Manhattan Associates, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. Manhattan develops and implements supply-chain, inventory, and omnichannel software and related services; results are reported across the Americas, EMEA, and APAC.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $139.1 | $122.5 | $272.6 | $236.1 |
| Operating income | $41.4 | $32.5 | $78.2 | $62.6 |
| Operating margin | 29.7% | 26.5% | 28.7% | 26.5% |
| Net income | $26.0 | $20.6 | $49.2 | $39.3 |
| Diluted EPS | $0.35 | $0.27 | $0.66 | $0.51 |
| Operating cash flow | $27.5 | $1.9 | $42.7 | $21.0 |
- Q2 revenue increased 14%; first-half revenue increased 15%. Services were 77% of revenue, software license 14%, and hardware and other 9% in both 2015 periods.
- Q2 license revenue rose 10% to $19.8 million; services rose 15% to $107.3 million; hardware and other rose 9% to $12.0 million. First-half growth was 11%, 16%, and 22%, respectively.
- Q2 gross margins were 89.2% for licenses, 56.7% for services, and 15.4% for hardware and other; first-half margins were 87.1%, 56.2%, and 17.2%, respectively.
- Cash, cash equivalents, and short-term investments totaled $108.4 million at June 30, 2015, versus $124.4 million at December 31, 2014. Cash and cash equivalents were $100.2 million and short-term investments $8.2 million. The company reported no debt and no credit facilities.
- Six-month investing cash use was $5.3 million, primarily $5.8 million in capital expenditures. Financing cash use was $53.0 million, including $61.3 million of common-stock purchases. The company repurchased 982,060 shares for a total investment of $51.5 million under its program; the filing separately says total common-stock purchases include shares withheld for taxes.
Changes versus the prior period
- Q2 operating income increased 27% and net income increased about 26%; first-half operating income increased 25% and net income about 25%. Management attributed operating improvement primarily to revenue growth and expense management.
- Services growth reflected higher professional-services work and customer support, associated with customer initiatives, upgrades, and large license deals. Services costs also increased with headcount and compensation.
- Large software license deals above $1 million numbered four in Q2 and eleven in the first half, compared with seven in the first half of 2014. Management noted that deal timing remains difficult to predict.
- Americas revenue increased 19% in Q2 and 20% in the first half; EMEA increased 8% and 12%. APAC revenue declined 40% and 31%, respectively, with APAC operating income also falling substantially.
- Weighted-average diluted shares declined year over year, alongside ongoing repurchases. The effective tax rate edged up to 37.7% in Q2 and 37.6% for the first half, primarily due to higher state tax rates.
Outlook, risks, and other matters
- The filing provides no specific revenue or EPS guidance. Management expected cash and investments to meet working-capital and capital-expenditure needs for at least twelve months, anticipated no borrowing for general corporate purposes during the remainder of 2015, and planned continued investment in product development and business growth. The board approved increasing remaining repurchase authority to $50 million in July 2015.
- Management described extended and unpredictable sales cycles for large license transactions amid global economic uncertainty. Large-deal timing can materially affect quarterly revenue, operating profit, margins, and EPS. Competition may pressure pricing, margins, orders, and market share.
- Services comprise a large share of revenue and have lower margins than licenses. Services growth depends partly on license sales and customer upgrade activity; the company also faces competition from offshore and other consulting providers. More than 90% of customers renewed comprehensive support and enhancement contracts over the preceding three years.
- Other risks include the pronounced APAC revenue decline, foreign-currency movements, and possible claims arising from failures of software used in customers’ critical operations. The company said it was not involved in legal proceedings it believed would likely have a material adverse impact.
- $49.3 million of cash and investments was held by foreign subsidiaries; management intends to reinvest undistributed foreign earnings indefinitely. Repatriation could result in additional taxes. The filing reported no material changes in market-risk disclosures and no material changes in internal control over financial reporting; disclosure controls were assessed as effective.
- The company was evaluating the impact of new revenue-recognition and cloud-computing accounting guidance. The filing also lists a settlement agreement with Steven P. Smith as an exhibit but does not provide its terms in the supplied text.
Important facts for investors to verify
- Whether large-license deal volume and timing sustain license growth, especially given the stated sales-cycle uncertainty.
- Whether services growth can be supported without eroding margins, and whether the APAC decline continues.
- How buybacks, including shares withheld for taxes, affect cash balances and diluted share count relative to investment and acquisition needs.
- Whether foreign cash remains available for planned uses without repatriation, and the potential tax implications if that changes.
- The terms and financial implications, if any, of the settlement agreement referenced in the exhibits.