Business context and reporting period
Manhattan Associates, Inc. develops and implements supply-chain planning and execution software, with revenue from software licenses, services, and hardware and other sales. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011, compared with the same 2010 periods. Dollar figures below are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $88.4 | $77.6 | $160.1 | $151.6 |
| Operating income | $18.2 | $12.0 | $25.8 | $23.5 |
| Operating margin | 20.6% | 15.5% | 16.1% | 15.5% |
| Net income | $12.3 | $8.2 | $19.5 | $15.4 |
| Diluted EPS | $0.57 | $0.36 | $0.89 | $0.68 |
| Cash from operations | $16.0 | $10.0 | $24.1 | $23.9 |
Q2 revenue grew 14%, operating income 52%, and diluted EPS rose to $0.57. First-half revenue grew 6%; operating income increased 10%. First-half cash from operations was nearly unchanged year over year.
Q2 revenue mix: licenses $16.3 (+6%), services $63.8 (+16%), and hardware and other $8.3 (+12%). First-half license revenue fell 19% to $24.1, while services rose 11% to $119.9 and hardware and other rose 18% to $16.2. License gross margin was 88.8% in Q2 and 87.3% for the first half; services gross margin was 56.9% and 56.3%, respectively; hardware and other gross margin was 22.0% and 21.0%.
At June 30, cash and cash equivalents were $103.4, with short-term investments of $6.0 and long-term investments of $0.9; management reported total cash and investments of $110.3. The company had no debt and no credit facilities. Current assets were $178.4 and current liabilities $87.2. Shareholders’ equity was $170.7. Cash and investments declined from $126.9 at December 31, 2010, primarily amid substantial share repurchases. DSO was 55 days, versus 61 days at December 31, 2010.
Material changes and management commentary
- Q2 license revenue improved modestly, including four license deals above $1 million; first-half license revenue remained lower due to extended sales cycles and economic uncertainty. Services growth reflected prior license activity and customer upgrades.
- Regional first-half revenue rose in the Americas and EMEA but declined 4% in APAC; APAC operating income fell to $0.1 from $1.4.
- The effective tax rate was 25.3% for the first half, versus 34.0% in 2010, including a $2.0 tax benefit from reducing an India-related valuation allowance. The Q2 rate was 33.5% in both years.
- During the first half, the company repurchased about 1.9 million shares for $63.9 at an average $33.55. Q2 repurchases under the public program were about 1.1 million shares for $38.3. In July, the board raised remaining repurchase authority to $50.0.
- Management prioritizes product development and profitable growth, will consider complementary acquisitions and continued buybacks, believes available cash is sufficient for at least 12 months, and does not anticipate general-purpose borrowing in 2011. The filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Management cited uncertain global conditions, extended sales cycles for large deals, customer caution on capital spending, and intense competition; timing of a few large license transactions can materially affect quarterly results.
- Services are a large share of revenue and have lower margins than licenses. Other risks include pricing pressure, dependence on customer renewals and implementation activity, foreign-currency movements, and potential claims if mission-critical products fail.
- The company reported no material litigation, though ordinary-course proceedings exist and management believes they will not materially affect results. The IRS was examining the 2008 federal tax return, with completion anticipated within six months.
- One auction-rate security had a $0.9 carrying value and was valued using significant unobservable inputs; changes in assumptions could cause future impairment. Another security, with $4.5 par value, had previously been written down to zero.
- First-half 2010 operating results included $1.2 of state sales-tax recoveries, a favorable comparison item. Management said disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the Q2 improvement in large license deals and operating margin continues, given first-half license revenue declined 19%.
- How share repurchases affect cash balances, share count, and capital available for investment or acquisitions.
- The sustainability of services growth and margins, customer-support renewals, and the effect of project staffing costs.
- Whether the $2.0 India-related tax benefit affects comparability of the first-half effective tax rate and future tax expense.
- Updates on the IRS examination and valuation of the auction-rate security.