Manhattan Associates, Inc. (MANH) Earnings Call Transcript & Summary

Good morning, everyone. My name is Brian Peterson. I'm the application software analyst here at Raymond James. Very happy to have the team at Manhattan Associates with us today. We have CEO, Eddie Capel; CFO, Dennis Story; and Senior Director of Investor Relations, Mike Bauer. We have a fireside chat. We do have the ability for you to ask questions. You can look at the chat feature there. I'll be able to see those questions, and I can ask them if any come in. But we'll go ahead and get started. Thank you, gentlemen, for making the time. Excited to have you here. A different format, but we'll make the best of it.

So Eddie, I wanted to start off with you, just more on the product investments. I think that's been a narrative that's really been clear in the last 2 years. And I wanted to get your sense of how you feel about the product portfolio today and maybe how that compares to the product portfolio coming out of the last downturn and how you feel positioned about the products maybe over the next few years.

Yes. Yes. Thanks, Brian. Well, thanks to everybody for attending. Thanks for Raymond James for hosting us today. It is a little bit of a different format, but regardless, we're thrilled to be here. So yes, there's no question that innovation is in our blood. We're fortunate enough to have a strong balance sheet that gives us the ability to invest and gives us a little flexibility when there is a little chop in the water. I would say, if we compare the '08, '09 turbulence with the more recent turbulence, there is a little bit of a change. Only in as much as through '08 and '09, there was obviously an economic cycle there and so forth. But there really weren't any major kind of business process changes and supply chain management changes. We will go through an economic challenge. We continued to invest during that cycle. So we were there for our customers with new innovation when the market returned. But this cycle has been a little bit different because for the last, let's call it, 10 years, now we've been investing in what was originally called e-commerce and then what's called multichannel, most recently called omnichannel commerce. And we've been certainly promoting those capabilities, whether it be inventory optimization across the omnichannel world, transportation, warehouse management or the omni suite of solutions that are kind of at the core of that, that we offer. So we've been promoting those things for 10 years. What's happened during this last 12 months or so, and I don't -- no surprise to anybody here, but an acceleration of digital transformations in just about every market that we serve, whether it be third-party logistics, whether it be retail, whether it be wholesale, whether it be manufacturing and the subcategories around that. And it feels to us that, frankly, there's more of a pull now than a push. So what I mean by that is we've been promoting omnichannel capabilities to the marketplace. And certainly, many of our customers and prospects that say, hey, those are great capabilities. We'll offer them to the marketplace and offer them to the consumer. I think it's clear today, what we're seeing is consumers saying, look, if you don't offer buy online, pick up in store, if you're a retailer, if you don't offer curbside pickup, if you don't offer swift SLAs, I'm probably not going to do business with you. So that's, obviously, a consumer pool versus a Manhattan push of the capability. So the investments that we've been making across the broad omnichannel capability across our suite of solutions over the last 10 years is really coming to the forefront and helping our trajectory and, therefore, a momentum, we think.

Interesting. Okay. So -- but it almost feels like there's a little bit more of a pull from your customers. The need and the strategic need of the solutions has really changed. Is that...

Well, I think the consumers are pulling, right? The consumers are pulling. The consumers are saying, look, I got to have -- I'm only coming to you as a retailer if I can pick up at curbside. I'm only coming to you as a retailer if I can buy online, pick up in store. So it's a pull from the consumer and a must-have from a retail or wholesale manufacturer perspective.

So this is becoming mission-critical for a lot of your customers. Where do they feel like they are? And what do you think the demand environment for your solutions feels like as we sit today?

Yes. So feels pretty good. Feels pretty good, frankly. I think you can look across various dimensions, again, inventory optimization, transportation, omni suite solutions and WMS. From a WMS perspective, maybe I'm jumping ahead with questions here, I don't know, but certainly, from a WMS perspective, we're seeing networks, overall supply chain networks, being reimagined, a, to get closer to the consumer; b, to create more resiliency and more contingency because we had a bunch of stationary inventory during the worst cycles of Q2 and so forth of last year. Nobody wants to get stuck with that again. And I think 2020 was a bit of a gap here when it came to reinventing store systems for obvious reasons. They were largely [ clear ]. So there were smaller, very important and very strategic initiatives being executed, again, buy online, pick up in store, at curbside, digital self-service, all of those kinds of things. But it feels like we're back to the more strategic digital transformation initiatives today, having taken a bit of a gap here in 2020.

So I was going to ask on WMS a little bit later, but I'll ask now. So Active WM, I know it's been a big investment for you, like -- I mean maybe talk about some of the early wins that you've seen and maybe highlight the traction and where you think that product could be over the long term.

Yes. So look, we launched it really what is essentially 3 quarters ago. And the enthusiasm has been strong, maybe a little stronger than we expected, frankly. So we're pleased with that. Just to remind the audience, this is a true cloud-native warehouse management system. So cloud-native in that terms means it's completely versionless, so never an upgrade ever in the history. A media access to innovation, so we deliver new capabilities to the marketplace every 90 days. It's completely elastic, so obviously, very important, particularly for retail with 10, 15x volume days that you have. So as the expression goes, you don't have to build the church for Easter, right? So the system flexes all those volume requirements. And then it's also extensible. So you can provide your -- put your own customizations around that solution and still maintain that versionless viability going forward. And again, it's very well received. So the demand has been strong. The enthusiasm has been strong, the go-to-market. At the end of the day, for us, 2 things, like -- 2, 3 things I would say. One, this is not a -- just a lift and shift, meaning we've taken the same capability and reinvented it in the cloud. There's a lot more new capability today versus the WMS of yesteryear. We can talk about that a little bit. But the real go-to-market at the end of the day is, listen, you get access, a media access to innovation that's required for agile supply chains in the new world. And number two, you free up your IT resources to do real differentiating things for you. You don't have to maintain WMS and so forth. You can go off and do differentiating things. Now look, great total cost of ownership, great flexibility and great innovation. But at the end of the day, those are the 2 major capabilities. And we're at a nice number of wins, particularly in Q4, the end of Q3 and Q4, I think the win cans are like 23 customers, mostly Tier 1, so big global organizations. We're pleased about that. And about 90% of the pipe is cloud for us now. You probably heard us talk about all the WMS business, Manhattan Active WM business that we've done, about 50% existing customers converting and about 50% new logos, which is a nice balance, and we like that as well.

That's on the wins, Brian. And when you look at -- that's on the wins that Eddie was talking about, Brian. But also when you look at the pipeline, about 40% of the opportunities there are net new logos as well. So roughly 50-50...

Okay. So -- yes. Well, so there's a couple of questions. I'll go back to WMS, but I do want to hit on the idea of TAM expansion, right? So the idea that a lot of the product investments, and we can kind of -- we can look at maybe some of the omnichannel solutions and talk about what you can do there, but also with WMS. So maybe we'll keep this to Active WM. How do -- does that open up the TAM? And maybe just kind of walk through that process and how that really helps you maybe address new parts of the market or new customer segments because it seemingly is 40% of the pipe being new opportunities. That's a big opportunity. So maybe I'll take that a little bit.

Yes, sure. Well, in terms -- the TAM for warehouse management systems hasn't grown overnight per se. Our ability, though, to gain market share, we think, is pretty strong. At the end of the day, we've been the most consistent investor in WMS for a pretty long time because on one hand, you might think yourself, warehouse management systems, oh, they've been around for 30 years. That's a pretty mature market. Does it really require continued reinvestment? My position to you would be yes because the warehouse -- the distribution centers of today look nothing like the distribution centers of yesterday. The level of automation, the level of robotics, the service level agreements that we all demand, the order profiles being much smaller shipments and so forth, speak to a vastly different distribution center layout and level of technology than we've seen 10 years ago. So WMS is whether they be legacy or old WMS system, providers that haven't invested like we have don't get the job done in the new distribution center of the future. You add on top of that wholesalers and manufacturers shipping direct to consumer, right? So that adds a level of complexity that requires a modern WMS. And then the ability for cloud to reach a little further from a geographic perspective and from a vertical perspective. And we feel like we're in a pretty good spot. WMS, in general, just across the board, is a -- depending upon which report you look at, it's a 6% to 8% grower. So it's a nice little grower in and of itself. But all of these other catalysts are creating a pretty nice opportunity for Manhattan Active WM and Manhattan Associates overall.

So Eddie, I don't want to put words in your mouth here, but like that almost sounds like a WMS refresh cycle to a certain extent. I mean there's a lot of legacy solutions out there. I mean, is there sort of a realization that a lot of these legacy solutions aren't working? Or is there any commonality in some of the new customers that you're bringing in? I'm just curious to get your thoughts there.

Yes. It's modernization across the board, Brian. There's no doubt, I think there's a bit of a refresh cycle there, but modernization, particularly driven by labor constraints and, therefore, more automation and more robotics required to smooth that labor demand. And then there's the redistribution of warehouses. You look at a Home Depot, building 125 distribution centers across the country, albeit small but small urban facilities to get much closer to the customer. And you see that phenomenon across the board. Everybody is -- they build distribution centers. And if you go out and look at the JLL or any of the studies that talk about distribution center build, generally, smaller footprint facilities in urban areas are much closer to the consumer.

Okay. Understood. So a lot of WMS questions, but I wanted to shift over to Active on me. I realize it's been an interesting dynamic for a lot of in-store innovation. But if we can kind of take the TAM component of it, maybe not TAM expansion, but the portion that you're addressing with the Active portfolio, can you maybe talk about high level, as people go through this retail reconstitution, how much more do you feel like you can really address with a lot of the innovation you've built over the last several years?

Yes. So from an omni perspective, there's a big TAM growth opportunity there for us. If you look at sort of what we would call traditional supply chain, WMS, TMS, inventory optimization and so forth, I'm being a little liberal here, but call it a $9 billion supply chain execution space, we address about half of that because we don't handle planning and procurement. So WMS, TMS, all those more traditional things for us, call it, a $4.5 billion market. As you move over into the store systems space, that's an $8 billion to $10 billion market that, in our view, is right for reinvention, driven largely by the massive change in retail. We don't think that retail stores are going away. We do think that retail stores -- gradually as leases allow and so forth, retail stores are going to become smaller and they're going to become more technologically enabled. They are clearly, and already are, moving away from being a single-function facility. For hundreds of years, they've been a single-function facility, right? You walk in, you pick something off the shelf, you pay for it, you walk back. At the end of the day, it can look different, the product can be different, they can be large format, but that's how they work. Today, stores are multifunction facilities. They're boutiques. They're galleries. They have billboards for the digital business, the customer service centers because you buy online, return in store. They manage your distribution centers because you buy online and you ship from store. They're all of those things. And the system that has been at the center of the retail store for the last 125 years, that small autonomous calculator, it's called a cash register that sits in the corner, doesn't get the job done in a new multi -- well, particularly when you want to build a shopping cart at home and bring it virtually to the store with you and have completely seamless omnichannel selling strategy. Of course, we all know that companies, for the most part, are not even breaking out e-commerce sales and store sales anymore because it's kind of hard to tell exactly where the sale emanates from anyway. So you've got to have systems that are completely seamless and treat the customer exactly the same way with exactly the same experience across all those channels. So it's a market that is very ripe for reinvention, in our view, and a terrific TAM expansion for Manhattan Associates.

And what is your customer? Because that seems so intuitive and like when your customer conversations suggest -- I mean, obviously, there's point-of-sale systems that have been there forever, but where are they in terms of kind of thinking -- like adapting to your way of thinking, which seems sort of intuitive? How does that trajectory look in your mind? And I'm curious what customers are saying right now kind of coming out of the pandemic here.

Well, I would answer the question this way. It's a little -- I don't mean to be coy about this, but if you jump on just about any earnings call of anybody that's a seller in any way, shape or form, manufacturer, wholesale or retailer, I think every earnings call says, we're going to be a digital-first company, right? Every CFO and CEO jumps on the call and says, we're going to be a digital-first company. So in terms of alignment of our thinking, I think we've got perfect alignment with the market. Now I'll tell you, becoming a digital-first company is not for the faint of heart, right? It's a lot of work, everything, from people to systems, to process, to real estate. So these are not overnight journeys, as we know. And we look at, obviously, some examples of companies that have done pretty well and bitten the bullet early on, as you say, and are doing pretty well or have done pretty well. But alignment is terrific. These are long journeys. We're in it for the long term. We've invested for the long term. So we really think that we're well positioned to be able to help our customers and help the market and help our shareholders, too.

Got it. Yes. No, well, and we've seen the stock move up. So I think a lot of that has worked. So Dennis, I want to get you involved here. I know you mentioned earlier on the pipeline of cloud opportunities. You gave us perspective on kind of what that mix looks like in new versus existing. How do we think about the mix of that existing base that might have on-premise solutions and migrating them over to cloud solutions? Is that a push versus pull? I know they see the innovation, but how does that process look over the next several years?

Yes. I think it's not going to be too dissimilar to what we experienced early days. We got to get -- when we get through with the launch of MAWM and the acceleration there, I think MAO pipeline activity is building as well. As Eddie mentioned, POS is starting to build, too. So I think we've got great diversity across product from a pipeline point of view. I think the mix, we trended over the last decade about 30% to 35% net new logos added in. We've got a really large installed base penetration opportunity, obviously, with MAWM and demands kind of backing that. So I think it's more of a pull than a push on that side. And I think that, in general, early days, we're going into the fourth year of a 5-year transition. But I'm thinking probably 70-30, 70% of the deals will be converting existing customers, and then that 30%, just kind of in the zone there will be net new logos. Obviously, we have a very large installed base through the year, 23 years since IPO, so a lot of work to do there, a lot of opportunity.

Have you been -- it sounds like Active WM has come in really stronger than you expected. I think you mentioned that earlier. Is that both with existing customers that are just excited to look at that or new customers? I'm curious just because it's just been interesting to see that the licenses has exceeded expectations, while the Active WM bookings are so strong. It just seems like it's really the execution that's been impressive. I'm curious how that maybe has come in on the Active WM side versus kind of new versus existing.

Yes. Well, as Eddie mentioned, so we're in the double-digit territory at closing MAWM deals. Pipeline is very strong. Half of those deals were net new logos. The other half were conversions of existing customers.

So a pretty good balance in between.

Yes. Yes.

Nice balance there. Licenses have been a bit stronger than we expected, Brian. But again, we've got a big customer base, and there are some big programs that are still in-flight that are on more recent versions of on-premise solution. And what those customers have essentially said is, look, we love what you're doing with Manhattan Active WM. We love being associated with a company that continues to invest in innovation, and we'll catch you on the next cycle in terms of transitioning to Manhattan Active WM. We've not got a gun to anybody's head, right? We're delivering great innovation to the field and to the market. But it's a customer's choice is to have a -- have and when they transition.

Yes. And the good news there, Brian, is we've got the customer. And they're ultimately -- again, the overwhelming demand is conversion to cloud. So license is going to be lumpy, but no question over the last 3 years, licenses are trending very aggressively. 90% of the pipeline is cloud. The other thing is, the beauty here is, this is also fueling services. And going into this year, services revenue -- more than 50% of services revenue is being driven by the cloud business. So pretty quick conversion license relative to cloud.

Wow. Okay. So it gives you a lot of visibility. So the next question I was going to ask you, again, on the last earnings call, you guys gave some long-term targets, some RPO, just some visibility. Maybe talk about -- to give the -- like, I would say that expressed a decent amount of confidence in the business. Maybe just kind of remind us what those are and just how you think about the ramp of this business, particularly as it relates to RPO and revenue over time.

Yes. So 2021, we put, in essence, a 3-year guidepost. For 2021, $450 million to $550 million with a $500 million midpoint on RPO, which is about 60% growth year-over-year. Going into 2022, $625 million to $775 million, $700 million midpoint with 40% growth. Our cloud revenue, we're expecting $135 million to $150 million in 2022, we're targeting that with $143 million midpoint and a 31% growth. So let me just stop there a second. The RPO growth is accelerating faster at 40% than the cloud revenue growth of 31%, and that is being driven by the ramp deals, primarily on the MAWM side that we've discussed on multiple earnings calls. And our op margin for 2022, we're targeting 22%. When we get to 2023, $850 million to $1.1 billion, $950 million midpoint, 36% growth for RPO; cloud revenue, $190 million to $250 -- $215 million, I'm sorry, with a $203 million midpoint and 42% growth. So you got 36% RPO growth and 42% growth. What that reflects with our forward visibility is the ramp getting its peak in terms of revenue generation and the subscription cycle. So that's what shifts that mix. Since it's early days in terms of doing the ramp deals, that's why your '22 is -- RPO is accelerating faster than cloud revenue. We felt like we really needed to put those targets out because of our forward-looking visibility, take the guess work out of calculating RPO and where we think the cloud revenue targets are going. And then across those 3 years, basically 100 basis points of -- on an annual basis of operating margin improvement.

And so I got a couple of question follow-ups on that. But just on the ramp deals, can you kind of give us a sense for how that works? I think it's some questions on that after the earnings call. So just as we think about the revenue opportunity, is there any sort of -- like how do we think about that as investors of the ramping deals over a 2- to 3-year period?

Yes, sure. I mean, look, in a way, it's pretty simple, Brian. Hypothetically, it goes something like this. It's particularly relevant in the warehouse management system space, right? Because for transportation or the omni suite of solutions, they tend to be a single instant corporate application, right? So we put it in. And there's still a bit of a ramp there, but it ramps fairly quickly. When you've got a WMS customer, a global WMS customer, this maybe has 30 or 40 distribution centers around the world, that might be a 3-year rollout plan, right? So I'm going to roll out distribution centers over 3 years. So you can imagine why that ramp is a little more acute than with sort of centralized corporate apps. So that would be point number one. In a world -- in a license world, and I'm using entirely hypothetic numbers here, of course, but in a license world, we might do a WMS deal that's $1 million license deal, we recognize it upfront, obviously, annual maintenance. In a SaaS world, what's going to happen is we're going to sign a 5-year deal, probably, a 5-year deal that is $5 million in RPO, hypothetically, okay? But in the first year, we may only recognize $500,000 or maybe even $250,000 worth of revenue, right? Not the 1/5 that you would expect us to recognize. The $250,000 in the first year, that ramps. So in the last year, it might be $1.5 million, right? It might be $1.5 million in the last year, and that gives you that $5 million over 5 years. And that's why you get that little bit of wonkiness or dislocation that Dennis described between RPO and revenue. Now to state the obvious, the beauty of this is, there is an assumption here, but there's a renewal period at the end of 5 years. When you renew, you renew at the year 5 level, right? So if we do nothing different, that $5 million in RPO turns into $7.5 million, if we do nothing different for the next period. So it's pretty compelling.

Well, I was actually going to say, I mean -- and I don't know, maybe, Dennis, for you because we've seen kind of some of the cloud transitions, but would you feel like the visibility into kind of your growth profile is so much higher just given -- these sound like commitments, right, but there's just kind of a ramp stage. So do you feel that the visibility in your cloud growth now is stronger than it's been over the last couple of years or even maybe the business overall? Just -- it seems like there should be a lot of confidence into the visibility of the business.

That's correct.

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The beauty of cloud, right, it's much more data-intensive, obviously, than a perpetual license business. But these are locked-in contracts, no termination for convenience. So we've got great forward-looking visibility.

One of the reasons we wanted to provide those guideposts, not guidance, for a couple 3 years out was kind of here we are saying, hey, we've got this great momentum and so forth. But the revenue doesn't necessarily reflect it in year 1. So we wanted to make it clear as to what the back end kind of looked like because it is very positive.

Yes, you should -- when I talk to investors, they should focus more on the year-over-year growth on cloud revenue versus the sequential because of the ramp impact and also watch that RPO performance because, all right?

Because the RPO is the leading indicator, so we got to look at RPO and then the revenue will come through. I think that makes sense. So if we think -- there's a lot of good things to come and a lot of good things are happening. Curious, how do you think about hiring and staffing and resources and implementations and go-to-market, product development, obviously, but curious to get your thoughts on that.

Yes. Well, let's see. So we're going to continue to be serial investors in innovation. We joke a little tongue in cheek, but we do kind of with investors. When you see us pulling back on R&D investment, and you'd probably be taking a harder look at the company, but we've got a lot of things on our road map that we want to get to. As always, we've got a longer list than we're able to get to. So you'll continue to see us be serial investors in innovation for sure. We continue to build out our cloud and people infrastructure, of course, to be able to support all of these systems as they come online. And those -- that build-out is largely in Atlanta and in Bangalore to get leverage there. We've got a 7/24 organization that's been built, and you'll see that scale as we continue to scale. And then from a services perspective, as Dennis said, about 50% of our revenue in 2021 will come from cloud solutions. It's ramping nicely. We've added about 75 people so far this year, Dennis, right?

Yes.

Maybe 70, maybe 70, 75 people so far. We've got a strategy that calls for about another 250 people to be hired this year across the board but mostly servicing the customer.

Okay. And so I did want to ask just on maybe broader -- I know you maybe -- I think you maybe just alluded to this, but thinking about share repurchases, M&A, use of capital, I mean kind of an interesting year in the stock market, I'd say more so, and I guess maybe in general, it's a pandemic. But what are your thoughts there in terms of capital deployment? How should we be thinking about that?

Yes. We will probably double team on this one. Again, I'll give you the high level. No change. Number one, use of capital, invest in research and development; number two, M&A. I'll come back to that. And in the absence of M&A, share repurchase, and Dennis will cover that in just a moment around the mechanics and so forth. In terms of M&A, we're open. We're definitely open for business there. If we can find strategic ways to fill ahead our footprint with modern technology, we're certainly open to -- we're certainly -- at a fair price, we're certainly open to do that. The challenge, to some extent, is that we are still innovating at a very fast pace into white space, okay? So really, the -- we're being first to market with the solutions that we're delivering. So it's a little harder to find M&A when you're leading the innovation in the market. But we're definitely open. We've always got our ear to the ground and so forth. But as you know, for the last couple of years, it's been, as they say, pedal to the metal on intrinsic innovation, and we'll continue to make that our #1 focus. Dennis, I think the...

All right. Yes, Dennis, I don't know if you want to comment on the repo.

Yes. Well, I think that the repo program, we typically target about $100 million on the balance sheet. And anything above that, we consider excess cash, and we'll put it back to work and the repo program absent the first 2 markers, investing in innovation and M&A. So pretty consistent with what we've historically done. We exited the year with $205 million of cash on the balance sheet. We had about a 24% free cash flow margin profile over the history of the company since IPO. It's been about 22% to -- 20% to 22%. So pretty solid there. So we feel pretty good about the program -- the repo program in and of itself. We don't want to carry too much cash on the balance sheet.

Understood. Understood. Now I did have one come in from the audience, and then I think we'll probably be out of time here. But just from a competitive perspective on the WMS side, the investments, like are you seeing other companies out there being as cloud forward as you are? Kind of paraphrasing this a little bit. But basically, I think the question from the investor was to say, how do you feel like the competitive environment changes in WMS as you guys start to lead with cloud? Any thoughts on that?

Yes. We feel pretty good about the competitive environment. From what we can see, frankly, we're the only Tier 1 true cloud-native warehouse management system application. There are others that are hosting old technology in the cloud. But in terms of being versionless, 0 downtime update, extensible, scalable, elastic and delivering innovation every 90 days, we think we're the only ones out there. In terms of -- look, it sent a little -- well, it is what it is. And the deals that -- in which we're being -- we're competitive, what we're finding is the real inhibitor is really only one inhibitor to us winning deals, and that is that we're not the least expensive in the market. We deliver a premium solution. And then we expect be able to get some premium value. And so the #1 inhibitor to us towards winning is cost. We do pretty well on most other aspects.

Great. Well, thanks, gentlemen. That's all we have. Eddie, Dennis, Mike, really appreciate it. We'll catch up again soon. Thanks, everyone.

Right. Thank you. Bye-bye.

Thank you, Brian.

Thanks, everyone.