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

Hi, everyone. I'm Joe Vruwink. I cover vertical software at Baird. Our next presentation, Manhattan Associates. Manhattan is the leader in supply chain, inventory management and omnichannel software. Very pleased to have with us today Eddie Capel, CEO; Dennis Story, CFO; Mike Bauer, leads Investor Relations, in the audience. This is going to be a fireside chat format. If you have questions, you can raise your hand or e-mail session 2 at R.W Baird, then I can read it from the iPad. But maybe to begin, I'll turn it over to Eddie and Dennis just for an intro to Manhattan and overview of the investment case.

Okay. Let's see, Manhattan Associates, supply chain management software only. 35 years, public in 1998, no other major financial milestones since going public in 1998. 4,800 people around the world. Our product set is, again, supply chain management focused only. For the first 10 years of our company, we're a one product, one country company, warehouse management systems for Tier 1 large distribution centers and grew into transportation management, order management, inventory management, retail point of sale and so on. We sit today, a little bit of rounding here, but we sit today, it's about a $1 billion revenue company, started a cloud transition about 10 years ago, released our first cloud product in 2017, next one, in 2020, 2021, just launched that final product, native cloud about 2 weeks ago. When we talk about running in the cloud, we have reengineered everything, every piece of code from the ground floor up to be a truly versionless cloud-native solution integrated. We focus on Tier 1 and Tier 2 around the world, bit of a loose definition, but essentially companies that are $0.5 billion in revenue and up, not that we don't have smaller customers than that, but that's sort of the sweet spot for us. From a vertical penetration perspective, our biggest vertical is retail. That's where those are the most complexity in supply chain, but retail, foodservice and grocery, third-party logistics, life sciences, automotive, high tech, would be the verticals that we are most prevalent and dominant in. From a revenue perspective, about 80% of our revenue comes from the Americas, 20% from international. About 1,200 customers worldwide. Let's see. I think that's sort of a Manhattan in about a minute or 2 in terms of our overview.

That's great. A few maybe rapid-fire questions about the business. So warehouse management, transportation, order management or omnichannel, relative sizes or proportions of each of these.

Yes, give you just general ballpark definition. So about half of our revenue comes from warehouse management systems, about 30% -- 25% to 30% order management, 15% to 20% transportation and then other.

And how would you characterize your competitive standing or market share in each of those?

Yes. So let's see. It's a little hard to define market share for things other than warehouse management because there isn't a great market definition. We have about a 20% market share, 21% market share of warehouse management systems. Overall, in supply chain management, we have about 2% market share. So plenty of runway in front of us. We track our win rates against our top 6 competitors, thinking that if it's -- if you're not a top 6 competitor, you're probably a smaller deal, we have about a 75% win rate against our top 6 competitors. In the 25% of the deals that we don't win, 90% of the reason we lose is on price. We are the premium Tier 1 solution in the market.

Okay. That's great. Maybe one last intro question, just little setting, the financial profile of the company. So last year, an incredible year, 20% revenue growth, margins moved to 30% this year, another double-digit revenue growth. How to just think about more over an extended stretch of time, kind of the growth in margins?

Yes. Well, growth in margins or revenue growth?

Revenue growth and margins. Thank you.

So our aspirations are to grow double-digit revenue growth year-over-year. We've seen that for a pretty long time. And then margin is about 100 basis points a year is what we're guiding to. The industry analysts will tell you that the supply chain management software market is growing at a bag 16% or 17%.

Okay. focusing on warehouse management, so heritage of the company, the thing Manhattan has always been best known for best-of-breed solution provider. That was true before cloud, it's even more true with cloud. And I think your lead has extended with cloud. Maybe just back up what were the elements of the cloud strategy to enable that lead extension to get us where we are today versus what your competitors have ended up doing.

Yes. So we were #1 in the market. Industry analysts, industry analysts, but from a Gartner perspective, Magic Quadrant in WMS, we've been in the -- we've had the top spot for 16 Magic Quadrants in a row a little bit longer than 16 years. We decided that we needed to move from on-premise into the cloud. We reengineered as I mentioned, to a true versionless cloud-native solution, and we've managed to extend our lead. The biggest reason that our customers move to the cloud with us for any solutions, but particularly for warehouse management system, is the media access to innovation. So it used to be in the old world, implement that software upgrade, do a big upgrade cycle every 5, 6 years. Today in a versionless world, we deliver brand-new capabilities every 90 days. And in the distribution world, things are moving much faster than the every 5 years, whether it be the speed that you have to operate because of the consumer SLAs, the labor market and the need for robotics and automation, just a real changing profile in distribution operations. So we feel like in terms of our moat, if you want to call it that, for WMS, we had a pretty big one to start with. We've done some very good things here, both from a technology and a capability perspective over the last 3 or 4 years. And frankly, we benefited from our competitors not making that move. So it's a combination of good things from us and not such positive moves from competitors, created a wider, deeper moat.

Now that competitors have seen your success, are they just replicating the strategy? And so there's a wave of multi-tendency on its way?

Yes. Probably. I mean one would think, right? They've got to compete. They haven't started yet or they either haven't started or they're just starting now. And frankly, I know how -- we know how big of a lift that is and how much effort it takes both time, money and resources and consistency of strategy. So given that we started our journey 10 years ago, and they're just getting started, and we're not going to stop innovating. I feel pretty good about keeping that market-leading position.

Maybe to focus on the macro for a moment. So there's always concerns about retail exposure and how that spending may move around. More recently, there's concerns about just IT budgets and software in those IT budgets. And then there's warehouses where you've heard CapEx is going to go down. We actually built too many sites, et cetera, et cetera. Then there's Manhattan, which RPO bookings or cloud bookings have been strong throughout all of those things. M1Q was another good quarter. So what's the disconnect between the first 3, which there's elements of truth across that all but then your business.

No doubt. Well, we're offering from those first 3 things as well. Look, let's not make any bones about it. Sales cycles being delayed, a little stutter stepping here and there, tapping the -- all those kinds of things, we're seeing all of those things as well. But by the same token, we are innovating at competitors. So we're taking market share for sure. If you look at that company half a dozen years ago, we were at 65% retail. We're 50% retail today in a market that's been growing because we've done a pretty nice job of diversification there. And look, even though things are tough, I don't think anybody would argue that every company on the planet is going through some form of digitalization. And we've got a lot of customers, particularly now and growing, who would not be considered retailers. But to us, they kind of look like retailers. I mean maybe the 2 quick examples. We started doing business with Nike, about 15 years ago, 100% wholesale. So they would sort of still be probably considered a wholesaler. But the way they operate and way they distribute, of course, 26% of the business traded consumer. To us, they look like a retailer. ExxonMobil who would have thought of them in any way, shape or form as being a retailer. They're not a retailer, but they're being added by their customers, the Autozones, the O'Reilly's, the Walmarts of the world, to create retail-ready shipments. So rather than sending me a truckload of oil, send me shipments that are store-ready, right that is store ready. So even though the other retailer, they're asked to being operated on the back end in a retail-ready way. So 2 customers there that clearly are not retail but need the sophistication of a retail supply chain software solution and has helped us, again, sort of diversify. And as this modernization process continues to kind of stretch out across every single industry, the investments that we've made seems to be performing quite well for us.

Second element of the spending question you put up a Gartner framework, double digits. I think that's 2x faster than the category was growing by before the 2020.

That's right.

So do you think WMS ultimately went through an extended period of just under investment and you're still in a mode where customers are making good for things they weren't doing before?

No. Not really. I mean there's a changing world, right? The fact that you can place an order at 8:30 in the evening, have it delivered to you on your doorstep at 5:00 a.m. I mean what goes on behind the scenes to make that a single product arrive on your doorstep at 5:00 a.m. when you order at 8:30 p.m. is quite -- that change is quite extensive and involves, amongst other things, modern software to accomplish the goal. So it's not -- I don't think it was necessarily a question of underinvestment, but the acceleration of the consumer SLAs has driven need for more speed in the execution systems.

You talked earlier your a cloud transition story at the moment, which means there's 2 paths to grow: You can win new logos and you can migrate your installed base. Maybe on the latter how many are in the installed base at this point that can still move cloud?

Yes. From a WMS perspective, which is our largest customer base segment, we've got about 900 customers, and we're about 15% of the way through the migration from on-premise to the cloud.

There's a big event coming out for those that were in SPS Commerce at this start of the day, it came up as well. SAP is sunsetting, not just their legacy WM product but also their ECC. Is that relative to change events that normally your customers are considering? Is this a big one?

Yes, it is. It's definitely creating some tailwinds for us. I think that -- look, I don't think there's any secret the ECC to S/4HANA move that SAP is encouraging people to take is not a reinvention of technology from an SAP perspective. They haven't rebuilt their systems from the grand floor to be client native. They're essentially taking their on-premise software and moving it into the cloud. What that signals to that customer is really there's no innovation, right? There's really no innovation. And I think that, that's fine for the core SAP solutions. Financials, order to cash, procurement, not a lot of innovation required there. So it's not going away any time soon. But in the areas around those core SAP capabilities, supply chain being one of them, customers, I think, are looking and saying, look, I can't just move that over and not have innovation for another 10 years. So they're starting to kind of splinter those things off, and we're the beneficiary. We actually had one of our more recent customers, Schneider Electric, wall-to-wall SAP customer, they're moving to S/4HANA, but they've broken away WMS, warehouse management and transportation management and awarded us the global contract to roll out WMS across all ADCs and TMS across. They were an SAP customer. And they're not the only one. They're the L'Oreals and the Nikes and the Asda in the U.K. and so forth, all going through that same ECC to S/4HANA migration at the same time, sort of breaking away those supply chain pieces and we've been the beneficiary. So I expect that to continue, frankly. And there aren't hundreds and hundreds and hundreds, just yet. But for us, they are the Tier 1 global accounts and candidly, you don't need that many of them to make the difference for us, yes.

The number that has been estimated as they may be of 5,000 legacy WM customers out there not all are going to be applicable to you. But do you have a rough sense proportion?

Honestly, I don't know what the number is of the 5,000. You're absolutely right in terms of many, many, many of them have -- I don't mean it's in a rude way, but pretty rudimentary needs, and they're satisfied by the SAP capability, they don't need innovation and so forth. But one, I think it would be fair to -- even if there were 10% that we're -- it would be highly advantageous for us.

Okay. Great. Wanted to go back to the comment you made earlier with cloud, it's easier for customers to access innovation because it's always happening. That's within a product, but it's also across the products, which gets to cross-selling. So Cross-selling as a contributor to cloud bookings has been a pretty steady element. Is that actually something that over time, as customers do move, this is going to become a more cross-sell centric growth story because of how the platform is architected?

I think so. So historically, it advances and quarter-by-quarter and so forth. But cross-sell, upsell is about 25% of our new software revenue every quarter, right, about 20. I think it's been as low as 20% and is the highest 30%. Anyway, so about 25%. In the old world of selling licensed software, let's just be maybe candid about it. In the old world of selling license, it was not -- it would not be unusual to go to a client, I'm speaking hypothetically here, of course, and they say, hey, we'd like to buy WMS. And we'd say, well, how about buying TMS as well? They would say only if it's a great deal. And in the license world, you could make it a great deal, okay? So they buy WMS and TMS together. In the cloud world, obviously paying subscription. Nobody in their right mind is going to say, yes, sure. Why don't I start paying for something that I'm not going to be using for a while. It just doesn't work that way. And our systems are such that it's not impossible. Schneider Electric is very big. They are taking on WMS and TMS at the same time. But most companies find it hard to execute on more than one of these initiatives at a time. They're big. Big WMS rollout, big OMS implementation, big TMS implementation, they're big. So as a consequence of that, of course, they buy when they're ready. We have a unified set of solutions, obviously, common technology and so forth. So I do think as we see more customers move over to the cloud with one product, the likelihood an opportunity for cross-sell, upsell is higher going forward.

And do you have dedicated sales and services teams just supporting cross-sales at this point?

Yes. We -- not services. Not services. Frankly, the services team execute on a project when it's sort of put in front of them as it were. But we have a team, account-specific team that are focused on existing customers and understanding their road map and working with them to build that road map out for a multiproduct.

There's been 2...

That's code for selling them more software.

There's been 2 new product introductions in recent history, point of sale, most recently, supply chain planning. Where when they happen, it's really kind of eyebrow raising because these are massive TAMs. Each equals what you've been doing in execution. Is there a commonality and why Manhattan arrived at those 2 things to go after?

Market need. Market need. So if we think really quickly at that point of sale. In fact, I've been asked at conferences like this 10, 12 years ago, where you essentially will we ever get into point of sale. The answer was no. There will be behemoth of companies in that space that dominate it. But things change for us, right? And as much as the short version is, retail stores have changed. They were the same for hundreds of years, right? They hadn't changed. They might look different, different shapes, different products, different lighting, but you walked into the store, you picked up a product, you paid for it, and you walked out. That's what a retail store did. It's a single function facility. And that little cash register, that low glorified calculator that sat in the corner, ran the store, consummated the transaction. That's all it did. You wake up today -- I'm making this a little simple, of course. But you wake up today, the store is a multifunction facility. Billboard for the digital business. It's a gallery. It's a boutique, maybe even they don't sell products. It's a customer service center, you buy online, return in-store. It's a mini distribution center. You buy online, retail, you use it to distribute store product right to you. You can buy online, pick up in store, you can buy online, pick up curbside. All these many, many functions now that go on inside of the store that cannot be supported by a glorified calculator, that cash register and the time was right, and we felt -- and we feel for the next generation of really not point of sale, it's really the next generation of selling platform. There's more to describe but you get my point that something changed in the market, and there is a market need. That's why we built, that's why we launched. The same is true, of course, entirely different of supply chain planning. Supply chain planning has been around -- supply chain planning is a category that has been around for decades. We believe something has changed. Something has tipped here. So for decades, planning systems were batch-based. And just one example, but you think about retail, retail would send one shipment to their stores once a week. And then the CEO would get the sales report overnight, what happened yesterday, what happened yesterday, but because of that infrequent delivery process, it meant that batch-based planning systems made sense. You took all these big chunks of data, you ran a big batch overnight or even once a month to decide what you were going to buy and where were you going to disposition that inventory. You fast forward to today, and again, you can buy at 8:30 in the evening -- order 8:30 in the evening online, and that product is on your doorstep at 5:00 a.m. And of course, that's an extreme situation. But over the last 15 years, that's been the trajectory, right, from going into a store and they're only getting 1 delivery a week. All of that agility, flexibility and speed over the last 15 years has been absorbed by the execution systems. Order management systems have got better, distribution centers have got faster. Robots have been put in there, automation has been put in there. Transportation systems have become much faster, Uber delivery and all those things deliver overnight. All of that speed has been absorbed by the execution systems. By the way, we benefited from that over the last 15 years and so on and so forth from a software perspective. But I think we're at a tipping point. We're at a tipping point. Because as fast as those execution systems get, you've still got to have inventory to feed it, right? You've got to have the inventory in the right place at the right time. There's only 2 answers to having the inventory in the right place at the right time: one is you constantly shuffle it around based upon where the demand moves. Around the nation. If you do that, you're handling it 2, 3, 4x. Transportation costs go through the roof suboptimal; the other answer is stockpile inventory where you might need it. And obviously, increase your balance sheet, that's not a very good answer either. We believe the time is now right to take planning systems from being batch-based to continuously optimize planning cycles so that you can take that one product that was sold at 8:30 and delivered at 5:00 a.m., deliver it immediately and consistently into the planning system and have the planning system continuously optimize what to buy and where to disposition inventory to make sure the right inventory is in the right place at the right time. So our charter or our objective is to be half a step ahead of the market. You never want to be too early and so forth. But we think now after 15 years of focusing on execution systems becoming faster and faster and smoothing all of that volatility there is no choice, frankly, to now begin to focus on the innovative side, planning side of ice. Hence, the reason that we sequenced the planning solutions moving into cloud native and breaking that batch model to the end of sort of our product portfolio versus the beginning. There is one other. It's a bit tactical but important. The computer you need to run these batches is big and powerful. And obviously, the advent of being able to scale that up and down today versus prior years is helpful too. But it's not the strategic reason for doing it. That was a long answer, was it?

If you give the directive, look, I don't want our win rates to change at all going after supply chain planning, even though it's a new product, I expect the same success. Do you think you'll end up narrowing in on a type of customer? Will it be a Manhattan WMS customer that sees the logic integrating with those?

I mean, look, that's going to be our first target. It was for point-of-sale. Our point-of-sale strategy was, hey, it's a brand-new product for us. We're not known for this. So let's go to sell to our existing customer base, where we've got a reputation of folks trust us. By the way, why don't we go and sell to existing Manhattan customers who already have or management because it's a natural extension. And we've had some success there. But we've also had success selling point-of-sale to customers so we've never done business with before and of course, by definition, have no other products from us. We were very encouraged by that because what it told us was we didn't need either an existing relationship and reputation or other products to enable us to win a point-of-sale deal. We could go head-to-head against point-of-sale system companies that have been around for 20 or 30 years and win just exclusively on the merits of the product. Now that said, as we launch supply chain planning, GA is going to be in early October, no question. The first doors we're going to be knocking on, the folks that are friends of ours and already have our products, that will be the place we start.

Manhattan is unique in the sense that you take on a lot of the services needs where other vendors maybe have delegated that over time. And so you're controlling a lot of the value. And that's influenced the idea of a partner community. The partners have been getting larger. So there's more SIs than you have worked with in the past. Other spend on partnership is go-to-market relationships. And I want to ask about Shopify, which was announced earlier this year, it kind of speaks to what you're doing in the omnichannel arena. But the virtue of your 2 companies come in together and why that's a good thing.

Yes. The short version there is there's a history of e-commerce forms. There used to be 3 big ones: IBM, SAP and Oracle. ATG, hybris and WebSphere Commerce. They sort of got a bit tight around the edges. This is an oversimplification, but a bit tighter around the edges and demand were it came along and became the dominant player, demand acquired by sales force became the dominant player. Popular theory hypothesis is that that's getting a bit tight around the edges. Technology is a bit old, and there are 2 new players emerging: one is commerce tool and one is Shopify, very different approaches. But nonetheless, they are emerging. Their objective is to sweep through that commerce platform market and do a bunch of replacements. And frankly, we want -- and a natural place for Shopify as they come up from SMB into the enterprise space is to look at our order management system customers as a great universe of opportunity. So why not prebuild integration with our order management, make it easier for them. So that's the Shopify benefit. For us, we'd like to be a part of that e-commerce platform replacement wave as it continues and move forward with Shopify. So hence, the partnership.

That's great. We're out of time. A lot of ground covered, but please join me in thanking Eddie and Dennis.

Sure thing. Thanks for your time. Appreciate it.