Manhattan Associates, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company develops and implements supply-chain, inventory-management and omnichannel software and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $154.1 | $154.9 | $297.6 | $304.8 |
| Operating income | $49.3 | $52.3 | $91.0 | $95.4 |
| Net income | $31.1 | $33.3 | $59.4 | $60.8 |
| Diluted EPS | $0.45 | $0.46 | $0.85 | $0.84 |
| Operating margin | 32.0% | 33.7% | 30.6% | 31.3% |
- Q2 revenue was nearly flat year over year; operating income declined 6% and net income declined 7%. For the first half, revenue fell 2%, operating income fell 5%, and net income fell 2%; first-half EPS increased from $0.84 to $0.85 as the weighted-average diluted share count declined.
- Q2 software-license revenue grew 9% to $22.4 million; services revenue declined 3% to $116.8 million; hardware and other revenue grew 3% to $14.9 million. For the first half, license revenue rose 10%, while services fell 4% and hardware and other fell 2%.
- Reported license gross margin was 89.5% for Q2 and 89.8% for the first half; services gross margin was 59.1% and 56.8%, respectively; hardware and other gross margin was 17.9% and 18.3%.
- Operating cash flow was $11.3 million in Q2 versus $19.1 million a year earlier, and $72.6 million for the first half versus $59.5 million. First-half capital expenditures were $2.7 million.
- At June 30, cash and cash equivalents were $76.7 million and short-term investments were $9.9 million, totaling $86.6 million in cash and investments. The filing’s MD&A sometimes describes the $86.6 million total as cash and cash equivalents; the balance sheet separates investments. The company reported no debt and no credit facilities.
- Current assets were $196.8 million and current liabilities $117.9 million. Accounts receivable were $96.3 million and deferred revenue $73.0 million. Total assets were $284.7 million and shareholders’ equity $157.7 million.
Material changes and unusual items
- Services weakness reflected delays in implementation work, primarily in the retail market. Professional-services revenue fell $6.1 million in Q2 and $15.2 million in the first half, partly offset by higher customer support and software-enhancement revenue.
- In May, the company eliminated about 100 positions to align services capacity with demand amid retail-sector headwinds. It recorded a $3.0 million pretax restructuring charge ($1.9 million after tax, or $0.03 per diluted share); $1.7 million remained accrued at June 30 and was expected to be paid in the second half of 2017.
- The six-month effective tax rate decreased to 34.4% from 37.0%, primarily reflecting adoption of stock-compensation accounting guidance. The 2017 tax provision included $1.9 million of excess tax benefits.
- First-half share repurchases used $81.6 million of cash, including shares withheld for taxes; the company reported $75.0 million invested in repurchases under its program. It repurchased 1.54 million shares during the half. The board raised remaining repurchase authority to $50 million in July.
- Foreign-currency losses contributed to the decline in other income. Foreign subsidiaries held $53.0 million of cash, and the company said it intended to keep undistributed foreign earnings invested abroad.
Outlook, commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management said it expected to prioritize product development and business growth, continue evaluating complementary acquisitions, weigh repurchases against investment opportunities, and did not anticipate borrowing for general corporate purposes during the remainder of 2017. It believed existing cash and investments would meet working-capital and capital-expenditure needs for at least 12 months.
- Management cited cautious customer spending, extended sales cycles for large license deals, and difficulty forecasting deal timing. Eight new contracts with license revenue of at least $1 million were recognized in the first half of 2017, versus six in the comparable 2016 period.
- The company planned to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method. It expected hardware revenue and related costs to be presented net, reducing both reported amounts, and was evaluating the treatment of sales commissions, some of which it expected to defer and amortize.
- Principal risks include macroeconomic and retail-sector weakness, timing and concentration of large license deals, competition and pricing pressure, implementation delays or failures, reliance on skilled services staff, foreign-exchange exposure, and product or data-security issues. Management reported no legal proceedings expected to have a material adverse effect, no material changes in market-risk disclosures, and effective disclosure controls.
Important facts for investors to verify
- Whether implementation delays and retail-sector headwinds persist, and whether services demand and margins stabilize.
- Large-deal license revenue timing, bookings and conversion, given long sales cycles and management’s reliance on large contracts.
- The actual impact and transition effects of the 2018 revenue-recognition standard, including commission-cost deferrals.
- Cash generation after repurchases, future repurchase activity, and the company’s stated liquidity needs and acquisition priorities.
- Cash-and-investment presentation and the amount, tax implications and availability of funds held by foreign subsidiaries.