Business context and reporting period
Manhattan Associates, Inc. develops and implements supply-chain software, with revenue from software licenses, services, and hardware and other sales. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Services represented 74% of third-quarter revenue and 75% of nine-month revenue. The company reports three geographic segments: Americas, EMEA, and APAC. International revenue was about 30% of revenue in both periods.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $85.6 | $74.0 | $245.7 | $225.6 |
| Operating income | $19.4 | $9.6 | $45.2 | $33.1 |
| Net income | $14.9 | $6.2 | $34.4 | $21.6 |
| Diluted EPS | $0.70 | $0.28 | $1.59 | $0.96 |
| Operating margin | 22.7% | 13.0% | 18.4% | 14.7% |
- Revenue mix: Q3 license revenue was $13.6 million (+12%), services $63.6 million (+19%), and hardware and other $8.4 million (flat). For nine months, licenses were $37.7 million (-10%), services $183.4 million (+13%), and hardware and other $24.6 million (+11%).
- Gross margins: Q3 license 91.2%, services 55.9%, and hardware and other 20.7%. Nine-month license 88.7%, services 56.1%, and hardware and other 20.9%.
- Cash flow: Operating cash flow was $16.9 million in Q3 (versus $11.5 million) and $41.0 million for nine months (versus $35.4 million). Nine-month investing activities used $3.2 million; financing activities used $63.9 million. Cash and cash equivalents declined to $94.2 million from $120.7 million at year-end 2010.
- Liquidity and debt: Cash, cash equivalents, and investments totaled $101.7 million at September 30, 2011, versus $126.9 million at December 31, 2010. The company reported no debt and no credit facility. Current assets were $173.5 million and current liabilities $92.5 million.
- Share repurchases: The company repurchased about 2.8 million shares for $93.3 million under its program during the first nine months; the cash-flow statement reports $95.6 million of common-stock purchases, including shares withheld for taxes. Q3 program purchases were about 0.8 million shares for $29.4 million. October authorization raised remaining repurchase authority to $50 million.
- Other balance-sheet items: Shareholders’ equity was $161.3 million, down from $183.8 million at year-end 2010. Days sales outstanding were 61 at quarter-end, compared with 55 at June 30 and 60 a year earlier.
Material changes versus the prior comparable period
- Q3 revenue increased 16%; nine-month revenue increased 9%. Services drove growth, while nine-month license revenue fell 10%, reflecting slower large-deal activity earlier in the year.
- Reported operating income and EPS benefited from a $2.5 million recovery on a previously impaired auction-rate security, equal to a disclosed $0.12 per diluted share. Excluding that unusual recovery, reported earnings growth was lower than the headline comparison suggests; the filing does not provide adjusted earnings.
- Nine-month effective tax rate declined to 25.9% from 34.0%, including a $2.0 million benefit from releasing an India-related tax valuation allowance, as well as other tax adjustments. Q3 effective tax rates were 26.6% and 33.9%, respectively.
- Cash and investments fell primarily amid substantial share repurchases. Operating cash generation improved year over year.
Outlook, commentary, risks, and unusual items
- Management said large software-license sales cycles had lengthened amid economic uncertainty, particularly in retail, and that the timing of large deals remained difficult to forecast. The company closed seven deals of at least $1 million in Q2 and Q3 combined and eight in the first nine months.
- Management expected cash priorities to include product development and sales and services resources, while evaluating acquisitions and repurchases. It did not anticipate borrowing for general corporate purposes in Q4 2011 or 2012 and believed existing cash and investments would cover working-capital and capital-expenditure needs for at least 12 months.
- Key risks include macroeconomic weakness and delayed customer spending, dependence on a small number of large license deals, competition and potential pricing pressure, services staffing and margins, foreign-currency movements, and exposure to product-failure claims. Management cited no material litigation and believed ordinary-course proceedings would not materially affect the company.
- The company retained one Level 3 auction-rate security with a $1.0 million par value and $0.9 million carrying value. Valuation depends on significant unobservable inputs, and future impairment charges are possible. The $2.5 million recovery recorded in Q3 came from selling a different previously impaired security.
- Unrecognized tax benefits were $1.8 million, with $0.4 million of accrued interest and penalties. Management said benefits could decrease by about $0.2 million within 12 months. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $2.5 million investment recovery and favorable tax adjustments.
- Whether license revenue and large-deal closings recover, given the nine-month license decline and extended sales cycles.
- Whether services growth can be sustained while maintaining services and overall margins, and how increased staffing affects costs.
- How ongoing repurchases affect liquidity and share count, and whether the $50 million remaining authorization is used.
- Whether days sales outstanding and the remaining Level 3 security create meaningful collection or valuation risk.