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MANHATTAN ASSOCIATES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to expectations about global macroeconomic trends and industry developments, plans for future business development activities, anticipated costs of revenues, product mix and service revenues, research and development and selling, general and administrative activities, and liquidity and capital needs and resources. When used in this report, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and similar expressions are generally intended to identify forward-looking statements. Undue reliance should not be placed on these forward-looking statements, which reflect opinions only as of the date of this quarterly report. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see "Risk Factors" in Item 1A of our annual report on Form 10-K for the year ended December 31, 2013. Investors are cautioned that forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. The following discussion should be read in conjunction with the condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2013, including the notes to those statements, included elsewhere in this quarterly report. We also recommend the following discussion be read in conjunction with management's discussion and analysis and consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2013. References in this filing to the "Company," "Manhattan," "Manhattan Associates," "we," "our," and "us" refer to Manhattan Associates, Inc., our predecessors, and our wholly-owned and consolidated subsidiaries. Business Overview We are a leading developer and implementer of supply chain commerce software solutions that help organizations optimize their supply chain operations from planning through execution. Our platform-based supply chain software solution portfolios - Manhattan SCOPE® and Manhattan SCALETM - are designed to deliver both business agility and total cost of ownership advantages to customers. Manhattan SCOPE (Supply Chain Optimization, Planning through Execution) leverages our Supply Chain Process Platform (SCPP) to unify the full breadth of the supply chain, while Manhattan SCALE (Supply Chain Architected for Logistics Execution) leverages Microsoft's .NET® platform to unify logistics functions. Early in the Company's history, our offerings were heavily focused on warehouse management solutions. As the Company grew in size and scope, our offerings expanded across the entire supply chain, while still maintaining a significant presence in, and a relatively strong concentration of revenues from warehouse management solutions, which is a component of our distribution management solution suite. Over time, as our non-warehouse management solutions have proliferated and increased in capability, the Company's revenue concentration in its warehouse management solutions has correspondingly decreased. Our business model is singularly focused on the development and implementation of complex supply chain commerce software solutions that are designed to optimize supply chain effectiveness and efficiency for our customers. We have three principal sources of revenue: • licenses of our supply chain software; • professional services, including solutions planning and implementation, related consulting, customer training, and customer support services and software enhancements (collectively, "services"); and • hardware sales and other revenue. In the three and six months ended June 30, 2014, we generated $122.5 million and $236.1 million, in total revenue, respectively, with a revenue mix of: license revenue 15%; services revenue 76%; and hardware and other revenue 9% for the three and six months ended June 30, 2014. We manage our business based on three geographic regions: the Americas, Europe, the Middle East and Africa (EMEA), and Asia-Pacific (APAC). Geographic revenue is based on the location of the sale. Our international revenue was 14-------------------------------------------------------------------------------- Table of Contents approximately $37.5 million and $70.4 million for the three and six months ended June 30, 2014, respectively, which represents approximately 31% and 30% of our total revenue for the three and six months ended June 30, 2014, respectively. International revenue includes all revenue derived from sales to customers outside the United States. At June 30, 2014, we employed approximately 2,700 employees worldwide, of which 1,280 employees are based in the Americas, 180 in EMEA, and 1,240 in APAC (including India). We have offices in Australia, China, France, India, Japan, the Netherlands, Singapore, and the United Kingdom, as well as representatives in Mexico and reseller partnerships in Latin America, Eastern Europe, the Middle East, South Africa, and Asia. Global Economic Trends and Industry Factors Global macroeconomic trends, technology spending, and supply chain management market growth are important barometers for our business. In both the three and six months ended June 30, 2014, approximately 70% of our total revenue was generated in the United States, 13% in EMEA, and the remaining balance in APAC, Canada, and Latin America. In addition, Gartner Inc., an information technology research and advisory company, estimates that nearly 73% of every supply chain software solutions dollar invested is spent in the United States (46%) and Western Europe (27%); consequently, the health of the U.S. and Western European economies has a meaningful impact on our financial results. We sell technology-based solutions with total pricing, including software and services, in many cases exceeding $1.0 million. Our software often is a part of our customers' and prospects' much larger capital commitment associated with facilities expansion and business improvement. We believe that, given the lingering uncertainty in the global macro environment, the current sales cycles for large license deals of $1.0 million or greater in our target markets have been extended. The current business climate within the United States and geographic regions in which we operate continues to affect customers' and prospects' decisions regarding timing of strategic capital expenditures. Delays with respect to such decisions can have a material adverse impact on our business, and may further intensify competition in our already highly competitive markets. In July 2014, the International Monetary Fund (IMF) provided a World Economic Outlook (WEO) update lowering its previous 2014 world economic growth forecast to about 3.4 percent in 2014. The WEO update noted that "the global growth projection for 2014 has been marked down by 0.3 percent to 3.4 percent, reflecting both the legacy of the weak first quarter, particularly in the United States, and a less optimistic outlook for several emerging markets. With somewhat stronger growth expected in some advanced economies next year, the global growth projection for 2015 remains at 4 percent." The WEO update projected that advanced economies, which represent our primary revenue markets, would grow at about 1.8 percent in 2014 and 2.4 percent in 2015, while the emerging and developing economies would continue to grow at a solid pace of about 4.6 percent in 2014 and 5.2 percent in 2015. During 2013 and continuing into 2014, the overall trend has been steady for our large license deals, with recognized $1.0 million or larger software license sales totaling fourteen for 2013 and totaling seven in the first half of 2014. However, the large deal flow has been inconsistent from quarter to quarter, reflecting what we believe to be ongoing lackluster macroeconomic growth in the United States and Western Europe. While we are encouraged by our 2013 and first half of 2014 results, we, along with many of our customers, still remain cautious regarding the pace of global economic recovery. With global GDP growth continuing to be well below pre-2008 levels, we believe global economic volatility likely will continue to shape customers' and prospects' enterprise software buying decisions, making it more difficult to forecast sales cycles for our products and the timing of large enterprise software license deals. Revenue License revenue. License revenue, a leading indicator of our business, is primarily derived from software license fees that customers pay for supply chain solutions. License revenue totaled $18.0 million, or 15% of total revenue, with gross margins of 89.7% for the three months ended June 30, 2014, and $35.1 million, or 15% of total revenue, with gross margins of 90.1% for the six months ended June 30, 2014. Prior to the 2009 global recession, our typical license revenue percentage mix of new to existing customers historically approximated 50/50. Post 2009, the percentage mix has fluctuated more. For the three and six months ended June 30, 2014, the percentage mix of new to existing customers was approximately 30/70. We anticipate that the new to existing customer mix will return to more historical levels on a more consistent basis in improved global economic conditions. License revenue growth is influenced by the strength of general economic and business conditions and the competitive position of our software products. Our license revenue generally has long sales cycles and the timing of the closing of a few large license transactions can have a material impact on our quarterly license revenues, operating profit, operating margins, and earnings per share. For example, $1.0 million of license revenue in the second quarter of 2014 equates to approximately one cent of diluted earnings per share impact. 15-------------------------------------------------------------------------------- Table of Contents Our software solutions are singularly focused on the supply chain commerce planning and execution markets, which are intensely competitive and characterized by rapid technological change. We are a market leader in the supply chain management software solutions market as defined by industry analysts such as ARC Advisory Group and Gartner. Our goal is to extend our position as a leading global supply chain solutions provider by growing our license revenues faster than our competitors through investment in innovation. We expect to continue to face increased competition from Enterprise Resource Planning (ERP) and Supply Chain Management applications vendors and business application software vendors that may broaden their solution offerings by internally developing, or by acquiring or partnering with independent developers of supply chain planning and execution software. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share. Services revenue. Our services business consists of professional services (consulting and customer training) and customer support services and software enhancements ("CSSE"). Services revenue totaled $93.5 million, or 76% of total revenue, with gross margins of 55.7% for the three months ended June 30, 2014, and $180.4 million, or 76% of total revenue, with gross margins of 55.7% for the six months ended June 30, 2014. Professional services accounted for approximately 69% of total services revenue and approximately 53% of total revenue in the three and six months ended June 30, 2014. Our consolidated operating margin profile may be lower than those of various other technology companies due to our large services revenue mix as a percentage of total revenue. While we believe our services margins are very strong, they do lower our overall operating margin profile as services margins are inherently lower than license revenue margins. At June 30, 2014, our professional services organization totaled approximately 1,730 employees, accounting for 64% of our total employees worldwide. Our professional services organization provides our customers with expertise and assistance in planning and implementing our solutions. To ensure a successful product implementation, consultants assist customers with the initial installation of a system, the conversion and transfer of the customer's historical data onto our system, and ongoing training, education, and system upgrades. We believe our professional services enable customers to implement our software rapidly, ensure the customer's success with our solution, strengthen our customer relationships, and add to our industry-specific knowledge base for use in future implementations and product innovations. Although our professional services are optional, the majority of our customers use at least some portion of these services for their planning, implementation, or related needs. Professional services are typically rendered under time and materials-based contracts with services typically billed on an hourly basis. Professional services are sometimes rendered under fixed-fee based contracts with payments due on specific dates or milestones. Typically, our professional services lag related license revenue by several quarters, as implementation services and related consulting are performed after the purchase of the software. Services revenue growth is contingent upon license revenue and customer upgrade cycles, which are influenced by the strength of general economic and business conditions and the competitive position of our software products. In addition, our professional services business has competitive exposure to offshore providers and other consulting companies. All of these factors potentially create the risk of pricing pressure, fewer customer orders, reduced gross margins, and loss of market share. For CSSE, we offer a comprehensive 24 hours per day, 365 days per year program that provides our customers with software upgrades, when and if available, which include additional or improved functionality and technological advances incorporating emerging supply chain and industry initiatives. Our CSSE revenues totaled $27.8 million and $55.3 million for the three and six months ended June 30, 2014, respectively, representing approximately 31% of services revenue and approximately 23% of total revenue for both periods. The growth of CSSE revenues is influenced by: (1) new license revenue growth; (2) annual renewal of support contracts; (3) increase in customers through acquisitions; and (4) fluctuations in currency rates. Substantially all of our customers renew their annual support contracts. Over the last three years, our annual revenue renewal rate of customers subscribing to comprehensive support and enhancements has been greater than 90%. CSSE revenue is generally paid in advance and recognized ratably over the term of the agreement, typically twelve months. CSSE renewal revenue is not recognized unless payment is received from the customer. Hardware and other revenue. Our hardware and other revenue totaled $11.0 million, representing 9% of total revenue with gross margins of 15.9% for the three months ended June 30, 2014, and $20.6 million, representing 9% of total revenue with gross margins of 18.6% for the six months ended June 30, 2014. In conjunction with the licensing of our software, and as a convenience for our customers, we resell a variety of hardware products developed and manufactured by 16 -------------------------------------------------------------------------------- Table of Contents third parties. These products include computer hardware, radio frequency terminal networks, RFID chip readers, bar code printers and scanners, and other peripherals. We resell all third-party hardware products and related maintenance pursuant to agreements with manufacturers or through distributor-authorized reseller agreements pursuant to which we are entitled to purchase hardware products and services at discount prices. We generally purchase hardware from our vendors only after receiving an order from a customer. As a result, we generally do not maintain hardware inventory. Other revenue represents amounts associated with reimbursements from customers for out-of-pocket expenses. The total amount of expense reimbursement recorded to hardware and other revenue was $4.9 million and $8.5 million for the three and six months ended June 30, 2014, respectively. Product Development We continue to invest significantly in research and development (R&D) to provide leading solutions that help global manufacturers, wholesalers, distributors, retailers, and logistics providers successfully manage accelerating and fluctuating demands as well as the increasing complexity and volatility of their local and global supply chains. Our research and development expenses were $11.9 million and $23.7 million for the three and six months ended June 30, 2014, respectively. At June 30, 2014, our R&D organization totaled approximately 640 employees, located in the U.S. and India. We expect to continue to focus our R&D resources on the development and enhancement of supply chain software solutions. We offer what we believe to be the broadest solution portfolio in the supply chain solutions marketplace, to address all aspects of inventory optimization, transportation management, distribution management, order management, store inventory & fulfillment, and planning. We also plan to continue to enhance our existing solutions and to introduce new solutions to address evolving industry standards and market needs. We identify opportunities to further enhance our solutions and to develop and provide new solutions through our customer support organization, as well as through ongoing customer consulting engagements and implementations, interactions with our user groups, association with leading industry analysts and market research firms, and participation on industry standards and research committees. Our solutions address the needs of customers in various vertical markets, including retail, consumer goods, food and grocery, logistics service providers, industrial and wholesale, high technology and electronics, life sciences, and government. Cash Flow and Financial Condition For the three and six months ended June 30, 2014, we generated cash flow from operating activities of $1.9 million and $21.0 million, respectively. Our cash, cash equivalents, and investments at June 30, 2014 totaled $101.4 million, with no debt on our balance sheet. We currently have no credit facilities. Our primary uses of cash continue to be funding investment in R&D and operations to drive earnings growth and repurchases of our common stock. We repurchased 1,477,036 shares of Manhattan Associates' outstanding common stock under our repurchase program during the six months ended June 30, 2014. In July 2014, our Board of Directors approved raising the Company's remaining share repurchase authority to $50.0 million of Manhattan Associates' outstanding common stock. For the remainder of 2014, we anticipate that our priorities for the use of cash will be in developing sales and services resources and continued investment in product development to drive and support profitable growth and extend our market leadership. We expect to continue to evaluate acquisition opportunities that are complementary to our product footprint and technology direction. We also expect to continue to weigh our share repurchase options against cash for acquisitions and investing in the business. We do not anticipate any borrowing requirements in the remainder of 2014 for general corporate purposes. 17-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes our consolidated results for the three and six months ended June 30, 2014 and 2013. Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (in thousands, except per share data) Revenue $ 122,530 $ 102,516 $ 236,093 $ 199,117 Costs and expenses 90,030 76,329 173,542 153,269 Operating income 32,500 26,187 62,551 45,848 Other income, net 312 1,243 79 1,394 Income before income taxes 32,812 27,430 62,630 47,242 Net income $ 20,594 $ 17,407 $ 39,306 $ 30,762 Diluted earnings per share $ 0.27 $ 0.22 $ 0.51 $ 0.39 Diluted weighted average number of shares 76,037 78,036 76,415 78,388 We manage our business based on three geographic regions: the Americas, EMEA, and APAC. Geographic revenue information is based on the location of sale. The revenues represented below are from external customers only. The geographical-based expenses include costs of personnel, direct sales, and marketing expenses, and general and administrative costs to support the business. There are certain corporate expenses included in the Americas region that are not charged to the other segments, including research and development, certain marketing and general and administrative costs that support the global organization, and the amortization of acquired developed technology. Included in the Americas costs are all research and development costs, including the costs associated with the Company's India operations. During the three and six months ended June 30, 2014 and 2013, we derived the majority of our revenues from sales to customers within our Americas region. The following table summarizes revenue and operating profit by region: Three Months Ended June 30, Six Months Ended June 30, % Change vs. % Change vs. 2014 2013 Prior Year 2014 2013 Prior Year (in thousands) (in thousands)Revenue: Software license Americas $ 14,498 $ 13,462 8 % $ 25,956 $ 24,991 4 % EMEA 1,621 1,118 45 % 6,071 2,437 149 % APAC 1,870 1,556 20 % 3,069 2,953 4 % Total software license 17,989 16,136 11 % 35,096 30,381 16 % Services Americas 73,884 62,510 18 % 144,788 123,790 17 % EMEA 13,851 10,477 32 % 24,715 20,240 22 % APAC 5,784 5,216 11 % 10,929 9,060 21 % Total services 93,519 78,203 20 % 180,432 153,090 18 % Hardware and Other Americas 10,251 7,628 34 % 19,244 14,639 31 % EMEA 439 369 19 % 804 718 12 % APAC 332 180 84 % 517 289 79 % Total hardware and other 11,022 8,177 35 % 20,565 15,646 31 % Total Revenue Americas 98,633 83,600 18 % 189,988 163,420 16 % EMEA 15,911 11,964 33 % 31,590 23,395 35 % APAC 7,986 6,952 15 % 14,515 12,302 18 % Total revenue $ 122,530 $ 102,516 20 % $ 236,093 $ 199,117 19 % Operating income: Americas $ 25,127 $ 21,256 18 % $ 49,260 $ 38,220 29 % EMEA 4,239 2,736 55 % 8,297 4,489 85 % APAC 3,134 2,195 43 % 4,994 3,139 59 % Total operating income $ 32,500 $ 26,187 24 % $ 62,551 $ 45,848 36 % 18 -------------------------------------------------------------------------------- Table of Contents Summary of the Second Quarter 2014 Condensed Consolidated Financial Results • Diluted earnings per share was $0.27 in the second quarter of 2014, compared to $0.22 in the second quarter of 2013. • Consolidated total revenue was $122.5 million in the second quarter of 2014, compared to $102.5 million in the second quarter of 2013. License revenue was $18.0 million in the second quarter of 2014, compared to $16.1 million in the second quarter of 2013. • Operating income was $32.5 million in the second quarter of 2014, compared to $26.2 million in the second quarter of 2013. • Cash flow from operations was $1.9 million in the second quarter of 2014, compared to $13.6 million in the second quarter of 2013. Days Sales Outstanding was 64 days at June 30, 2014, compared to 53 days at March 31, 2014. • Cash and investments on-hand were $101.4 million at June 30, 2014, compared to $125.9 million at March 31, 2014. • During the three months ended June 30, 2014, we repurchased 782,489 shares of Manhattan Associates common stock under the share repurchase program authorized by the Board of Directors, for a total investment of $25.1 million. In July 2014, the Board of Directors approved raising our share repurchase authority to an aggregate of $50.0 million of our outstanding common stock. 19 -------------------------------------------------------------------------------- Table of Contents The results of our operations for the second quarters of 2014 and 2013 are discussed below. Revenue Three Months Ended June 30, % Change vs. % of Total Revenue 2014 2013 Prior Year 2014 2013 (in thousands) Software license $ 17,989 $ 16,136 11 % 15 % 16 % Services 93,519 78,203 20 % 76 % 76 % Hardware and other 11,022 8,177 35 % 9 % 8 % Total revenue $ 122,530 $ 102,516 20 % 100 % 100 % Our revenue consists of fees generated from the licensing and hosting of software; fees from professional services, customer support services and software enhancements; hardware sales of complementary radio frequency and computer equipment; and other revenue representing amounts associated with reimbursements from customers for out-of-pocket expenses. License revenue. License revenue increased $1.9 million, or 11%, in the second quarter of 2014 compared to the same quarter in the prior year. We completed three large software license deals greater than $1.0 million in the second quarter of 2014. The license sales percentage mix across our product suite in the quarter ended June 30, 2014 was approximately 50/50 of warehouse management solutions to non-warehouse management solutions. Services revenue. Services revenue increased $15.3 million, or 20%, in the second quarter of 2014 compared to the same quarter in the prior year due to a $13.2 million increase in professional services revenue and a $2.1 million increase in customer support and software enhancements. The increase in services revenue was due to customer-specific initiatives in conjunction with customer upgrade activity and large license deals signed. Services revenue for the Americas, EMEA and APAC segments increased $11.4 million, $3.4 million and $0.5 million, respectively, in the second quarter of 2014 compared to the same quarter of 2013. Hardware and other. Hardware sales increased by $1.8 million to $6.1 million in the second quarter of 2014 compared to $4.3 million for the second quarter of 2013. The majority of hardware sales are derived from our Americas segment. Sales of hardware are largely dependent upon customer-specific desires, which fluctuate. Other revenue represents reimbursements for professional service travel expenses that are required to be classified as revenue and are included in hardware and other revenue. Reimbursements by customers for out-of-pocket expenses were approximately $4.9 million and $3.9 million for the quarters ended June 30, 2014 and 2013, respectively. Cost of Revenue Three Months Ended June 30, % Change vs. 2014 2013 Prior Year Cost of license $ 1,848 $ 1,937 -5 % Cost of services 41,457 35,058 18 % Cost of hardware and other 9,265 7,023 32 % Total cost of revenue $ 52,570 $ 44,018 19 % Cost of license. Cost of license consists of the costs associated with software reproduction; hosting services; media, packaging and delivery, documentation, and other related costs; and royalties on third-party software sold with or as part of our products. Cost of license decreased by $0.1 million in the second quarter of 2014 compared to the same quarter of 2013 due to decrease in sales of third-party software over the prior year. 20-------------------------------------------------------------------------------- Table of Contents Cost of services. Cost of services consists primarily of salaries and other personnel-related expenses of employees dedicated to professional and technical services and customer support services. The $6.4 million, or 18%, increase in cost of services in the quarter ended June 30, 2014 compared to the same quarter in the prior year was principally due to a $3.8 million increase in compensation and other personnel-related expenses resulting from increased headcount in our services organization to support ongoing growth of the business and a $1.6 million increase in performance-based bonus expenses. Cost of hardware and other. Cost of hardware increased by $1.2 million to $4.4 million in the second quarter of 2014 compared to $3.2 million in the same quarter of 2013. Cost of hardware and other includes professional services billed travel expenses reimbursed by customers of approximately $4.9 million and $3.9 million for the quarters ended June 30, 2014 and 2013, respectively. Operating Expenses Three Months Ended June 30, % Change vs. 2014 2013 Prior Year (in thousands) Research and development $ 11,867 $ 11,032 8 % Sales and marketing 12,848 11,888 8 % General and administrative 11,256 7,932 42 % Depreciation and amortization 1,489 1,459 2 % Operating expenses $ 37,460 $ 32,311 16 % Research and development. Research and development expenses primarily consist of salaries and other personnel-related costs for personnel involved in our research and development activities. Research and development expenses for the quarter ended June 30, 2014 increased by $0.8 million, or 8%, as compared to the quarter ended June 30, 2013. This increase is primarily due to an increase of $0.4 million in compensation and other personnel-related expenses and $0.4 million in performance-based bonus expenses. Our principal research and development activities have focused on the enhancement of new products and releases while expanding the product footprint of our platform-based Supply Chain Commerce Solutions. These solutions are designed to help retailers, wholesalers, manufacturers and third party logistics providers seamlessly manage inventory, distribution and transportation while meeting the ever-changing customer demands created by the omni-channel driven marketplace. The Manhattan Supply Chain Process Platform provides not only a sophisticated service-oriented, architecture-based application framework, but also one that facilitates integration with Enterprise Resource Planning (ERP) and other supply chain solutions. For each of the quarters ended June 30, 2014 and 2013, we did not capitalize any research and development costs. Sales and marketing. Sales and marketing expenses include salaries, commissions, travel and other personnel-related costs, and the costs of our marketing and alliance programs and related activities. Sales and marketing expenses increased by $1.0 million, or 8%, in the second quarter of 2014 compared to the same quarter of the prior year primarily due to a $0.6 increase in performance-based compensation expense and $0.4 million increase in compensation and other personnel-related expense. General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related costs of executive, financial, human resources, information technology, and administrative personnel, as well as facilities, legal, insurance, accounting, and other administrative expenses. General and administrative expenses increased by $3.3 million, or 42%, in the current year quarter compared to the same quarter in the prior year. The increase was primarily due to a $1.6 million reversal in 2013 of a previously expensed transaction tax resulting from the expiration of the tax audit statute, an increase of $1.3 million in compensation and other personnel-related expenses including temporary contracted personnel, and an increase of $0.4 million in performance-based bonus expense. 21-------------------------------------------------------------------------------- Table of Contents Depreciation and amortization. Depreciation expense was $1.5 million for each of the three months ended June 30, 2014 and 2013. The intangibles associated with various acquisitions in prior years were fully amortized prior to the second quarter of 2014, and amortization expense for the three months ended June 30, 2013 was immaterial. Operating Income Operating income for the second quarter of 2014 was $32.5 million compared to $26.2 million for the second quarter of 2013. Operating margins were 26.5% for the second quarter of 2014 versus 25.5% for the same quarter in the prior year. Operating income and margin increased primarily due to strong revenue growth and expense management during the quarter. Other Income and Income Taxes Three Months Ended June 30, % Change vs. 2014 2013 Prior Year Other income, net $ 312 $ 1,243 -75 % Income tax provision 12,218 10,023 22 % Other income, net. Other income, net principally includes interest income, foreign currency gains and losses, and other non-operating expenses. Other income, net decreased $0.9 million in the second quarter of 2014 compared to the second quarter of 2013 primarily due to a $1.0 million decrease in foreign currency gains related to the fluctuation of the U.S. dollar relative to foreign currencies, principally the Indian Rupee. Net foreign currency gains were immaterial during the quarter ended June 30, 2014, but we recorded net foreign currency gains of approximately $1.0 million during the quarter ended June 30, 2013. Income tax provision. Our effective income tax rate was 37.2% and 36.5% for the quarters ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate for the quarter ended June 30, 2014 is principally due to the expiration of the federal research and development tax credit. Summary of the First Half of 2014 Condensed Consolidated Financial Results • Diluted earnings per share for the six months ended June 30, 2014 was $0.51, compared to $0.39 for the six months ended June 30, 2013. • Consolidated revenue for the six months ended June 30, 2014 was $236.1 million, compared to $199.1 million for the six months ended June 30, 2013. License revenue was $35.1 million for the six months ended June 30, 2014, compared to $30.4 million for the six months ended June 30, 2013. • Operating income was $62.6 million for the six months ended June 30, 2014, compared to $45.8 million for the six months ended June 30, 2013. • During the six months ended June 30, 2014, we repurchased 1,477,036 shares of Manhattan Associates common stock under the share repurchase program authorized by the Board of Directors, for a total investment of $50.5 million. 22 -------------------------------------------------------------------------------- Table of Contents The results of our operations for the six months ended June 30, 2014 and 2013 are discussed below. Revenue Six Months Ended June 30, % Change vs. % of Total Revenue 2014 2013 Prior Year 2014 2013 (in thousands) Software license $ 35,096 $ 30,381 16 % 15 % 15 % Services 180,432 153,090 18 % 76 % 77 % Hardware and other 20,565 15,646 31 % 9 % 8 % Total revenue $ 236,093 $ 199,117 19 % 100 % 100 % Our revenue consists of fees generated from the licensing and hosting of software; fees from professional services, customer support services and software enhancements; hardware sales of complementary radio frequency and computer equipment; and other revenue representing amounts associated with reimbursements from customers for out-of-pocket expenses. License revenue. License revenue increased $4.7 million, or 16%, in the six months ended June 30, 2014 over the same period in the prior year. Our license revenue performance depends heavily on the number and relative value of large deals we close in the period. We completed seven large deals greater than $1.0 million in the first six months of 2014 and 2013. Due to the sluggish economic recovery in the United States and other geographic regions in which we operate, the sales cycle on these deals remains somewhat less predictable. The license sales percentage mix across our product suite in the six months ended June 30, 2014 was approximately 60/40 of warehouse management solutions to non-warehouse management solutions, respectively. Services revenue. Services revenue increased $27.3 million, or 18%, in the six months ended June 30, 2014 compared to the same period in the prior year due to a $23.5 million increase in professional services revenue and a $3.8 million increase in customer support and software enhancements. The increase in services revenue was due to customer-specific initiatives in conjunction with customer upgrade activity and large license deals signed. Services revenue for the Americas, EMEA and APAC segments increased $21.0 million, $4.4 million and $1.9 million, respectively, in the six months ended June 30, 2014 compared to the same period in the prior year. Hardware and other. Hardware sales decreased by $3.6 million, or 43%, to $12.1 million in the six months ended June 30, 2014 compared to $8.5 million for the same period in the prior year. The majority of hardware sales are derived from our Americas segment. Sales of hardware are largely dependent upon customer-specific desires, which fluctuate. Other revenue represents reimbursements for professional service travel expenses that are required to be classified as revenue and are included in hardware and other revenue. Reimbursements by customers for out-of-pocket expenses were approximately $8.5 million and $7.2 million for the six months ended June 30, 2014 and 2013, respectively. Cost of Revenue Six Months Ended June 30, % Change vs. 2014 2013 Prior Year Cost of license $ 3,461 $ 3,715 -7 % Cost of services 79,917 70,104 14 % Cost of hardware and other 16,744 13,237 26 % Total cost of revenue $ 100,122 $ 87,056 15 % 23 -------------------------------------------------------------------------------- Table of Contents Cost of license. Cost of license consists of the costs associated with software reproduction; hosting services; media, packaging and delivery, documentation, and other related costs; and royalties on third-party software sold with or as part of our products. Cost of license decreased by $0.3 million, or 7%, in the first half of 2014 compared to the same period of 2013 principally due to decreased sales of third-party software over the prior year. Cost of services. Cost of services consists primarily of salaries and other personnel-related expenses of employees dedicated to professional and technical services and customer support services. The $9.8 million, or 14%, increase in cost of services in the six months ended June 30, 2014 compared to the same period in the prior year was principally due to a $6.2 million increase in compensation, other personnel-related and travel expenses resulting from increased headcount in our services organization to support ongoing growth of the business, and a $2.3 million increase in performance-based compensation expense. Cost of hardware and other. Cost of hardware increased by $2.3 million to approximately $8.4 million in the six months ended June 30, 2014 compared to $6.1 million in the same period of 2013. Cost of hardware and other includes out-of-pocket expenses to be reimbursed by customers of approximately $8.3 million and $7.1 million for the six months ended June 30, 2014 and 2013, respectively. Operating Expenses Six Months Ended June 30, % Change vs. 2014 2013 Prior Year (in thousands) Research and development $ 23,670 $ 22,508 5 % Sales and marketing 24,868 23,322 7 % General and administrative 21,905 17,440 26 % Depreciation and amortization 2,977 2,943 1 % Operating expenses $ 73,420 $ 66,213 11 % Research and development. Research and development expenses primarily consist of salaries and other personnel-related costs for personnel involved in our research and development activities. Research and development expenses for the six months ended June 30, 2014 increased by $1.2 million, or 5%, compared to the same period in 2013. This increase is primarily due to an increase of $0.4 million in compensation and other personnel-related expenses and an increase of $0.5 million in performance-based bonus expense. For each of the six months ended June 30, 2014 and 2013, we did not capitalize any research and development costs. Sales and marketing. Sales and marketing expenses include salaries, commissions, travel and other personnel-related costs and the costs of our marketing and alliance programs and related activities. Sales and marketing expenses increased by $1.5 million, or 7%, in the first half of 2014 compared to the same period of the prior year. This increase was mainly attributable to the increase in performance-based compensation expense of $0.9 million and a $0.6 million increase in compensation and other personnel-related expenses, including temporary contracted personnel. General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related costs of executive, financial, human resources, information technology, and administrative personnel, as well as facilities, legal, insurance, accounting, and other administrative expenses. General and administrative expenses increased by $4.5 million, or 26%, during the six months ended June 30, 2014 compared to the same period in the prior year. The increase was primarily due to a $1.6 million reversal in 2013 of a previously expensed transaction tax resulting from the expiration of the tax audit statute, an increase of $1.9 million in compensation and other personnel-related expenses including temporary contracted personnel, and an increase of $0.4 million in performance-based bonus expense. Depreciation and amortization. Depreciation expense amounted to $3.0 million and $2.9 million for the six months ended June 30, 2014 and 2013, respectively. Amortization expense for the six months ended June 30, 2014 and 2013 was immaterial. 24 -------------------------------------------------------------------------------- Table of Contents Operating Income Operating income for the six months ended June 30, 2014 was $62.6 million compared to $45.8 million for the same period in June 30, 2013. Operating margins were 26.5% for the first six months of 2014 versus 23.0% for the same period in 2013. Operating income and margin increased primarily due to strong revenue growth and expense management during the six month period. Other Income and Income Taxes Six Months Ended June 30, % Change vs. 2014 2013 Prior Year Other income, net $ 79 $ 1,394 -94 % Income tax provision 23,324 16,480 42 % Other income, net. Other income, net principally includes interest income, foreign currency gains and losses, and other non-operating expenses. Other income, net decreased $1.3 million in the six months ended June 30, 2014 compared to the same period in 2013 primarily due to a $1.3 million decrease in foreign currency gains related to the fluctuation of the U.S. dollar relative to foreign currencies, principally the Indian Rupee. We recorded net foreign currency losses of approximately $0.5 million and net foreign currency gains of $0.8 million during the six months ended June 30, 2014 and 2013, respectively. Income tax provision. Our effective income tax rate was 37.2% and 34.9% for the six months ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate for the quarter ended June 30, 2014 is principally due to the expiration of the federal research and development tax credit. The effective tax rate for the six months ended June 30, 2013 includes the benefit of the credit for the 2013 tax year, partially offset by an increase in foreign taxes. The effective tax rate for the six months ended June 30, 2013 also includes the benefit of the credit for the 2012 tax year, partially offset by the establishment of state income tax reserves. Liquidity and Capital Resources In the first half of 2014, we funded our business through cash flow generated from operations. Our cash and investments as of June 30, 2014 included $49.1 million held in the U.S. and $52.3 million held by our foreign subsidiaries. We believe that our cash balances in the U.S. are sufficient to fund our U.S. operations. In the future, if we elect to repatriate the unremitted earnings of our foreign subsidiaries in the form of dividends or otherwise, we would be subject to additional U.S. income taxes which would result in a higher effective tax rate. However, our current intent is to indefinitely reinvest these funds outside of the U.S. and we do not have a current cash requirement need to repatriate them to the U.S. Our operating activities generated cash flow of approximately $21.0 million and $33.7 million for the six months ended June 30, 2014 and 2013, respectively. Two consecutive quarters of record revenue growth in 2014 combined with higher taxable earnings in 2013 and 2014 impacted our 2014 year-to-date results versus the prior year. The decrease in operating cash flow for 2014 versus 2013 is timing related, primarily driven by second quarter 2014 performance. The increase in revenue combined with large license deal closings in June 2014 resulted in a $19.9 million increase in trade receivables compared to March 31, 2014 and a $15.6 million increase compared to December 31, 2013 and also contributed to an increase in Days Sales Outstanding to 64 days at June 30, 2014 compared to 53 days at March 31, 2014 and 61 days at December 31, 2013. Further, we paid $24.3 million in estimated income taxes in the first half of 2014, compared to $8.6 million in the first half of 2013. Included in the first half of 2014 estimated income taxes paid was a $6.5 million estimated payment for 2013 U.S. income taxes. Of the $24.3 million in estimated income taxes paid year-to-date in 2014, $16.4 million was paid in the second quarter of 2014 representing a $12.1 million increase compared to the same period in the prior year. Our investing activities used cash of approximately $5.0 million and $3.7 million during the six months ended June 30, 2014 and 2013, respectively. The primary use of cash for investing activities for the six months ended June 30, 2014 was $3.6 million in capital expenditures and $1.4 million in net purchases of short-term investments. The primary use of cash for investing activities for the six months ended June 30, 2013 was $1.6 million in capital expenditures and $2.1 million in net purchases of short-term investments. 25-------------------------------------------------------------------------------- Table of Contents Our financing activities used cash of approximately $50.6 million and $26.2 million for the six months ended June 30, 2014 and 2013, respectively. The principal use of cash for financing activities for the six months ended June 30, 2014 was to purchase approximately $58.3 million of our common stock, including $7.8 million of shares withheld for taxes due upon vesting of restricted stock and restricted stock units, partially offset by proceeds generated from options exercised of $0.8 million and a $6.9 million excess tax benefit from equity-based compensation. The principal use of cash for financing activities for the six months ended June 30, 2013 was to purchase approximately $34.9 million of our common stock, including $4.6 million of shares withheld for taxes due upon vesting of restricted stock and restricted stock units, partially offset by proceeds generated from options exercised of $3.9 million and a $4.9 million excess tax benefit from equity-based compensation. Periodically, opportunities may arise to grow our business through the acquisition of complementary and synergistic companies, products, and technologies. Any material acquisition could result in a decrease to our working capital depending on the amount, timing, and nature of the consideration to be paid. We believe that existing balances of cash and investments will be sufficient to meet our working capital and capital expenditure needs at least for the next twelve months, although there can be no assurance that this will be the case. In the remainder of 2014, we expect that our priorities for the use of cash will be our share repurchase program, developing sales and services resources and continued investment in product development to drive and support profitable growth and to extend our market leadership. We expect to continue to weigh our share repurchase options against using cash for investing in the business and acquisition opportunities that are complementary to our product footprint and technology direction. We do not anticipate any borrowing requirements in the remainder of 2014 for general corporate purposes. Critical Accounting Policies and Estimates In the first six months of 2014, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 2013. |