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

Thanks for joining. We're going to go ahead here and get started. My name is Brian Peterson. I'm one of the application software analyst here at Raymond James. Very happy to have Eddie Capel with us from Manhattan Associates.

Good afternoon.

So Eddie, maybe to get started, I think some people in the room may be newer to the story. Can you start maybe with a higher-level overview of what you guys are doing in Manhattan?

Yes, sure. So Manhattan Associates, supply chain management software. We're a software product company. Manhattan, in a minute, is 33-ish years old. Found in Manhattan Beach, California, hence the name, relocated to Atlanta in 1995, public in 1998, public ever since. We're about 4,200 people worldwide. 1,200 customers, something like that. We're focused on Tier 1 -- what we call Tier 1 and Tier 2 enterprises, 80% of our revenue in the Americas, 20% international, kind of following that supply chain management software spend profile. Customers -- products at a very high level, warehouse management system software running big distribution centers as our first product 33 years ago. We have grown our footprint to be transportation management software, inventory management software, order management software, most recently, store systems and point of sale software. Our customers, again, sort of Tier 1 enterprises, the names the like of Boeing, General Motors, Schneider Electric, Grainger, Target, Best Buy, Home Depot, Tiffany jewelers, Starbucks, everybody from kind of bigger industrials to specialty retail and everything in between. From a revenue profile perspective, we have a pretty big professional services organization. So not unique, but a little unusual in terms of we have a pretty big implementation services business to go along with software product development. About 50% of our revenue comes from our professional services organization, about 1,800 professionals around the world focused on implementing our solutions in the field for our customers.

So maybe just to kind of start on the macro, right? I think everybody seems to be talking about that these days. So you guys have actually executed really, really well despite maybe a choppy macro. Can you talk about what you're hearing from customers? And I guess, your assessment of what's going on with the business?

Yes. Yes. So from our window -- look, I've told a lot of people this. Honestly, if we woke up in the morning and only looked at the world through the lens of Manhattan Associates, never turned on a news feed, a TV or open a newspaper, we think things are pretty good, frankly. But can't be naive about what's going on in the world, of course. We have seen a little bit of choppiness. And as the expression goes, elongation of sales cycles just a little bit. But the sort of theory from our window is that our solutions are: a, mission-critical; and b, focused on supply chain, which continue to be critical for our customers and the industry at large. Backing off in a wholesale way from making investments in supply chain seems to be not that smart of a thing to do, right? Even though things might be a little bit tougher from a consumer-demand perspective, still satisfying that customer demand making sure that supply chains are resilient and building some contingency into supply chains still a pretty popular past time.

And I wanted to hit maybe on the customers too, just kind of double click on it. I know we've talked about that in terms of what is the status of the health of the customer base today maybe versus 10, 15 years ago? How has that changed?

Yes. Well, so look, there's winners and losers, obviously, and one tends to see the headlines around those that might be having a few challenges here and there. Some of those are our customers. Bed Bath & Beyond is a customer of ours, Party City is a customer of ours, just to give some context there. Now when customers go through challenges of those types in our world, frankly, they still continue to have to operate. So our systems remain mission-critical. Maybe more importantly, though. There is no customer in our portfolio that represents more than 2% of revenue in any given year, and that's kind of rotational as well. So we're pretty reasonably insulated.

All right. So want to hit on a lot of the product stuff. But maybe if I take a step back, if I look at Gartner Magic Quadrants, like you guys have been the leader in those kind of things for a very long time. And then you started on this journey with Active. So I'd love to understand with that multi-tenant cloud product portfolio now, what is that value you can provide to customers? What has that done to win rates because you're already leading. So how far ahead are you now?

Yes. Yes. I mean, look, we -- as you say, Brian, we've been a market leader for most of our solutions, top right-hand corner and so forth for a number of years, even when we were an on-premise perpetual license software company. So it was kind of 25-year or so history of doing that. We felt that it was important to start to build the next generation of solutions, and that meant for us, rebuilt -- reengineering everything -- every product that we have from the ground floor up. Not taking our perpetual software and hosting it, reengineering it from the ground floor up to be able to benefit from cloud technology. Number 1 -- in my opinion, the number 1 reason that our customers transition from on-premise to cloud is access to innovation. So gone are the days where we would release a product -- do a product release once a year, and that customers would upgrade every 4, 5, 6, maybe even 7 years. Today, completely version-less software, never do an upgrade again, and we're delivering new innovation to them with 0 downtime every 90 days. So as you think about the world, particularly the world of supply chain today with consumer demand changing and preferences changing dramatically, supply chain configurations, having to change dramatically and quickly. The ability to have access to brand-new innovation never have to do an upgrade again is the #1 differentiator, I would say.

And so maybe you can give us a highlight then on the Active WMS space. I know WMS is a big product for you guys. What have you seen in terms of win rates? And how is the adoption of that product gone so far?

Yes, terrific. So WMS was the first product we developed 33 years ago. So we got a lot of history there. We released a truly cloud-native solution of WMS almost 3 years ago, almost 3 years ago. So we've got a -- we've acquired about 95, call it, I might be off by 1 or 2, 95 customers in that 3 years. So the biggest and fastest product adoption release in the history of Manhattan, for sure. So 95 customers almost exactly split 50% of those 95 contracts were existing customers that are moving from on-premise to the cloud and 50% of them brand-new logos that we've never done business with before. Where that puts us in terms of the sort of the existing customer base, we're about 5% converted in terms of our on-premise customers that will, in my opinion, all inevitably move to the cloud. Look, this is a forecast from my perspective. I think that 95% of our customers, there will always be some stragglers, will move in the next 6 to 7 years.

And so -- all right. So you got a lot of that base already ready to transition. But I'd love to understand on the net new side. Like what are you displacing? And how do you think about win rates as you kind of look at something...

Yes. So yes, win rates you asked about that. I'm sorry. So we publicly talk about across the entire portfolio, 75% win rates against our top 6 competitors. Top 6 because if you're not in the top 6, it's probably not a big deal, right. Those are the bigger deals. And that's across our entire portfolio. Some of our products, we don't win at 75% win rate. So you can imagine and rationalize from that, that our win rates for our flagship products, Manhattan Active WM, for example, are well above 75%. In terms of kind of a, the market drivers; and who are we taking business away from. Market drivers when it comes down to it as sort of 2 things in the WMS space. One is the need for just about every company on the planet to drive greater levels of efficiency, which means robotics and automation into the distribution centers, right? Labor capacity shortages, need for increased velocity productivity and throughput from distribution centers. So as a consequence of that, yesterday's WMS, as it were, it doesn't fit the need for a modern distribution -- modern highly distribution -- highly automated and robotized distribution center. Second, typically, we operate the most sophisticated distribution centers around the world. Most of those historically have been driven by retail requirements because that's where the most sophisticated distribution is not so much in manufacturing, wholesale, CPG particularly. But what we've seen happen and we all have seen this, right, as consumers over the last few years, so many more manufacturers and wholesalers are moving to a direct-to-consumer model, which really frankly blows up the distribution and fulfillment needs. And so hence, the need for modern software.

But can you talk about the flexibility that like Active WMS gives them, right? And if you're thinking about maybe retail it was a little bit further ahead, what about these other end markets like CPG and grocery like? Is that -- is this a time for them to invest. That's what you're seeing in the pipe?

Yes, for sure because they're starting to go direct-to-consumer or shipping retail ready. This is an incredibly old and an incredibly simplistic example, but I'll use it nonetheless. 15 years ago, Nike, a customer of ours, their distribution model was send big trucks of product to finish line, Foot Locker, Macy's and Dick's Sporting Goods, right? And you go sell that. We don't know -- first of all, we don't know who you're going to sell it to. But second of all, go sell it. And if you don't, just flip it over to T.J. Maxx and they'll sell what's left, right? Today, they send -- 26% of their business is sending a single pair of shoes to you, Mike and me, okay? That changes the context of how you manage orders and fulfill orders and the SLAs you have to meet for that individual consumer. By the way, on top of that, in the old world, they had never heard of a return, right? Product coming back to me, what are you talking about? I just push it this way. It sells one way or another, and I just push some more, push some more. Now they're shipping tens of thousands of individual pairs of shoes to individuals' doorsteps. And by the way, you have to -- you send them back from time to time. And all of the implications of that on a fulfillment and distribution network requires: A, a great deal more of a sophistication than a single truckload of product going to a single customer; and all of the tentacles that has to financial reconciliation, inventory management and fulfillment.

So maybe just kind of rounding out the discussion on Active because I know it's not just WMS. So maybe starting with Omni. What has the uptake been like there? And how do you think about the synergies between Omni and maybe the rest of the Active suite.

Yes, right. So Omni in our world is sort of an order management acronym, frankly, to enable our customers, again, whether they be manufacturers, wholesalers or retailers to be able to manage the orders that they're receiving, frankly, figure out exactly how to fulfill them across a distributed network, where to fulfill them from, greatest profitability, greatest inventory leverage, greatest margin leverage and fulfill the SLA of consumer. So it could be fulfilling from a store, could be filling from a distribution center. It could be fulfilling from a partner. It also includes a very sophisticated multichannel call center application and all of the retail store systems that go along with that, so that retailers can ship directly from store, provide you with buy online, pick up in store capabilities. Buy online, curbside pickups capabilities, all of those kinds of things have managed that capability. So as, obviously, direct-to-consumer continues to accelerate. COVID has accelerated the need for those capabilities. Order management, if you look across the portfolio and the approximate breakdown of our revenue, about 50% of our revenue comes from warehouse management systems, bounces around quarter-by-quarter, but 25% to 30% of our revenue comes from Omni or order management side of the business. And as you bring those things together and particularly warehouse management, transportation management, inventory management and an Omni suite of solutions, creating that unified suite of capabilities so that our customers can deliver a great experience to you, the consumer, but also manage those fulfillment and inventory management strategies with a level of precision, accuracy and the appropriate margin.

And what about on the TMS side, right, that's maybe your latest Active product launch. How has that been received? And I know we've talked about kind of cross-selling with Active WMS. So where are we in that today?

Yes. So transportation management on our cloud-native Active platform, came only 1.5 years -- it was released only 1.5 years ago. So it's a little earlier in the cycle. About 25 or 30 customers so far. About 50% of those customers are WMS customers as well. So that's great for us. There's a great deal of adjacency and benefit there. So we feel pretty good about the cross-sell and upsell opportunity. Last year, 2022 calendar is fiscal for us, about 26% of our software sales were from cross-sell, upsell.

Okay. So as we're -- I was just migrating on the product side, point of sale, always been excited to talk to about this.

Yes. Right. Yes me, too.

What is that longer-term opportunity? And maybe can you talk about what you've done on the supply chain execution side that allows you to kind of come in and provide more value with the rest of the Active suite? I'd love to unpack that a bit.

Yes, yes, sure. So point of sale is essentially one of the newer developments for us. So as I mentioned, we provide execution capabilities and have done for a little while inside the store. So you buy online, pick up in store, getting that order ready for you to pick up or shipping an order from the store and so forth. So we've been in the store. But our belief is that the industry is ripe to reinvent the point-of-sale market, primarily because retail stores are no longer single-function locations. They used to be walk in the store, pick up a product, pay for it, walk out. That's what a retail store did, right? Today, they're a multifunction facility, they're miniature distribution center, they're a customer service center for return -- online returns at the store, either a boutique, a gallery. They're a digital business or a digital billboard. And all of those kinds of things in that little glorified calculator that used to sit in the corner of the store to consummate the transaction, no longer gets the job done in a true omnichannel selling world, number one; number two, point of sale used to be a hardware game, right? There were manufacturers or companies that had factories that built cash registers, it's a software game now, not a hardware game and well suited, of course, because of the distributed nature of it to a cloud application. So we think there's a huge opportunity there. We're just -- all of us just getting started on that journey. We've got very small number of customers at the moment. We've got essentially 0 revenue coming from that line of business to all intents and purposes. We've got about 10 or 12 customers under contract. We've got about a handful live and in production. And my feeling is that in order to kind of get over that, where have you done a lot of implement, you need to have about 10 or 12 live customers to bring some real kind of credibility and get past that early adopter stage. And by the end of this year, we'll be at 10 or 12 live customers.

And so what do you think -- and I know it's early, right. So you're not promising anything, but what about the size of that opportunity versus the...

The way I think about it, so the point of sale is a pretty bifurcated market, right? When you check into the hotel here, that's a point-of-sale system, right? So there's in the barber shop, the coffee shop, the grocery store with [ belt ] scan. But that's not our game. We're in sort of -- think about anywhere there's a higher touch with the consumer is where our point of sale really plays because we can sell and [ on the side ], we can provide personalization, access to inventories across the network and so forth. The market overall, there's not great market numbers. If you look at the market today or the industry pundits today, they'll tell you it's a $10 billion market. Problem is that includes the hardware and some of these sort of edge case point of sale. I think for us, certainly, my eyes at the moment are set on there is no reason that this business can't be as big as WMS, right? I mean I think that's conservative, frankly, but that's sort of the size of the opportunity that I think is available to us.

Well, that's definitely something we'll be following. So I also want to talk about hiring plans, right? So it's interesting from our perspective, following software, you see a lot of other companies that are maybe trimming a little bit. You guys are hiring. So I think that speaks to maybe your bullishness about the business. But talk about your hiring plans, where are you adding and any thoughts there.

Yes, sure. Well, in calendar '22, we hired -- about 4,000 -- well, maybe 4,300 now but something like that. In 2022, we hired about 550 people which are about on target, a little behind where we wanted to be, but about on target. This year, plan is a little less of that, maybe 450. We're about 175 that we brought on so far this year in that range, 175, 180. So I feel pretty good about where we are. We didn't over hire any point and so forth. So we keep a very close eye on demand. We love to have just a little bit more demand than supply, not much, but just a little bit. Don't want to hurt customer satisfaction there, but that's where we'd like to be and seem to be on a pretty good track there.

And maybe just -- because I think the perspective matters here, but talking about your margin profile and maybe what you've done with your excess cash over the years, I think it is something that people would want to...

Yes, yes. So we're a debt-free company. Never had a penny of debt. We sit today with about $200 million on the balance sheet. Number one use of cash for us is to invest in R&D. We have about 1,000 people running numbers in our research and development organization, so continue to invest heavily in R&D. Number 2 is M&A. For those of you who know us, we've barely done any M&A in lifetime and haven't done it in the last 5 years. But if we could find something that get us over the hurdle in terms of strategic to our portfolio and modern technology and at a reasonable price and so forth, we'd certainly consider it. In the absence of investing more in research and development, acquiring companies, then we think the best way to put our money to work is in a share buyback program. So for the last, call it, 15 years, we've been pragmatic. We don't try to time the market, consistent pragmatic share buyback program over the last 15 years, reduced shares outstanding. We've bought back about almost 40% of the company. It's a go private in 1 quarter, but not really. But we bought back about 40% of the company over the last 15 years or so. Yes.

That's good perspective. I'll open it up to the audience if there's any questions. Yes.

A few familiar faces in here. Good to see you.

We got a quiet group.

All right. Right. You're good.

Just on hiring wages. You team's on the right track in terms of expansion of [indiscernible] of new hires...

Yes. Sure. Yes. No, it's more expensive today, for sure. No question about that. Tech talent. Look, I often get the question of, is it easier to hire talent now with layoffs around the tech industry and so forth and -- no, not at all. I mean it's still voracious war out there, certainly for the best talent anyway. And there's no question. Wage inflation is there. But we -- I think we've done a pretty balanced and reasonable job of keeping our team intact, keeping our talent, our experience and our tenure in place, but being responsible while we do that. Attrition last year was -- now we have almost a couple of thousand people in Bangalore. So usually you see a little more higher attrition rates there. But globally, our attrition rate was just a tick below 13% including the Bangalore operations. So I feel pretty good about keeping all of the talent.

And maybe just one for me. Just on the -- I think there's a lot of legacy solutions in the WMS space. I'm curious what the kind of large conglomerate-oriented companies like what are they -- are they doing anything different competitively to try to attack the WMS...

I don't think so. I mean I don't think so. I mean, look, I'm biased, and it's easy for me to say. But -- so we started a cloud -- reengineering our solutions to build cloud native products in 2013. And in 2013, it was 3 PowerPoint slides, right? We were just kind of getting -- it was a twinkle in our eye and just getting started. But we started in 2014. We didn't release our first product until 2017. So in terms of bringing our Tier 1 sophisticated WMS to a truly cloud-native solution. It's been a 10-year journey, right? It cost us $1 billion essentially to reengineer our solutions to -- I think it's pretty hard to catch. I think the moat is pretty deep and pretty wide, frankly.

Even on maybe some of the pure-play competitors, I know there's been some news out there from...

Yes. No. I mean, look, they keep us on our toes mostly from a pricing perspective. There's always competition out there. But as I said, our win rates are well above 75%. So we're doing well against our competitors. We just got to make sure we can demonstrate value to have prospects to maintain our premium position.

So -- and I've asked you this question in the past, but in terms of the innovation going forward, right, like what you've been able to do is impressive. I'm curious, as we think about where you're investing now, is that more into the kind of existing markets you've talked about? Or are there new kind of opportunities that you're probably going to identify for us, but is there more out there?

Yes. So we will continue to stay focused on supply chain management software, right? That's what we do. That's what we know. We feel like we're pretty good at it. Now, the markets continue to grow both from a geographic perspective, from a vertical opportunity perspective and still within the bands of supply chain. But our future development is really mostly about getting closer to the consumer, whether it be the order management solutions, point of sale, of course, getting closer to the consumer. And we don't call it this, but the way to think about it is consumer-based CRM, right? So knowing exactly what we've sold from a retail perspective, what's been sold to you, when it was sold to you, what price it was sold for, did you buy 10 things on sale and return 9 of them, did you buy 10 full price and never return any of them and being able to profile you as a customer from a lifetime-value perspective, understanding how we did for you, what was my SLAs, what were my might fill rates and so forth and thereby being able to market to you in a very accurate and precise way because we are the owner of all the -- all that data.

I think we might have time for one more? All right. Well, I'll ask on maybe on Active WMS. Sorry...

No. Go for it.

How have the implementations gone right? When it gets complex and some of them are very large customers, some are small, like -- how have that gone so far? You mentioned, I think, mid-90s in terms of customers.

Mid-90 customers under contract. We've got -- you have to give me again a little bit of license, 1 or 2 either way. We've got -- almost half of those guys are live, in one shape, form or another. The client that has the most distribution centers because a lot of them have big networks and so forth, I think 12 or 13 is the most distribution centers that 1 customer has rolled out. We've got some very nice global contracts with big Tier 1 customers, L'Oreal, for example, has, I don't know, 54 distribution centers around the world, something like that. We're about 4 or 5 into that so far. But yes -- but going well. going well. And we're -- our world is a big referenceability -- referenceability world. So we've got to have good customer satisfaction to get wholly ongoing sales.

Great. Thanks, Eddie. That's all the time we have.

My pleasure. My pleasure. Thanks, everybody. Appreciate it.