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

All right, everyone, we're going to go ahead and get started. Welcome to the 45th Annual Raymond James Institutional Investor Conference. Very happy to kick off the conference with Manhattan Associates, CEO, Eddie Capel. Thanks for coming back.

Good morning. Yes, sure. My pleasure. Thank you.

So Eddie, for people maybe new to Manhattan, maybe start with a couple of minute intro into the company.

Yes, right. I'll try to do Manhattan in a minute. Let's see. So founded in 1990, 34 years old, Manhattan Beach, California, hence the name actually, relocated to Atlanta in 1995, have been there ever since. We focus on supply chain management software, supply chain management software only, public in 1998. That's pretty much the only financial milestone that we've had in the history of the company. Let's see, I started -- the first product we developed was a warehouse management system. So software that manage inventory inside of big distribution centers that you see on either side of the highways. And for the first 10 years of our company's existence, that was our only product. One product, one country for the first 10 years. In the year 2000, we started to expand our portfolio and grew in a pretty logical way. We now manage warehouse management software, transportation management software. We moved into the management of inventory, order management software, maybe most recently, point-of-sale and call center software. So a pretty contiguous footprint of supply chain management software. We're about 4,500 people -- 4,600, 4,700 people -- actually about 4,700 people globally, offices in 17 -- offices around the world. 80% of our revenue comes from the Americas, 20% from international. That sort of follows the industry metrics for the most part. And let's see, the one other quick transition, I guess, I'll tell you about is starting in 2017 from a product release perspective, we began a journey to the cloud. So the approach that we took is we reengineered all of our products from the ground floor up to be completely cloud native. So we've launched our first product in 2017. Our warehouse management system, which is sort of our legacy product, our key legacy product in 2020, transportation in 2021 and so on and so on and so forth. So we've completed that cloud transition now both from a product perspective and from an economic perspective. This year, perpetual license software will probably represent 0.5% of our revenue, something like that, just a few people, adding a few users here and there from over the years. And I guess I would say maybe that's sort of Manhattan in a minute.

We'll hit on some of the products. But maybe just a higher level, I know the macro has kind of dominated the headlines. I'd love to understand what you're seeing from a macro perspective and maybe talk about how that compares to maybe other -- other times in history. You've been around doing this for a while.

Yes. Yes, I've been with Manhattan for about 24 years. By the way, CEO for about half of that. I would say just a bit of chop in the water versus if you go back to the Internet bubble of 2001, 2008, of course, the COVID times when we saw a sharp drop-off in demand, there's no such thing going on at the moment. I would say there's a little more chop in the water today. Obviously, when we came in -- all of this came into 2023, there were quite a few things going on around the world, affecting the macro economy and none of those have gone away, and a few more have been added on coming into 2024. So there's no question there is a bit of chop in the water but no change in the shape of demand for sure. Now interestingly, I mean, I think if you think about -- it is sort of important, I feel, if you think about our core product, the one that we've had the longest, warehouse management, we've been developing that solution for 34 years, now you would think, wow, boy, that's I maybe jumping ahead here a little bit, but you would think maybe, boy, 34-year-old product, you've been developing, that must be declining from a growth perspective. You must be developing some of these new products to sort of replace this heritage product you have. And not so much. So the industry forecast, which, by the way, have been accurate for 12 or 15 years in a row in terms of the go-forward spend, have a supply chain execution software, so WMS and TMS, so the things that kind of move goods, managed goods and so on and so forth, growing at about a 15% CAGR on the software spend side. So I think that's really driven by, of course, from an overall perspective, the digitalization of supply chain, maybe we'll get into that a little bit more as it relates to digitalization.

You guys are actually growing faster than that. So like I wanted to understand, like when you referenced like win rates north of 75%, talk about the differentiation in the experience and everything that you have that's really driving this?

Sure thing, sure thing. Maybe one other thing I'll just say or certainly talk about that. We focus on -- it's a bit of a loose categorization, but we focus on what we call Tier 1 and Tier 2 companies. So the most complex needs out there in the marketplace for us, that really means companies with about $500 million in revenue and above. But the needs are driven by the complexity in terms of distribution -- warehouse management and distribution centers by the -- again, digitalization. If you walked into a distribution center even 10 years ago, it looks way different today than it did 10 years ago, maybe even 5 years ago, you think back 10 years ago, not exaggerating a little bit to make the point, but largely speaking, you would see companies, retailers, particularly, picking very large orders, putting them on very large trucks and shipping them to one location. In other words, a retail store. And that made operations inside of a warehouse, reasonably simple. You look at that, and of course, there's thousands and thousands and thousands of tiny packages, one-off packages coming to your doorstep. And that drives an incredible amount of labor intensity when -- in a labor market that's not that wonderful for distribution. And so the consequence of that is there's an awful lot of automation and robotics inside of the distribution center. For those of you that haven't been inside, a distribution center either ever or in the last 10 years, it's pretty surprising, frankly, the level of sophistication and automation. And when companies are spending literally $1 billion building a distribution center, that's a number, they spend that kind of money on an advanced distribution center, the software that operates all of that is pretty mission-critical for what's going on in there and the software of 5 years ago or 10 years ago, frankly, doesn't get the job done when you're operating a $1 billion distribution center.

How does the footprint look when you see customers that are out there, right? In terms of -- I know there's some ERP migrations for end of life? Like what are you seeing? And what do you think that cadence of modernization will look like?

So for us, we run on a -- all of our products from a single, common cloud-native platform. So for us, frankly, which product you buy first from us is based upon need, number one, and number two, we don't really care, frankly, which product you buy first. We hope that we do a great job for you, and then the road map continues with our product portfolio. So it's really based on need, whether it be a transportation challenge that you might have, a distribution challenge that you might have, an omnichannel challenge for our order management system in retail, maybe a store refresh challenge on the point-of-sale side, we're pretty ubiquitous to what type of product you buy first.

Well, I want to double click on the WMS maybe a bit. Obviously, still earlier in the transition to the cloud from the customer base, so remind us where are you in that and what kind of opportunity do you see there?

Yes, that's a good question. So over the call it 30 years that we've been around, we've got a little less than 1,000 WMS customers, something like that. And we're about 15% of the way through the migration, right? We've moved about 15% of our customers since mid-2020 for over to cloud-native, it's about 15% of the way through.

And what has the customers seen? I know some of this just from your user conference, but like some of the benefits in terms of the automations or savings that they're getting.

Yes. I mean in terms of -- I mean, look, there's sort of 3, I suppose, fundamental benefits that our customers are looking for from a capability perspective, super high level. One would be the more sophisticated management of inventory because it's the largest work piece of working capital they've got, so they need to be able to manage inventory in a more sophisticated way to make sure they got the right product in the right place for the right people, number one. The management of the people inside of the building and getting just the most productivity out of the people possible because they're sort of hard to find and an expensive commodity. And then thirdly, the management of the automation and robotics and blending those 3 together are really what customers are looking for. Now the one big sort of non-process benefit of moving to the cloud is, of course, we deliver zero downtime updates. So new software capabilities every 90 days. In the old world, probably we'd upgrade a piece of perpetual software every 5 to 7 years to keep the software modern and up-to-date. We're now doing it every 90 days with no interruption to operations.

And I want to hit on point-of-sale. I always love asking about this, but that's a newer product for you guys. Where are we and talk about what you think about the opportunity there?

Yes. So point of sale, we're particularly excited about. Not -- there's no -- everything we do is enterprise class. So these things don't move super, super quickly. But look, my -- our philosophy is that there's a huge amount of disruption going on in the retail store space, okay? If you just think about the fundamentals, again, give me a little license on sort of how I'm positioning the message here. But for hundreds and hundreds and hundreds of years, stores haven't changed. Retail stores haven't changed, right? They did one thing on -- they may be bigger footprint. They may have brighter lights, they may have fancier signs, but still retail stores haven't changed for hundreds of years. Their purpose was, you walk in the door, you pick something off the shelf, you paid for it and you went home. That's all they did. It's the only thing they did, and of course, we now know that the retail stores have changed and changed forever. They're now multifunction facilities. They still have cash and carry, of course, but they're -- they're billboards for the digital business, they're galleries, they're boutiques, they're customer service centers, you buy online, return at the store, they administer distribution centers, they ship out of the stores these days. You buy online, pick up in store, you buy online curbside, you reserve a product to try on, all those kinds of things. Well, as you can imagine, in the old world, there was one little system in the store that consummated that transaction in a cash and carry world were the cash register, right? It was autonomous, a glorified little calculator, not connected to anything else. Well, it can't get the job done in a world where you've got all of those other functions that have to be carried out in the store. There are other challenges as well that we can talk about with how to manage inventory in a retail store with all these other things going on as well. So there's tons and tons now going on. So our perspective is that there is a massive refresh that needs to happen in retail store selling systems over the next few years because of the problem statement that I just had and it's I mean, just, just getting started. We have embarked over the last few years on building the next generation of retail store system, generally called point of sale, but of course, today, it's much more than just point of sale, but everybody knows it as a point of sale. At the end of the day, the objective even though all of those functions have to be handled is making sure that you can sell anything to anybody from anywhere. And when -- what we've got to enable is retailers to move from sort of this culture of no to a culture of yes. I mean by that is, often times, we're all conditioned, right, when we go into a retail store, to hear the word no. Do you have this size color? No, sorry, we don't. But maybe next weekend, we'll have it. Today, the answer has to be yes. No matter what the question, yes. Now how would you like me to get that product? Do you want to come back in and get it, go to another store, ship at your home, ship at the office, the answer has to be yes. For the answer to be yes, you've got to have immediate instantaneous access to salable inventory from everywhere across the network, number one. And number two, you need to know a lot about the consumer, where to ship to, how to ship, their preferences, et cetera, et cetera, et cetera. Because you're trying to bring consumers together with inventory and that we're focused, the long story. But anyway, we're focused on solutions that bring all those things together, hence, the belief that there is a complete revolution of retail source selling systems that's going to happen over the next few years. And we spent the last 4 years, essentially maybe a little more, developing that solution, and we're starting to see the benefits. We have. I think to get to the actual answer to your question, Brian, we've got 11 live customers going into peak. We've got about 22 or 23 or something like that in the contract, 11 live customers going through the retail peak season of 2023. 30,000 store associates using our system, and I think the highest transaction volume cloud native point of sale in the market and kind of flawless operations. So I feel pretty good about where we are. It is a mission-critical system for retailers. So they don't flip them out overnight, but we'll be there when they need us.

So you're thinking about like in a distribution center, multi-tenant cloud.

Yes.

Now you're all the way in the store multi-tenant cloud, you're converging those. How do we think about the emphasis in the really push to kind of cross-sell those products across...

Sure, sure, yes. Frankly, super important for us. I think in, let's say, 2023, to get my years right here, it maybe up by 1 percentage point, but about 27% of our new software sales was from cross-sell upsell, about 27%, so the WMS customer buying TMS, order management system customer buying point-of-sale and so on and so forth. I don't know that it's going to change dramatically over time. I think it will go up a little bit. And the key reason for it not changing percentage-wise is we're very focused on still bringing new logos into the family. So not just -- frankly, not just farming our existing customer base. We've been fortunate in that for the -- since we've migrated -- begun this migration to the cloud 2017, every quarter about -- work with me here, but it varies a little bit quarter-to-quarter, but about 1/3 of our new software sales every quarter come from new logos, new companies joining the Manhattan family. So we're very pleased about that. Of course, we've seen it as high as 50% in the quarter. We've seen it as low as 25%. But generally speaking, about a 1/3 and then on top of that, about just a little less than 30% of cross-selling that. So again, I don't see that percentage changing because we expect the new logo acquisition to remain at the same levels, at least for the foreseeable future.

So we're going to hit on some products, but I also wanted to understand AI. I know it's a big topic of conversation for everyone in the room here. But help us understand how you're thinking about AI in the context of Manhattan.

Yes, sure, sure. So let's see. That's a long subject, so I'll try to keep it as short as I can. So there are 3 or 4 areas where we see AI as being particularly applicable for our products and our customers. One, of course, is the one that we essentially all use, how do we get to the knowledge base of information as to how our systems work, how to troubleshoot our systems and so on and so forth, so that customers can diagnose them and so forth, very, very quickly. So the price of admission as it were, but useful and very, very powerful. The second is, we live in a world of customization, right? Our customers like to customize our solutions for their own purpose, and giving our customers the ability to be able to literally write and develop customization using the spoken word as opposed to having to have software developers to write code. So we're building an AI framework to enable our customers be able to build customizable software extensions through the new programming language, which is English, Spanish, Hindi, whatever it may be, will be #2. And then the third -- sort of 2-part thing here. The third is how do you interact with our systems. They are quite complicated because they're sophisticated, right? So the configuration of that system as to how you manage the inventory, how you manage orders, how you manage customers and you've got to be pretty knowledgeable to know how to set the system up to get the absolute most out of it, number one. And then number two, how you interact with our user interfaces, and this is true of all systems, of course, sometimes just 2, 3, 4 clicks to get to one piece of information buried in the system. So be the end to handle, both of those things without frankly years and years experience and being able to use natural language are the 3 basic areas. We've -- we expect to introduce AI capabilities into production this year. I'll tell you, I don't -- we're super excited about the potential for AI. Personally, I think it's going to be a little bit of a slower burn than maybe some might think. There's a little bit of a maturation required there. We've done a lot of work on this and have been for a little over a year now. And the results still need a little maturation. Frankly, we get generally about 80% to 85% accuracy rates from gen AI work. And we can't give 85% accurate answers to our customers. So there's a little bit of work just to be done there, but no question, a lot of power for us.

I'd ask you this every quarter. So given the complexity of the product, you guys handle a lot of your own services. How are you thinking about the hiring efforts there and the productivity of that?

Yes. So for those of you who don't know, about 50% of our revenue comes from professional services. So we're a reasonably services-heavy business. One misnomer though. For a decent sized program that's being run out there, we're doing about 25% of the services. I think people think we do all of the services. These are big programs and there's a lot of services being done by everybody from Cognizant to Accenture to Deloitte to IBM and boutique shops that are out there doing all of the other. We like -- what I'd like to call it, we sort of do the last mile of services, right? That last piece of integration and configuration of our solutions to make sure our customers are getting the ROI that they expect. But we do a fairly healthy amount of services. We hired about or roughly 450 people net adds last year, most of which were into our services organization to help with customer satisfaction and system implementations and so forth. We expect to hire probably a bit less this year. Frankly, part of that is driven by we've seen lower attrition than we've seen historically in the history of the company. So lower attrition means a little bit lower net hiring there. But I expect to add probably 250 people to services I mentioned, something like that. And the key -- as well as, of course, driving top line revenue, but the real key differentiator for us, having our services guys side-by-side with the customers is we know exactly what's going on in the marketplace. So we've been very fortunate over the years that we've never built any products that haven't gone anywhere. We tend to build products that the market needs, and that's one of the key ways that we get that intelligence.

And maybe pivoting a bit just -- sorry, the margin profile, cash flow, really, really healthy. Just can you talk about where you're investing and how should we -- maybe should think about long-term ones?

Yes. So not to put too fine a point on it, we have not been terribly acquisitory over the years. We've done a few very small, as the expression goes, tuck-in acquisitions to get either a tiny little bit of technology or some specialist people on foot and so forth. But generally, we invest organically in research and development. We spent, I think, last year about $110 million in research and development. We have a little over 1,000 people in research and development. And we're investing into white space, not against doing acquisitions at all, but we've got to find something that's obviously strategically beneficial to the footprint. We won't buy more of what we've already got. We're not going to buy another warehouse management system or transportation management system or anything like that, that will be a reasonable price. So with that bar out there, we've tended to develop and innovate into white space with our own people. So number one use of cash, investing in innovation for sure. Number two, definitely open to acquisitions if we can find one that fits the need and makes the bar. In the absence of number 1 and 2, share buybacks has been our other use of cash. We've been very pragmatic about that. And over the last 14 years or something like that, we've bought back about just under 40% of our own company. And we expect to continue on that strategy as long as we can.

That's worked out pretty well for you.

Yes. No bad, no bad.

And maybe just thinking about -- you mentioned the white space, like as you're looking at new potential markets or just thinking about that R&D allocation, how much of that is really continuing to push the envelope of your existing products versus maybe targeting some of that white spaces?

Yes. So it's a great question. Look, we're in a SaaS world now. So I mean we've always been committed to continuing to innovate in our existing products. I mean, to me, warehouse management is the epitome of demonstrating that. Again, you would think that would be an old mature product that didn't need continued innovation, it does. We've continued to invest in WMS. It's played out super, super well for us. We're the market leader. We've been the market leader. And as you talk about -- we publicly talk about 75% win rates every quarter, roughly 70%, 75% win rates against our top 6 competitors. For WMS, it's higher than that. We don't disclose exactly what it is, but it's higher than that. So we're continuing to invest in innovation in our new product. And in a SaaS world, again, you're obligated to, right? Our customers are paying a subscription, one of the things they're paying for is continued investment in innovation. So about 30% to 40% -- it depends, about 30% to 40% of all of our research and development every quarter goes into new capabilities for existing products. There is some sustained capabilities in there and horizontal innovation in technology, the platform AI, for example, which would be considered innovation, but it's sort of horizontal across products and all those kinds of things. It's not specific to one product, and then about 1/3 on brand new innovation, new products and things that we're working on to bring to market that obviously, we don't disclose what they are, but we generally release new products every year.

And there was a press release earlier this year about your partnership with Shopify. Maybe you can talk about that and what other partnerships do you see as potentially helping the growth longer term?

Yes. So we -- so right at the beginning of the year, we announced a partnership with Shopify. Shopify is doing their very best to move up into the enterprise. They've had a very, as it were, a successful run or a successful career operating in small to medium business, and they'd like to move up into the enterprise. Obviously, them partnering with us sort of made sense to that customer bases they're looking to go after. That front-end e-commerce web store is in need of a refresh, it's moved from Hybris, ATG Web Commerce, than on to Demandware Salesforce and all those technologies are starting to wane a little bit without much of a refresh. Shopify sees an opportunity to be able to come up and do some refresh there. And frankly, we'd like to benefit from that wave of e-commerce refreshment on the point of sale and the order management system side. So far, so good. We've got a number of customers in implementation with a joint solution from us and Shopify. So, so far, so good.

Maybe we'll end it on this. But as we think about 2024, like what are your top maybe 1 or 2 priorities that you really focus on?

Well, look, we can only -- just to state the obvious, we can only worry about the things that we can control. So all the other stuff that's going on around us, like everybody else, we read about it, but don't react, overreact, we're focused on delivering innovation for our customers, delivering great implementations for our customers, continuing to innovate in the world. We're going to stick to our thing. You're not going to see us do something wildly different, that we've never done before. We've had a successful run, staying focused on what we're good at. We'll continue to innovate into white space. So that would be sort of the high-level answer to that. I'm particularly excited about the opportunity, as I mentioned in point of sale. It's not -- I don't think we -- we're not going to see a hockey stick in 2024. This is going to be something that builds force just like everything else we've done. And our intention is to become the top right hand corner of Gartner Magic Quadrant for point of sale just like we are for WMS and the other solutions that we offer. But pretty excited about where we are, frankly, pretty excited.

Eddie, thanks a lot. Appreciate it.

My pleasure. Thanks, everybody, for coming in so really. Appreciate it. See you.