Cracking the Books: Manugistics' Results

Manugistics (MANU Quote) reported its third fiscal quarter earnings Tuesday after the close -- and a few hours after my column raised some warning flags. It was a strong quarter. Total revenues increased 96% year-over-year, and the company earned a profit of 5 cents a share vs. the consensus estimates of 3 cents. The stock, which was up in after-hours trading last night, and was nearly $3 a share higher this morning, is falling once again.

In terms of the three warning flags I raised (declining allowance for doubtful accounts, increasing accounts receivable, and negative and declining free cash flow), the news was mixed. Though it wasn't in the earnings release, the company reported during the conference call that its allowance for doubtful accounts was $5.5 million, equal to 7.1% of gross accounts receivable. This is a big jump from the previous quarter's 3.7%. Maybe it's good to be conservative, but it makes you wonder whether the company was overly aggressive in the past two quarters. Also, I don't like the way this number bounces around so erratically.

Days' Sales Outstanding, or DSOs, fell to 94.0 days, an improvement from 100.8 last quarter. Herb Greenberg raises a good question, however, when he asks what happened to the $2.5 million that Manugistics received from Verticalfund (and may have to return). Herb notes that it went into cash on the asset side of the balance sheet, but the company won't say where it went on the other side of the ledger. Herb says that shorts think that it went as a credit to receivables, in which case DSOs would be increased to 97.7 days, not 94.0 days.

We won't know what free cash flow was until the 10-Q is released, but a quick comparison of the second fiscal quarter and third fiscal quarter balance sheets doesn't appear to show any major shifts that would affect cash flows. Overall, the balance sheet seems to have improved somewhat from the previous quarter, but it's still weaker than it was in the fourth fiscal quarter of 2000 (ended Feb. 29, 2000), and the first fiscal quarter of 2001 (ended last May). ...