July 30, 2007
Research Associate: Priti Dhanuka,M.Fin.,M.Com.
Editor: Christopher Jones, CFA
Sr Ed: Ian Madsen, CFA; ; 1-800-767-3771, x9417
www.zackspro.com 111 N. Canal Street, Suite 1101 l Chicago, IL 60606
Manhattan Associates
/ (MANH-NASDAQ) / $28.39Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 2Q07 Results. (Previous: Minor Change in Estimates, July 11)
Recent Events
On July 24, 2007, Manhattan Associates (MANH) reported 2Q07 results. The company reported total revenue of $89.6 million, up 15.0% y/y. The non-GAAP EPS and GAAP EPS as reported by the company were $0.36 and $0.32, respectively. The revenue and Non-GAAP EPS results surpassed the consensus estimate of $82.8 million and $0.35, respectively, attributed to strong license business out performance and upside in hardware revenues.
Overview
Key Positive Arguments / Key Negative Arguments· Increase in cash leads is expected to improve the liquidity position of the company.
· The company is enjoying the benefit of its deals being average-sized, which in turn, is attributable to its new product releases, which are gaining traction.
· MANH’s execution in international markets has improved.
· Its investments in research and development can be viewed as a competitive advantage. / · Risks to the company include increasing competition from well-established and better-funded ERP vendors.
· Slower-than-expected adoption of RFID technology.
· Acceptance of new products and a rapid change in technology may cause obsolescence in the company's products and services.
· Financial results are dependent on the signing of several large contracts.
Based in Atlanta, Georgia, Manhattan Associates, Inc. (MANH) is engaged in the development and provision of supply chain software solutions for the planning and execution of supply chain activities. Its solutions include Integrated Planning Solutions, Integrated Logistics Solutions, Performance Management, and Logistics Event Management Architecture. Integrated Planning Solutions include Advanced Planning that enables companies to plan their inventory using various methodologies as well as other solutions, including Financial and Item Planning, Catalog Planning, Web Planning, and Promotion Planning. Integrated Logistics Solutions consists of Distributed Order Management; Warehouse Management; Slotting Optimization, which determines the optimal layout and placement of products in a distribution facility; Labor Management that enables the tracking, monitoring and management of employee activities within the warehouse; Transportation Management that enables companies to plan and procure transportation services, and includes Transportation Procurement, Transportation Planning and Execution, Audit Payment and Claims, and Carrier Management; Yard Management for incoming and outgoing loads; Trading Partner Management for synchronizing the business processes; Reverse Logistics Management for managing the returns process; and RFID Solutions for capturing and tracking EPC data. The Performance Management solution captures transaction-related data from its planning and execution solutions and transforms that data into actionable information. Logistics Event Management Architecture manages the flow of data between its solutions. The company was founded in 1995. For more information about the company, please visit its website at www.manhattanassociates.com.
Note: MANH’s Fiscal Year ends on December 31.
Revenue
Revenue- FYE Dec 31 / 2Q07A / q/q %change / y/y %change / 2006A / 2007E / 2008ESoftware Licenses / $23.4 / 70.0% / 10.2% / $66.5 / $76.0 / $83.6
Services / $55.9 / 1.9% / 15.4% / $194.5 / $225.9 / $248.6
Hardware / $10.4 / 7.7% / 26.2% / $27.8 / $34.8 / $32.5
TOTAL REVENUE / $89.6 / 14.6% / 15.0% / $288.9 / $336.7 / $364.8
In 2Q07, total revenue as reported by the company was $89.6 million, up 14.6% sequentially and 15.0% y/y. The revenue results were in line with the Zacks Digest average, but surpassed the consensus estimate of $82.8 million. According to analysts, revenue upside was driven by license revenue out performance and hardware business upswing.
Revenue by Segments:
Software License revenue was $23.4 million, up 70.0% sequentially and 10.2% y/y. The License revenue performance was driven by the large deal business and European sales force, which recovered from execution lapses in prior quarters. In the reported quarter, the company signed 6 deals greater than $1.0 million versus 3 deals in the previous quarter.
Services revenue was $55.9 million, up 1.9% sequentially and 15.4% y/y. The revenue performance was in line with the analysts’ expectations.
Hardware revenue was $10.4 million, up 7.7% sequentially and 26.2% y/y.
According to analysts, WMS (Warehouse Management System) remains the largest license contributor, with 45.0% of license sales attributable to the WMS business. Positively, the non-WMS business saw strong performance in the quarter as well. According to one analyst (Suntr. RH.), the company continues to see a significant balance in license sales from a variety of products and it expects the company to continue remaining flexible in new Tier 1 retail/supplier-to-retail opportunities, leading with either the WMS or non WMS solutions and than following up in cross-sell opportunities in future periods. It further opines this strategy of an integrated logistics/planning suite strategy is likely to continue paying dividends, and will contribute strong large-deal activity in future.
Significant sales-related achievements during the quarter include:
· Signing new customers, such as Bally Technologies, Crocs, East Bay, Fashion Biz, GraysOnline, Lakeshore Equipment Company, Laura Ashley Limited, Mitsubishi Corporation LT, Inc., Ozburn-Hessey Logistics, Rhenus AG & Co. KG, Volcom and Seiwa Kaiun Co., Ltd.
· Expanding relationships with existing customers, such as American Eagle Outfitters, Donaldson Europe BVBA, Ergon SCM de Mexico SA de CV, Panalpina Management AG, Stride Rite Children's Group Inc. and Wincanton plc.
Regionally, the Americas remained the strongest in 2Q07 and the company expects this trend to continue. Revenue in the Americas was $75.6 million, an increase of 15.0% y/y. In addition, the EMEA region posted better than expected license revenue result of $4.0 million, up 43.0% y/y. Revenue in APAC was down 22.0% y/y.
According to analysts, execution in the U.S. has materially improved over the last five quarters, but MANH has struggled in the international markets. They opine situation has started to improve in Europe in 2Q07 as MANH benefited from two deals greater than $500,000 and from better execution, which they expect to sustain into 3Q07. In Europe, MANH is realizing benefits from changes to the sales team and better pipeline management, and the company expects the improvements to continue in the coming quarters as competition remains easy. MANH is currently revamping its sales force in APAC to sell up-market, according to analysts. The process was started in 4Q06 and MANH expects it to last another couple of quarters as the company faces competition from local vendors resulting in pricing pressure. One analyst (J.P. Morgan) expects it will be a few quarters before MANH stabilizes its APAC operations, though 3Q07 and 4Q07 expectations are very low.
Outlook:
According to one analyst (Suntr. RH.), aside from the good execution in the WMS product set, the company continues to make inroads in the transportation management systems market. It states MANH is increasingly winning business in emerging areas outside WMS, and is able to differentiate itself from its peers in sales cycles through its ILS (Integrated Logistics Solution) strategy.
It further believes the company may continue to monetize an attractive competitive situation in North America, and will hopefully see a recovery in the EMEA market, along with a rebound in the small Asia-Pacific market. The company has an integrated product release that ties in Evant planning functionality into the broader supply chain execution suite, which according to it, could bode well for further competitive differentiation in FY07 and beyond.
Please refer to the Zacks Research Digest spreadsheet of MANH for detailed revenue breakdown and future estimates.
Margins
MARGINS - FYE Dec 31 / 2Q07A / q/q %change / y/y %change / 2006A / 2007E / 2008EGross / 58.3% / 3.6% / 0.0% / 57.6% / 57.6% / 58.5%
Operating / 17.0% / 5.7% / -0.4% / 15.0% / 16.0% / 17.1%
Pre tax / 17.4% / 4.6% / -1.8% / 16.4% / 16.8% / 18.2%
Net / 11.3% / 2.9% / -0.6% / 10.1% / 10.9% / 11.6%
In 2Q07, the Zacks Digest gross margin was 58.3% (in line with the company’s results), up 360 basis points sequentially, but flat y/y.
In 2Q07, the Zacks Digest operating margin was 17.0% (in line with the company’s results), up 570 basis points sequentially, but down 40 basis points y/y. The currency headwinds in 2Q07 negatively impacted operating margin, according to analysts. One analyst (Suntr. RH) indicated the significant appreciation in the Indian Rupee put upward pressure on operating expenses due to the company’s significant research and development presence in India, and therefore, operating expenses increased more than expected. One analyst (Pacific Growth) believes the company’s business model remains heavily leveraged towards its service business, which has limited opportunity to expand its margin in the near term due to continued hiring in its consulting business.
Head count at the end of 2Q07 was 2,150, up by 150 employees sequentially. The number of quota-carrying sales representative declined to 65 in the quarter from 56 in 1Q07. The company plans to hire additional representatives in 2007 to finish the year with about 70.
Outlook:
Management suggested MANH could reach 20.0% operating margin over the next three years, and expects to derive leverage in the model in R&D and sales expenses. Margins are also expected to benefit from improvements in the international market execution, and the company believes its underperformance is costing it approximately 150 basis points in operating margins.
One analyst (CIBC) expects the company to continue to invest in growth initiatives, and near-term margin gains to be incremental.
MANH expects margin expansion in 2H07 will result in 50 basis points y/y improvement in margins in FY07. One analyst (J.P. Morgan) believes most of the margin expansion in FY07 will come from shift in the revenue mix from lower margin hardware and services revenue to the higher margin license and maintenance revenue. It expects FY07 R&D spending to be $50.0 million. However, it foresees scope for leverage in 2008 especially in R&D and S&M, which should result in margin expansion.
Please refer to the Zacks Research Digest spreadsheet of MANH for more details on margin estimates.
Earnings per share
PRO FORMA EPS - FYE Dec 31 / 2Q07A / 3Q07E / 4Q07E / 2006A / 2007E / 2008EZacks Consensus / $0.30 / $0.35 / $1.17 / $1.28
Company Guidance / $0.29-$0.34 / $1.27-$1.31
High Estimate / $0.36 / $0.34 / $0.41 / $1.09 / $1.32 / $1.52
Low Estimate / $0.36 / $0.29 / $0.36 / $1.08 / $1.25 / $1.37
Digest Average / $0.36 / $0.32 / $0.38 / $1.08 / $1.29 / $1.45
In 2Q07, the company reported non-GAAP net income of $10.1 million or $0.36 per diluted share, up 6.0% y/y. The pro forma EPS surpassed the consensus estimate of $0.35, but was within the management’s guidance of $0.32-$0.38. GAAP net income as reported by the company was $9.0 million or $0.32 per diluted share, up 28.0% y/y. The GAAP EPS was within the management’s guidance of $0.27-$0.33. The EPS results were in line with the Zacks Digest average.
According to analysts, EPS results were hindered by currency headwinds in the reported quarter. Management stated currency appreciation, principally the Rupee, negatively impacted GAAP and adjusted EPS by $0.03 in the quarter. According to one analyst (Pacific Growth), EPS upside was limited due to the company’s business model being heavily leveraged towards its lower margin services business. In the forthcoming quarters, the company does not expect the Indian Rupee to continue appreciating.
Non-GAAP net income excluded charges related to equity-based compensation and the amortization of acquired technology and intangible assets (detailed reconciliation in table below).
Outlook:
Manhattan has modified its equity compensation plan for 2007, exchanging stock options grants for restricted stock. While stock options expense was excluded from non-GAAP results, restricted stock expense will be included in the results. This change could reduce dilution over the next several years, but may also negatively impact non-GAAP EPS by $0.03 in 2007. An unrelated increase in 2007 diluted share count assumptions, up 6.0% from MANH’s share price appreciation in 2006, is expected to dilute 2007 non-GAAP EPS by another $0.08.
Zacks consensus EPS is $1.17 for FY07, and $1.28 for FY08.
2007 forecasts (10 of them in total) range from $1.25 to $1.32, the average is $1.29.
2008 forecasts (10 of them in total) range from $1.37 to $1.52, the average is $1.45.
The 2Q07 GAAP and Non-GAAP reconciliation is shown below:
Please refer to Zacks Research Digest spreadsheet of MANH for more extensive EPS figure.
Guidance
For 3Q07, management expects GAAP diluted earnings per share in the range of $0.24-$0.29, while non-GAAP diluted earnings per share to be in the range of $0.29-$0.34. The GAAP diluted earnings per share includes the impact of stock options expense under SFAS 123.
For FY07, management expects GAAP diluted earnings per share in the range of $1.08-$1.12, while non-GAAP diluted earnings per share to be in the range of $1.27-$1.31. The GAAP diluted earnings per share includes the impact of stock options expense under SFAS 123.
Management believes the second quarter results positioned the company well for 2H07, and has, therefore, increased EPS guidance for FY07 by $0.02 per share.
Target Price/Valuation
The Digest average target price is $32.00 ( $1.00 from the previous Digest report).
Target prices for MANH range from $29.00 (Cantor Fitzgerald) to $37.00 (Suntr. RH.). 5 analysts have quoted target prices for the company. The analyst (Cantor Fitzgerald) with the lowest target price has used 21x FY08 EPS estimate as a valuation metric. The analyst (Suntr. RH) with the highest target price used 25x 2008 EPS estimate as the valuation methodology. Most of the analysts have used P/E multiple methodology for the valuation of target price.