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

Thanks, everyone, for joining. I'm Joe Vruwink from the vertical software team at Baird. Next up is Manhattan Associates. So Manhattan, the leader in warehouse management systems, really more than that, though, warehouse management, transportation management, inventory, broad set of omnichannel products, not just the leader in these categories, but I think the leader in a lot of ways of bringing cloud as a technology format to supply chain management, which is still underinvested and underpenetrated in cloud. So this should be a good discussion. . With us, we have Eddie Capel, CEO; Dennis Story, CFO. This is going to be a fireside chat. So I have questions if anyone in the audience has questions, it's session 2 at R.W. Baird, and I can moderate those from the iPad. But maybe just to begin, intro to the company and what people need to know.

Sure. I'll give it my best shot in Manhattan, a couple 3 minutes. A 33-year-old company. So founded in 1990, went public in 1998. Since then, no major financial milestones in the company's history and so forth. We're focused, as Joe says, exclusively on supply chain management software. We started our lives in 1990, building a warehouse management system. We've expanded our product portfolio over the years from warehouse management, transportation management, order management, inventory management, more recently, point of retail, point-of-sale systems. So we sort of -- as supply chains have got closer to the consumer in general, we've sort of followed that path and chased in the same avenues. From a technology perspective, Joe also mentioned this. Starting in about 2013, we began our cloud journey. We've reengineered our products from the grand floor up to be truly cloud native. We can talk about what that means. Our definition of that, if you'd like. But truly cloud native, we launched our first true cloud product in 2017. We launched our sort of heritage product, warehouse management in cloud native form in 2020 and have all of our solutions offered in the cloud native. This year, just to give you some perspective, license fees -- perpetual license fees, which is our old world for 25 years and will represent 1.5% of our revenue this year. So we've been on a cloud transition from 2017 to 2022, 5-year journey and sort of completed that journey. We focus on sort of Tier 1 and Tier 2 customers. It's a bit of a fuzzy, some fuzzy lines there, but our definition of Tier 2 are companies that are $0.5 billion to $1 billion in revenue, Tier 1, [ Tier 2 ] and above. We operate in 17 countries around the world. 80% of our revenue comes from the Americas, 13% from Europe, 7% from Asia Pacific. Today, we sit at about 4,300 -- a little more, 4,300 employees around the world. Yes, that's I think Manhattan in a couple of minutes.

Good. Sticking on typical customer profile, just for those that don't know Manhattan. And you mentioned Tier 1, Tier 2, where I always think of it, Gartner warehouse automation and levels 4 and 5 where you tend to operate. What would you say this is the type of customer where we're going to be best suited as opposed to maybe an ERP vendor being best suited? And what type of warehouse environment is your software typically managing?

Yes. So the more sophisticated -- larger and more sophisticated, the better for us. That's where we differentiate. So our market share in warehouse management, if you look at across the board, we're #1 in market share. We have about 22%. If you look at 1 million square foot, a highly automated distribution centers around the world, we probably have a 75% market share. So that's really where the focus is. From a kind of revenue breakdown by product, about 50% of our revenues come from warehouse management, varies by quarter, of course, 50% from warehouse management, 25% to 30% from order management, 15% from transportation management and the rest from others. Yes. But in terms of a target customers, it would be those that generally finished goods, manufacturing, wholesale and retail, 50% to 60% of our business is in retail, which is where the -- obviously, the complication of sophistication in supply chain emerges and where we're able to differentiate. If you just think about customer names, for us. In retail, we really span the gambit, everything from the big box guys. So Target, Home Depot, Best Buy, all the way down through the specialty guys of Victoria's Secret, J.Crew, to the real specialty guys of Tiffany jewelry and Starbucks. So a pretty wide birth there, the largest third-party logistics companies in the world. So the DHLs, the CEVAs, the UPSs, Federal Expresses are all customers. And as you move into industrial, the Graingers, the Schneiders, Boeing, General Motors and so forth. So those would be kind of typical customer names.

A year ago at this conference, you said, look, if you look over the last 5 years, supply chain software has grown at this, I think it's 8% or so has been a CAGR. But as you look out over the next 5 years, it could grow low double digits. Has it stayed pretty close to that expectation just over the last year? .

It has. It has, yes. These are -- not our forecast, these are industry analysts or so the Gartners and ARCs of the world. They track this stuff for a couple of decades, frankly. And for the last 15 years or so, they forecast the CAGR to be about 8% or so. That's what it's been. Let's say in the next 5 years, it's the CAGR increase is about 60% to about 13%, and that seems to be how it has playing out.

And what's driving the uplift? .

Visualization of supply chains. In general, I think -- and you would all know this just as consumers as well as specialists and analysts and so forth, I don't think there's a company on the planet that isn't in some way shape or form getting closer to their customers, right? So certainly, retailers are, of course, and -- but many manufacturers and wholesalers that you wouldn't have expected to have some kind of direct-to-consumer presence now do, right? So again, the Graingers, the automotive companies, ExxonMobil, I always talk about them as sort of the extreme, all now are thinking about things from a direct-to-consumer perspective, and our relationship with Nike, for example, began, I think 12 years ago, something that. They were 100% wholesale at the time. Today, somewhere in the 26% of the revenue comes from direct-to-consumer. And that blows the company's supply chain up, right? When you move from -- just use the example of Nike, Nike used to ship to Foot Locker, Finish Line, DICK'S Sporting Goods and [indiscernible], okay? And they would say, go sell these new products. And if you don't sell them, flip them over to TJX and they'll sell, TJX, and they'll sell them. Today, 26%, they're shipping individual pairs of shoes to your doorstep and all of our doorsteps, which changes their supply chain dramatically in every single way, the physical aspects of it, the inventory management, the financial reconciliation. And just to make the point for years and years and years, Nike never thought about what happens when somebody returns a pairs of shoes to store, right? And if you think about everything that you have to do when you start getting a pair of shoes, a pair of shoes coming back to you, it blows up supply chain. And it makes it much more complicated, much more sophisticated, and that's where we play.

And just double quick on that. So in a direct-to-consumer fulfillment operation, what is Manhattan providing from a technology -- not talking Nike, but just generally, what are your solutions involved in that value chain? .

Well, from a direct-to-consumer perspective, Obviously, the fulfillment activities inside a warehouse are quite different shipping individual pairs of shoes versus truckload and the order processing, the fulfillment process, the replenishment processes, shipping process, much more complicated, much more sophisticated, SLAs are much tighter. But then you move over to the order management side of the world, which is taking in an order and figuring out where to fulfill it from in the first place, whether it be a distribution center, whether it be a third-party warehouse, whether it be your own retail stores. And you see start to get closer and closer and closer to the consumer from a supply chain perspective. And again, that's where we play.

So cloud adoption, it's rising through supply chain management. Supply chain management has been on the lagging. And so you think about worldwide share of revenue, I think it's 10% or so for the category, something like CRM is 70% or 80%. So it's coming, but still a long way to go. Manhattan is very far ahead of those, 60% of your software business at this point is cloud. And you are investing in cloud before anyone was asking you for it. I guess what was the genesis of that strategy? I think you said 2013 to get going, and then now that some of your peers are also offering cloud products. What allows you to continue to stand out?

Yes. let's say, the easy part for is that our peers and competitors aren't really offering true cloud-native solutions, number one. Number two, certainly, if you look at Warehouse Management system just specifically top right-hand corner of the Gartner's Magic Quadrant for 15 years or so ago, 8, 9 years ago, we said, yes, it's nice to be in the top right-hand corner, but we want to reinvent ourselves. And obviously, cloud technology afforded us an opportunity to build everything that we've always wanted to build for the last 25 years and solve the problems that have been largely unsolvable. But the #1 driver for moving to the cloud, we're no different from any other company, never mind supply chain but enterprise applications. In the old world, our customers would buy a perpetual license from us. We would release new capabilities, a new version every year. They would upgrade every 5 or 6 years. So the way I describe it, they would come to our customer conference, we would tell them about all the great new capabilities. They will be salivating and think they were fantastic, but we actually be able to use them 5 or 6 years from now when they upgraded. In today's world, we deliver brand-new capabilities with 0 downtime to their operation every 90 days. And that's what the market needs, whether it be warehouse management, transportation management, order management, point of sale. You've got to have more flexibility, more agility and greater access to new innovation.

The point on just because someone offers you a cloud doesn't mean it's true cloud, maybe it's a good point at the user conference recently, composable unification was a big kind of percolating takeaway across really every product session. So what exactly -- when you talk about being different from peers, what is it about your cloud architecture? And what is that allowing you to do from a product standpoint? .

Yes. So I mean, again, the #1 is access to innovation. So we built -- rebuilt from the grand floor up, monolithic piece of software into truly composable microservices, API first software that allows you to, in no particular sequence, scale automatically as the demand requires it in a way that you would expect the client solution to do, try to be completely versionless, right? So it is truly versionless just like Netflix and Facebook, what version you're running, just today's version. There is no version upgrades that you ever have to do, which means when we deliver new capabilities every 90 days, with 0 downtime, 0 downtime, those capabilities are available to you instantaneously. The thing that we've done that is -- that is a little unusual is we also allow customization, right? Because that world is driven by the need for customization. So most of the -- sort of what you would consider to be the pure play and the early adopter cloud companies, which are fabulous, but the ADPs and the HCM and the -- even the CRM guys that don't allow customization, we have to like customers -- so we -- those first 3 tenants that I described on top of allowing our customers to customize their solution, that's the definition of native cloud for us.

There's a lot of different ways to ask what changes in an all cloud world. There's differences in financial model, customer lifetime value, what customers are receiving. Maybe let's focus on cross-selling. You brought up the old example when you have Sintex incompatibilities between each annual release. It's hard to cross-sell and how that's starting to change. Is this something that you think drives a material uplift and where growth is coming from Manhattan? .

Yes. So yes, and it's definitely part of our strategy. One of the ways that we talk about it is that once you have our platform installed and one of our solutions running, the bridge to get to the next solution is pretty short/nonexistent. Maybe an example, I think it's a good one, is we've built our point-of-sale system to be an extension of order management, okay? And the theory would go something like this. If you have our order management system installed, right? Omnichannel order management system that has call center capabilities. Call center, you are taking orders, you're processing transactions, you're doing tax calculations, you're doing fraud protection, you are selling through the call center, right? Just like you as consumers call in, give you a credit card number, da, da, da, so forth. So if you've got our order management system installed, the bridge to point of sale, you're already essentially somewhere in the range of 60% installed with point of sale if you have order management. Because all of the integration to the payment providers, the tax calculation, fraud protection, all of the other integration is already done. So we part of our value proposition there side of the omnichannel capabilities and everything goes along with it, the ease of being able to cross that bridge, we take all of that friction a lot of time and a lot of cost out of that implementation.

I thought it was interesting, again, going back to the user conference a few weeks ago. Big keynote presentation by a very passionate omnichannel point-of-sale customer. And my take was they're up on stage, and they're a long time Manhattan supply chain customer, but they're like, look, we needed -- this was the most, I think you said, ambitious IT investment of relatively new undertaking. And point of sale was actually the first thing they decided to do. So can you go into a bit more detail because I don't think when Manhattan comes up, at least in the investment community, everyone immediately goes to WMS. But what is it about your point-of-sale opportunity? Because I know this has been a focus of a lot of time that you think really stands out relative to that competitive landscape.

Yes. So look, the point-of-sale landscape in the retail store technology landscape has changed dramatically, I'm going to try to make this very fast. But my view is that in the broad sense, retail hasn't changed for hundreds of years, up until recently. What do I mean by that? Well, the way retail work was, you walked into a retail store, you pick product off the shelf, you paid for it and you went home. That's how retail work, whether it's big box, small box or in between specialty that's how retail operated. So retail stores were single-function facilities, and the system that ran that single function facility was an autonomous stand-alone glorified calculator focused only on consummating that transaction, whether it be cash, check or credit card, right? That's how I work. It work for hundreds and hundreds of years. Today, the retail store is not that. The retail store is a multifunction facility, right? That still does cash and carry, but it's a gallery, it's a boutique, it's a billboard for the digital business. It's a customer service center, you buy online return product at the store. It's a miniature warehouse shipping product out of the store. It requires a whole new set of technology for at the store associate to support all of those capabilities seamlessly. On top of that, my view is the retail culture is shifting from a no culture to a yes culture. What I mean by that is, you used to go into a retail store, and got my size and color. No, I don't, come back on Saturday because I'm getting the shipment on Thursday. And I might have what you want on the truck. It was very much, no. Today, the answer has to be yes. Whatever you want, the answer is yes. Now how do you want me to get that to you? I don't have it here, but do you want to pick it up another store? Do you want to come and pick it up here tomorrow, ship it to home, ship it to office. Again, the answer is yes. I just need to figure out how to get that to you. If I'm the store associate, how am I going to be able to do that? You have to have access to all of the allocatable inventory across the network. What can I sell to whom, for how much, where can I get it from and when can I get it to you? That doesn't come from a glorified calculator that sits in the corner of the store that consummates a transaction. And then the final piece is retailers want to know more about, right? When you walk into the store, they want to know, you're a full-price shopper, do you only buy on sale. The 10 items that you typically buy, do you return 9 of them? What's the profile? Plus what have you bought? And how have I done for you? How have my SLAs? Has my fulfillment record being with you? With all of that, now I compete together a customer profile and inventory from across the network, and I can bring those things together. Again, whether it be cash and carry, whether it be BOPUS whether it be ROPIS, whether it be curbside pickup, whether it be shipping store, whatever it may be. And so our view is that all of those capabilities essentially get consummated in a sophisticated order management system because that's where all of the orders come in. So you know everything about the individual. That's where all the inventory knowledge sits, so you can match the customer with the inventory. So as far as we're concerned, the confirmation of that transaction is the by the way part, right? That's the sort of the old news. And then finally, for us, if you think about the point-of-sale industry for the last 100 years, it's been a hardware business, right? The big bahamas in that space have factors the build cash registers. It's not a hardware game anymore. Obviously, it's software. So that's where we think we can, a, differentiate and really change the game.

In the past, you talked about the TAM for just retail point of sale is about equal to your core supply chain markets, I think about $8 billion...

That's right.

Do you think the revenue mix for Manhattan should be about equal?

So the answer to that is yes. Now -- first of all, the market sizing and the TAM per point of sale is still in flux because historically, it's included hardware, right? So -- and that will be into the normalized day, what's the software component and so forth is important. Secondly, I think point of sale can be certainly as big a business for us as WMS and a core going forward, right? We still got -- obviously, we've got 30 years worth of customers built up and so on and forward. But new software sales every quarter, I think point of sale can be as big as WMS and TMS over time.

And where are we in terms of any installed base statistics, who's using point-of-sale now...

From us?

Yes.

Yes. So we're early. We've got about half a dozen referenceable customers. And obviously, you've talked about Spark, they've got multiple brands they live across the Reebok network with more brands to go live this year. My view, and there's no single right answer here. I think we've got to get to about 10 or 12 referenceable customers, and at which point we start to build some real sort of credibility in the marketplace. And that's really just looking at the history of when we've released products over the years, it takes getting to 10 or 12 highly referenceable customers to get some real momentum going. The first 1 or 2 are clearly early adopters. And by the time you get to 10% to 12%, and that we expect to be there by the end of the year.

Maybe just final question on this line of thought. So you've seen very visible examples, not to name names, but Shopify where you controlled kind of the front end and then you moved into fulfillment and then they bought a company to help with that kind of bridging the integration, so you could preemptively pick and pack and maybe offer faster shipping. And then there is a concession. [ Boy ] fulfillment is really hard to do. It would seem like you have the opportunity to kind of do it all in a sense. How many customers do you think pursue that? We're talking about more cross-selling. But do you think Manhattan as just the single platform for all of these capabilities is a viable future?

I do. I do. Now there is applicability. Not every customer is a great customer for TMS, not every customer is a great -- WMS customers is a great customer for TMS, [indiscernible] so on down the line. And the example for that would be the one I like to talk about just because it's simple, it makes the point, Tiffany, right? Tiffany & Co is a great warehouse management system company for us, right? Various management -- very valuable to it, very high-value product, precision, accuracy, fill rates, inventory control, super, super important, not so much on the transportation side, right? They don't have a big transformation given the size of the product and so on and so forth. But aside of that, there's great applicability for all of our products across that customer base. Last quarter, we were at about, I think, 26% cross-sell, and we expect to be able to continue to grow that over time as well.

Focusing on just the financials of the business, and this is -- as we've been talking, still a model that is in transition. So how things look 5 years from now? I think will be different than they look today. What would you steer people towards if you're having success by your own measures, this is what you're focused on. And therefore, this is what us from the outside looking and should be focused on in terms of key financial performance measures.

Yes, I mean I think the key financial metric for us is RPO, remaining performance obligation, because it speaks to essentially how the backlog of business is building. And everything kind of pulls through from that. Obviously, free cash flow is important. But at the end of the day, really RPO is the single largest or single most important, I should say, metric for us.

And your services org, even though it's not as multiyear noncancelable, it's tied to this backlog. So services is somewhat dependable on that regard.

Sure. Yes. Yes. No, that's my point. I mean, RPO -- everything else drags through from software sales and bookings and so forth, including our services business that is important to us. It's a large part of that revenue, but it's important for, we believe, to drive ROI and customer satisfaction and even more strategically for us to be able to be very close to our customers and understand what product road map and footprint needs to look like going forward.

In terms of financial returns, a lot of companies that have gone through what Manhattan has gone through. One CFO calls at the valley of death where you take your margins from very good to very bad, but there's a line of sight to very good again. And it doesn't really seem like Manhattan every went through that. I think margins troughed at 20%...

Well, we peaked out at 36%. And then when we started the transition, we announced -- and we said, look, we're going to go immediately from 36% to 24%. We think we're going to trough at 20%. We never actually got to the trough. We said it was a 5-year transition at which point we would sort of bounce back. And that's really what we've done. We've said that we're on about a 75 basis point per year margin improvement. And we've also made it clear that we don't expect to return to 35% or 36% margins, but we do think we can have a 3 handle on operating margins.

So the platform being in place, I think, gives you a good line of sight to keeping this leverage going. Any incremental investments that may -- I mean, investment is always happening. But when you think about AI as a topic, does that cause you to pivot investing to do different investments? I guess, AI is a topic, but also if that changes anything?

No. AI has no more -- no bigger of an impact on our business than any other. So it's not particularly pivotal. It's important it's real, 3 different dimensions, obviously, product capability, just knowledge base in general and the ability to be able to, to some extent, generate software and code somewhat autonomously. So I think everybody would say the same thing there. And no bigger impact for us than any other business, but important. So no need from our perspective to student body left any investment strategies, we will adopt and adapt over time, for sure.

Okay. Okay. Any questions? Maybe just the last one then with a minute left. On the retail macro and as we started, it's a much more diversified customer base than just a retailer. But I think a lot of people have been surprised that just how truly resilient Manhattan and other supply chain-related software vendors have been. Does that just speak to a long period of underinvestment and it's going to be a long period of compensating that needs to come through to modernize supply chain?

I think so. I think so. And the mission criticality of nature, I know everybody talks about mission criticality. But at the end of the day, even if you're in a bit of a tight spot, you've still got to get product from overseas, you've still got to manage your inventory, you still got to ship orders that even if you're in a bit of a tight squeeze. So we're not a nicety product, we are definitely a necessity product. And look, we suffered headwinds. The Bed Bath is a customer of ours, Party City is a customer of ours. David's Bridal is a customer of ours. Peloton is a customer of ours. [indiscernible] is a customer of ours, too. So there's the winners and the losers out there and so forth. But we've definitely suffered from those headwinds.

Great. We will leave it there. Please aside join me in thanking Manhattan.

Yes. Thanks. Yes, thank you, Joe. Appreciate it. Thanks a lot. Appreciate.