | $50.5 | $39.4 |
| Diluted EPS | $1.02 | $0.69 | $2.58 | $1.93 |
- Revenue mix: Q3 services revenue was $85.0 million (+18%); license revenue was $14.8 million (-9%); hardware and other was $8.0 million (+3%). For the first nine months, services were $238.1 million (+13%), licenses $45.1 million (-4%), and hardware and other $23.7 million (+6%).
- Cash flow: Operating cash flow was $32.7 million in Q3 versus $17.5 million a year earlier, and $66.4 million for the nine months versus $51.4 million. Nine-month investing cash use was $5.5 million; financing cash use was $37.3 million.
- Liquidity and debt: At September 30, cash, cash equivalents and short-term investments totaled $125.9 million; the company reported no debt and no credit facilities. Current assets were $208.7 million and current liabilities $99.8 million. Cash and investments included $42.9 million held by foreign subsidiaries.
- Capital returns: The company repurchased 573,676 shares for $43.9 million under its program during the first nine months. Cash-flow-statement purchases of common stock were $48.7 million, including shares withheld for taxes. The board raised repurchase authority to $50 million in October 2013.
Material changes and management commentary
- Total revenue increased 12% in Q3 and 9% for the nine months; operating income increased 42% and 26%, respectively. Services growth, expense management and lower share counts supported earnings growth despite declining license revenue.
- License sales remain uneven: the company closed two deals above $1 million in Q3 and nine in the first nine months. Management said large-deal sales cycles were extended and difficult to forecast amid macroeconomic uncertainty. Services growth reflected customer initiatives, upgrades and implementation work associated with large deals.
- Americas revenue rose 10% in Q3 and 9% year to date; EMEA rose 20% in Q3 but 2% year to date; APAC rose 28% and 25%, respectively. Nine-month license revenue varied substantially by region, including a 48% decline in EMEA and a 328% increase in APAC.
- Management expects to prioritize share repurchases, sales and services capacity, and product development for the remainder of 2013; it will also consider complementary acquisitions. It did not anticipate general-purpose borrowing needs. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Management cited global economic uncertainty, extended enterprise-software sales cycles, large-deal timing, strong competition and potential pricing pressure as risks. Services revenue depends in part on license activity and customer upgrade cycles.
- Nine-month operating results included a $1.6 million reversal of a previously expensed transaction tax after the related audit statute expired, and management cited approximately $1.5 million of favorable foreign-currency translation effects. Foreign exchange also increased non-operating income; the company reported a $1.1 million net currency gain for the nine months.
- The effective tax rate was 37.1% in Q3 2013 versus 35.6% in Q3 2012, and 35.8% for both nine-month periods. 2013 tax effects included the reinstated R&D credit and changes in uncertain-tax-position reserves. The company intends to reinvest $39.3 million of undistributed foreign earnings; repatriation could result in additional U.S. taxes.
- The company reported no material litigation. It cautioned that failures in software used in customers’ critical operations could lead to substantial claims, and that contractual liability limits may not always be enforceable.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether license revenue and large-deal activity recover, given year-to-date license declines and management’s comments on sales-cycle uncertainty.
- How much operating-income growth reflects sustainable operating performance versus the $1.6 million tax reversal and favorable currency effects.
- The composition and availability of the $125.9 million cash-and-investment balance, including foreign-held funds and potential repatriation taxes.
- Future share-repurchase pace and its balance against investment in the business or acquisitions; distinguish program repurchases from total stock purchases that include tax withholding.
- Whether strong services growth can be sustained while maintaining services margins and customer-support renewals.