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 from Manhattan Associates here today. We have the CEO, Eddie Capel; CFO, Dennis Story; and Mike Bauer, our Senior Director of Investor Relations. So Mike -- or maybe Eddie, I will start with you. Just for people in the room that are maybe less familiar with Manhattan Associates, maybe start with a couple of minute overview.

Yes, sure, just [indiscernible]. So contrary to popular belief, we are not a New York [ wealth fund ], we are a supply chain management software. We've -- founded in Manhattan Beach, California, by the way, and hence the name, but been around just a little over 30 years, focused on, again, supply chain management software. We'll probably get into that a little bit more as we go through here. Our focus is on Tier 1 and Tier 2, have a loose definition, but Tier 2 for us is $250 million [indiscernible] in revenue, Tier 1, $1 billion and above. So we focus on the sophisticated, more challenging and complex supply chains around the world. We've been -- had a pretty successful run here over the last few years, finished up 2021 just recently, a record year for the company, record year from a revenue perspective, from an earnings perspective and an investment in innovation. Our strategy, not necessarily because we laid it out this way, but over the last, call it, 10 years or so, has been one of intrinsic innovation. Now we have not been terribly acquisitive, a couple of small -- very small tuck-in acquisitions over the years and tended to invest in self-developed innovation. We believe that the way we're going, it's hard -- it's faster to get there with intrinsic innovation than trying to buy. So we've invested over the last 10 years, almost $1 billion in research and development. This 2022 will be our first year to eclipse $100 million investment in research and development. So from a capital perspective, we're about 3,600 people around the world, 2 big offices, one in Atlanta, one in Bangalore, and 16 other sales and services offices in the important places you would expect us to be around the world.

And maybe just building on the innovation cadence and thinking about some of the key products and investments you've made over the last 3 to 4 years, how do you prioritize some of these R&D opportunities running?

Yes. Good. So maybe I'll just add at a super high level, the product portfolio or the areas that we focus on are really 3 for us. One, we call supply chain execution. So warehouse management systems, transportation management systems. In the middle, we have omni-channel solutions, so order management, retail store systems. And then finally, a pillar focused exclusively on inventory optimization. Over the last 8 years or so, our focus has been on transitioning our company to being a cloud-first company. So we have, again, 30 years -- a 30-year company. For the first 25 years, roughly of our company's distance, and we were an on-premise perpetual license market company. Starting with technology investment and innovation about 8 years ago, we began a journey to be a cloud first and cloud native set of solutions for our customers. And we sequenced our journey through the cloud transition, focusing first on our omnichannel suite of solutions. They were launched as cloud-native applications in May of 2017. So knocking on the door 5 years ago. About 2 years ago, we launched our flagship solution, warehouse management, reengineered as cloud native and about a year ago, our transportation solution. So rebuilding and reengineering all of our solutions to be cloud native.

And there's obviously been a lot of buzz about Active WM. I think that's been a key focus on a lot of the investor calls. Can you talk about how the product receptivity there has been? And anything that you've learned in terms of kind of the early customer momentum there?

Yes, yes. So again, our flagship solution or the oldest solution in our portfolio, Tier 1 Warehouse Management Solution released as cloud native 2 years ago or so. And frankly, the adoption and the enthusiasm has been quite successful. Arguably caught us a teeny bit flat-footed in terms of how much enthusiast there was for the solution. We have seen no resistance to cloud transition, frankly. And #1 -- really the #1 reason I would say that people are focused on our cloud solutions and WM specifically is access to innovation. So we're delivering brand-new capability, 0 downtime updates, no upgrades anymore. We deliver brand-new innovation to our customers every 90 days. In the old world, right, it was a pretty big extensive upgrade every 5 or 6 years. So in the world that we live in today, in the world that our customers live in and the need to participate and accelerate their digital transformation, the access to innovation has been, I think, the key reason for the enthusiasm.

And obviously, supply chain has been in focus for a lot of folks recently. Can you talk about -- has that been a catalyst for demand or people kind of retrenched and evaluated like as we've kind of gone through some of the COVID dynamics, how have you seen that in terms of impacting your business?

Yes. Good question, Brian. So I would say overall, digital transformation has been the fuel for our success and our growth. We did see almost everybody out there, the middle 2 quarters of 2020 were a little bumpy for us as it were with everybody. And frankly, we've had a record 2018, a record in 2019. Q1 of 2020 was a record. And then we had a couple of pretty bumpy quarters in Q2 and Q3 of 2020. But by Q4 of 2020, we're starting to see things stabilize and come back. And then, as I said, a record again in 2021. So just kind of an important but a bit of a blip there in 2020. I think, and as we've seen from almost every angle, digital transformation has accelerated during the COVID period, and that's been helpful to fuel that growth. The other thing -- the other big thing, I think, that has helped us not just during the last couple of years, but over the last 5 years or so. We've seen a lot of companies that would traditionally be -- you would recognize them and think of them as manufacturers and wholesalers with frankly not as complex supply chain, as you might think in that manufacturing and wholesale would transform to sell direct-to-consumer, right? So companies, if I rattle off a few names, just Nike, Adidas, Schneider Electric, Sonepar, Grainger, companies that you would traditionally think as wholesalers and manufacturers, are selling direct-to-consumer. And that adds a lot more complexity into their supply chains and we've managed to capitalize on that.

And I just like even thinking about that, and I guess maybe there's a lot of different products that you can kind of look through this lens. But if we're kind of sticking on the WMS side, what's the state of that market now? And I know there's been some M&A in the space and the competitive dynamics. I'm just curious to get an update there.

Yes. I mean, look, we feel like we've built a pretty wide and deep moat, frankly, in the WMS space. Again, there is need for access to innovation for a variety of reasons, to primary digital transformation, smaller packages, more complicated supply chains and much more sophisticated warehouses. The level of robotics, the level of automation that are being driven into almost every distribution center across the planet is the need for modern, more sophisticated solutions. And frankly, we've been investing pretty heavily in that space, particularly for the last 10 years, particularly during the last 5 as we've released Manhattan Active WM. And we feel like we've created a good bit of differentiation from the competitors who have rolled up older solutions, older companies in that kind of roll-up style.

And the win rates have remained pretty healthy.

Yes. So our win rates have probably kicked up just a little bit in the last couple of years from 70% to maybe touching, on a good quarter, 75%. So we feel pretty good about our win rates, of course. 90% of the reason that we lose, frankly, is on price. We are the premium solution in the market and expect to stay the same.

I wish my sports teams had those points.

Yes, right. Mine too.

So maybe pivoting to Active Omni a bit. Just curious to kind of get an update on the pulse of demand there. And obviously, there's a lot of innovation in how people are distributing certificates. So just curious what you're seeing there?

Yes, sure. Well, 2020, maybe for obvious reasons. So our omnichannel suite of solution which is -- we've got a sophisticated multichannel order management system, a sophisticated call center capability, cloud-based point-of-sale and retail store systems that are all hanging off of this Omni suite of solutions. And as you can probably imagine, 2020 was kind of what call it -- it was a little bit of a gap year for those solutions with stores closed and so forth. Demand wasn't very high. But 2020 (sic) [ 2021 ] is back strong. We had a very strong year for our Omni solutions in 2020 (sic) [ 2021 ] and off to a good start in 2022. And a number of facts here, not least of which the number of channels that we're all using to stop the permutations of channels that we're being fulfilled products through. Of course, we still got a big cash and carry component. We've got an online component, but online, pick up in store, curbside pickup, buy online, return to store, all of those permutations are creating the need for advanced technology being built into kind of those retail channels and fueling that enthusiasm.

And there's also some innovation that you've added to in terms of the portfolio of Active solutions, right, and thinking about Active Omni and then thinking about point of sale, right? And I think a lot of investors asked questions about, okay, positioning and point of sale and how would you think about the ramp of that product?

Yes. So the point of sale is an interesting one. We call our solution, the next generation of point of sale because of -- if we don't call it that, then it's hard to recognize what it is. It's much more than a point of sale solution as we think about retail for the last couple of hundred years, right? Retail stores have really been single-function facilities really for hundreds of years. You walk into the store, you pick product off the shelf, you pay for it and you walk out. That's how stores work, regardless of whether they are 200,000 square feet or 10,000 square feet, that's the way they work. But not today. Today, they are a combination of galleries. There can be a boutique where you go view product. They have a customer service center because you buy online and return product at store. They are miniature distribution centers because you are buying online and having products shipped from stores. You're buying online, picking up in store. You're buying online, doing curbside pickup. All of that requires a whole new set of software solutions in the retail store. That little glorified calculator that used to take that payment in the retail store no longer gets the job done in this multifunction facility. So we built a next-generation native cloud-based, we call it point of sale, but it's much more than point of sale to satisfy the need of those stores. And we believe that this is a market that is in the very, very early stages of transition, because we don't think there's any going back. Retail stores are going to become more technologically enabled, probably, over time, smaller footprint of retail stores and more technologically enabled.

And maybe I'll just follow-up on that, and then I'll ask one for Dennis, I think. So in terms of this kind of I think you called it a retail reconstitution, when you talk to customers, how long do you think that's going to take to evolve?

Yes. No, I mean it's a multiyear journey. That's for sure. Because look, retailers have spent 100 years, some of them building a set of processes, or products and systems, go-to-market strategies that are focused on cash and carry. And the entire company has to be changed. There's only one person by the way in the company that can make that change and it's the CEO to ensure that the entire company is thinking about serving you the consumer in an omni way. But it's a multiyear journey. We just got started off the back of COVID, frankly.

So Dennis, I wanted to hit on RPO. I know this came up last night. But just in terms of exceeding your targets in 2021 and just you're giving multiyear RPO targets, so that suggest a high level of visibility. So just curious what gives you the confidence to kind of lay out those targets. That's not something that we typically see from software companies?

Yes. Really, it gets down to...

Turn the mic on.

It's on. Can you hear me?

Yes, all right.

Okay. So what it comes down to is really that forward visibility that Brian mentioned. So our metric internally, we call it banked revenue. And so when we close a cloud deal, let me back up a little bit, but 50% of our bookings is driven by warehouse management, 30% is driven by Manhattan Active Omni that Eddie talked about, and the balance is transportation management, POS. When we look at the pipeline and the demand in the pipeline, it's broadly diversified. We have a record pipeline on the deals that we closed, that forward revenue subscription year by revenue -- by year essentially is banked revenue, it's noncancelable contracted revenue looking out into the future. So what gives me confidence is really the percentage of that business or that revenue out in the future that we already have booked, again, noncancelable, pegged against our targeted revenue objective. So at this stage, we're looking out to about [ $1,025 million ]. We've given guidance on cloud revenue as well as RPO through 2024.

And can you just remind us, just on some of that because I think you ended about $700 million in RPO. What was the target kind of heading into 2021?

Heading into 2021 was about $300 million. We closed out with $700 million of RPO, and we guided to a -- yes, it's pretty good.

Pretty good year.

We guided to a midpoint of about $1 billion for 2022 RPO.

And so how do you think about -- like just as we're thinking about growth sectors, the balance of kind of expanding the relationships that you already have versus net new. Obviously, there's some RPO targets out there. But how do we think about kind of the [ plan ] versus expand dynamic with customers?

Yes. So with the diversity of the solutions and the newer solutions, there's really a great opportunity there. Closing out 2021, 15% of our overall bookings, roughly about $80 million was cross-sell, upsell to existing customers. So we feel real good about that. We think we're going to -- obviously, with 2022, we're going to have more opportunity with the newer solutions, transportation management, POS driving that number up.

And just thinking about the priorities for investments next year in terms of sales capacity or services capacity, products. I know you guys have invested in innovation. How do you prioritize that? And what's kind of the 3- to 5-year plan there?

Yes. It's more of all of that. I mean, look, the core of our success over the last few years, we believe, is a sustained, consistent and focused innovation. And that's where we plan to remain in that exact same spot, staying consistent and focused innovation. Now those new software sales are certainly driving services demand for us as well. So we've got to make sure we can keep up with the services demand. We concluded 2021 with about 3,600 people around the globe, as I mentioned. Our plan is to be a little above 4,000 by the end of the year. Most of those folks will be focused on customer-centric capabilities, some in R&D, but a lot in services. We're off to a good start. We got about 100 of those folks in the door, right. So we're hiring aggressively. So it's all about innovation and people from an investment perspective.

Then we'll open it up to the audience, if there's any questions.

Sure. Yes, we do think [ eloquent praise ] are going to repeat [ just for record ].

Well, just on the hiring, I mean it sounds like you're doing well there so far in the 2022 goals. But in terms of wage inflation and finding skilled professionals, even from like services or engineering, how do you deal with that? And what are the implications?

Yes, it's a competitive market, for sure. Look, we've got to be a great destination for people to invest their careers for sure, give them challenging work to do, meaningful work and we got to compensate them fairly. Just to say the very obvious. But when you're one of the leaders in the market, you've got at least an opportunity to recruit some of the best of the best. And that's what we're doing. We can talk about the allowance, frankly, that we've made in our 2021 -- excuse me, '22 guidance and expectations around investment in our people.

Yes. Sure. So 2022 operating margin guidance is 23.5%, built into that, it's about 200 basis points, focused on wage inflation, hiring.

And so Dennis, we were talking about this last night, just maybe hit on the free cash flow generation and what you guys have been able to achieve. I think in software, it's been kind of a grow at any cost kind of mentality. You guys have been able to grow and generate pretty healthy cash flow. So maybe expand a bit on that a little bit.

Yes, yes. So a 27% free cash flow margin, 28% EBITDA margin. We had a record collection year. The way we manage cash internally is, the objective is to collect more cash and you generate revenue. We've got a long track record of being able to do that. We closed out the year with $165 million of cash on the balance sheet. The Board re-upped our share repurchase authority. Basically, we're a very focused cash-centric company from a financial point of view.

And how do you think about deploying that? I know you guys haven't been active in M&A. Obviously, the share repurchases has been most of it, $265 million. How do you think about that going forward given the healthy cash generation?

Yes. So #1, obviously, Eddie has been saying it, invest in innovation. So that will be the first focus. We'll look at M&A, but we're not going to be a roll-up acquirer. It has to be complementary to our product technology and our end markets and our strategic objectives. Absent that, we'll put cash back to work through a buyback program. We like to keep about $100 million on the balance sheet, $100 million to $150 million just to show strength, financial strength against the big players. And then essentially, when we do go into the market and put cash to work from a buyback program, we don't time the market, we just dollar cost average. In my 16 years, we've delivered common shares outstanding about 40% on the buyback program. In addition to that, no executive or employee is compensated on the benefit of that buyback program.

So I want to take a step back, Eddie, because I feel like it's an important point just on the customers in the cloud and the access to innovation. So when they're sitting down and they're looking at Active WM versus on-premise maybe 5, 10 years ago, does the -- is the level of commitment to Manhattan, even though they may not sign a contract, it might not be in RPO, but the conversations are longer term, right, because you're now selling a broader portfolio and it's cloud-based so they can integrate more. I just -- I think it's an important point to...

No, no, it's a great question. And it's true. I mean, I get the questions on, say, how many people buy, for example, WMS and TMS and order management from you at the same time? And the answer to that is almost none. And the only reason for that is these are big projects. So how many of these projects can any given customer take on at any one time? So it's when the need is WMS, TMS or order management, that's clearly they're going to start. But I can guarantee that every one of those sales cycles, regardless of where the point of entry is, also includes the other solutions because the road map is important to them for sure.

And is there anything that's really changed the conversation from a product perspective? I know we've talked about cloud, but -- do you feel like there's any one product that's really kind of up for refresh or that's where the pipeline has really changed over the last 24 months?

Not really, to be honest with you. I mean, if you look at -- if you just think about it naturally inside of these warehouses, the level of robotics and automation and the harmonization of people or man and machine is a real focus for a variety of reasons, speed and velocity and throughput in these distribution centers is important, juxtapose the labor challenges and so forth. So the level of automation, frankly, that's been cramped in would be probably the #1 driver or focused on digital transformation. On the Omni side of the world, we've talked a little bit about the reconstitution of retail and how that continues to change. We all see that personally as well as professionally. On the transportation side, it's a bit tactical, but you having to move a lot more inventory a lot more frequently and you've got a lot less resources to be able to do it. So optimization is key there.

So over the last, I guess, more than probably 8 years from a product side, the product portfolio has completely transitioned to cloud, point of sales and new product.

Yes.

How do we think about reinvesting and kind of sustaining that innovation in the existing portfolio versus are there more TAM-expanding products?

Yes, there is a lot more to be done. And so we spent all these years getting to a cloud first and cloud native posture on WMS, TMS and there is tons more to be done. I can tell you, tons more to be done. Think about WMS was our first product in 1990. It was our only product for the first 10 years of our existence. We're focused on Tier 1 and Tier 2 and we have a 20% market share. So there's still plenty more to be done. You look at supply chain management, overall, we have a 2% market share. So there's still plenty more for us to focus on there. Now point of sale on the -- is -- again, it's not just point of sale, it's that broad retail strategic selling platform and in the retail content, there is an enormous opportunity. We've essentially got 0 revenue to all intents and purposes. We're off to a good start. We've got 0 revenue. My belief is there's enormous opportunity there. The big players in that space, NCR and so forth, but they have factories that make cash register, they build a $6 billion business based upon it being a hardware play. It's clearly a software play now. And that transformations happen I think you're going to see it again personally and professionally over the next 3 to 5 years. The other space that is particularly interesting to us is, I guess, think about it as consumer-based CRM, obviously, Salesforce did a magnificent job on the B2B side, it's an enormous space. But real focused and sophisticated consumer based CRM requires all the transactional data, to know all about your shopping habits so that marketing could be focused at you personally and specifically, without being overly irritating. And we own, obviously, those transactions. So we think there's a huge market there for us to get closer and closer and closer to the consumer. And we haven't scratched the surface yet.

Interesting. So I'm sure there'll be more on that at some point. But just lastly, on the TMS product. That's kind of the latest cloud innovation. Curious on how the adoption is.

Yes, pretty good, pretty good. So we're less than a year in market with Active TMS. We're off to a great start, frankly, like just as we were with OMS in '17 and WMS in 2020. We made a specific area of focus is expanding internationally for that solution servicing great uptick in Europe. Interestingly, you asked about kind of the cross-sell and so forth. About 50% of our Active TMS customers or cloud-based TMS customers are also WMS customers. So it's starting to see that conversation which is exciting too.

Great. That's all the time we have. Everybody, thanks for listening in.

Thanks for having us. See you.