Manhattan Associates, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited; comparisons are with the corresponding 2013 periods. Share and per-share figures reflect the four-for-one stock split.
Business context
The company develops and implements supply-chain planning and execution software. Revenue comes from software licenses, services (implementation, support and enhancements), and hardware and other items. Services generated 76% of revenue in both Q2 and the first half of 2014. Approximately 31% of Q2 and 30% of first-half revenue was international.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $122.5m | $102.5m | $236.1m | $199.1m |
| Operating income | $32.5m | $26.2m | $62.6m | $45.8m |
| Operating margin | 26.5% | 25.5% | 26.5% | 23.0% |
| Net income | $20.6m | $17.4m | $39.3m | $30.8m |
| Diluted EPS | $0.27 | $0.22 | $0.51 | $0.39 |
- Q2 revenue increased 20% year over year: license revenue rose 11% to $18.0m, services rose 20% to $93.5m, and hardware and other rose 35% to $11.0m. First-half revenue increased 19%; license revenue rose 16%, services 18%, and hardware and other 31%.
- Q2 license gross margin was 89.7% and services gross margin 55.7%; hardware and other gross margin was 15.9%. First-half license and services gross margins were 90.1% and 55.7%, respectively; hardware and other was 18.6%.
- Cash from operations was $1.9m in Q2 and $21.0m for the first half, versus $13.6m and $33.7m in 2013. First-half operating cash flow was affected by higher receivables and tax payments.
- At June 30, cash and cash equivalents were $91.1m and short-term investments were $10.3m, totaling $101.4m. The company reported no debt or credit facilities. Current assets were $206.3m and current liabilities $99.9m.
- First-half share repurchases used $58.3m of cash, including shares withheld for taxes; the company separately reported 1,477,036 shares repurchased under its program for $50.5m. The board raised repurchase authority to $50m in July.
Changes, outlook and risks
- Operating income and margins improved as revenue growth outpaced cost growth. G&A expense rose 42% in Q2, partly because 2013 included a $1.6m reversal of a previously expensed transaction tax.
- The effective tax rate was 37.2% for Q2 and the first half, versus 36.5% and 34.9% in the prior-year periods. Management attributed the increase principally to expiration of the federal R&D tax credit.
- Management reported increased receivables following June license closings: DSO rose to 64 days from 53 at March 31 and 61 at year-end. Cash from operations was also affected by $24.3m of estimated taxes paid in the first half, including a $6.5m payment for 2013 U.S. taxes.
- Management described large-deal sales cycles as extended and uneven amid macroeconomic uncertainty; seven software license deals above $1m closed in the first half. No formal financial guidance was provided in the supplied filing text. Management expected to prioritize product development, sales and services resources, repurchases, and potential complementary acquisitions; it did not anticipate borrowing for general corporate purposes in the remainder of 2014.
- Risks include competition and pricing pressure, delays or variability in large license deals, customer capital-spending decisions, services staffing and margin pressures, foreign-currency movements, and potential claims arising from product failures. No pending legal proceeding was identified as likely to have a material adverse effect. Management said disclosure controls were effective.
- The company intended to keep undistributed foreign earnings permanently reinvested; repatriation could create additional U.S. and foreign taxes. It was evaluating the impact of the new revenue recognition standard, effective for the company after December 15, 2016.
Investor verification points
- Reconcile reported hardware-and-other revenue growth with the MD&A narrative, which says first-half hardware sales decreased, while the financial statements show hardware and other revenue increased 31% year over year.
- Track collections, DSO and receivables after the June large-deal closings, and determine whether the lower Q2 operating cash flow was timing-related as management stated.
- Confirm the amount and pace of post-June repurchases against the expanded $50m authorization, and distinguish open-market program purchases from shares withheld for taxes.
- Assess whether license growth, large-deal timing, services capacity and margins, and the elevated tax rate persist in subsequent periods.