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

Yes. So both are big opportunities. New logos, obviously, because it allows us to compete in parts of the market where maybe customers would think, "Hey, I know Manhattan is the leader, but maybe they're too expensive, too complex for us. And now that's no longer the case, we can compete everywhere. But conversion is a good 1 that you brought up. Over the past year, we announced last July, a dedicated conversion team and today, about 25% of our maintenance paying on-prem customers have either moved to the cloud or started that conversion to the cloud. So that means we've got still a massive opportunity to convert our own on-prem customers to the cloud. And in that process over the past year where we've talked to literally hundreds of customers we've recognized that some of our customers that have become on-prem customers over the past couple of decades had no intention of going to active warehouse because they are customers that enterprise premier is just too big and complex for them. So we recognize that we needed on-ramps for all of those on-prem customers, and now we have that. So every 1 of our on-prem customers has a place that they can go in active warehouse and active transportation in all of our active platform products. So that really changes, I think, the opportunity around conversions and will help us accelerate the time line of converting those customers.

Got it. I think when we talk to customers and partners, 1 of the other maybe stumbling box in terms of why some of these customers are not converting faster is just kind of the cost and complexity of that process? It seems like that's an area you've spent a lot of focus -- maybe you could just talk us through how much improvement you've made there? How would you frame what a time line for a conversion is like today versus maybe a year ago?

Yes. So when you think about some of these customers that have been running on-prem products for decades, typically customers would somewhere in the range of every 5 to 8, maybe 10 years would do an upgrade of an on-prem product. And those upgrade processes typically would be often referred to as open heart surgery, just very complex, risky to the business. Expensive, often ran long. So these are things that maybe customers started out with, we want to upgrade every 5 years, but sometimes that dragged out to a longer term than that because they were just avoiding this complexity. So a lot of these customers have that image in their head when they think about moving to the cloud. So as part of our conversion program, we've gone to them and said, that's not the case. We've built automation around this with our solution design studio, we can take natural language design documents and turn them into a configured system in the cloud. And with all that, we're willing to take the risk. So we're willing to go out and offer you a fixed price and a fixed time line conversion. So it's a significantly different conversation, different time line, different price point than what they had in their mind. And that alone is unlocking a lot of customers that kind of say, "Oh, well, in that case, let's have this conversation because the difference between what they have today in terms of features and functionalities on-prem versus what they could have on the cloud has never been bigger. And it's growing faster than ever, right? With AI and all of the things that we're adding new features coming into the cloud product every quarter at a faster pace than they ever have before.

Got it. You talked about the the team dedicated conversions, my understanding is also a team dedicated to the renewal side. I would love to spend a little time there. I think that's an opportunity that seems quite compelling. Maybe you could talk about as the renewal book has started to build, what have been some of the learnings from some of those deals and how maybe a renewal today would compare to 1 before you had this team in place and these new processes.

Yes. And that's another one. We announced the dedicated renewal team last July. So we've had now a year to really build on that and get it in place. And the idea there was, as we see the number of renewals growing over time, when we've relied on our account management teams to perform those renewals, they might have a very limited volume of renewals that they're doing in a given year, as an example. So now they're working with this dedicated renewals team, so the account management team brings the knowledge from that account and then the dedicated renewal team brings the experience of the multiple renewals that they're doing every month and really learning about how to maximize the price uplift, how to maximize the opportunity around cross-sell based on the products that this customer is running, what are the natural cross-sell opportunities and really take learnings from 1 deal to the next and maximize the opportunity for price expansion and product expansion at the time of renewal with a big focus on GRR and NRR. And we've seen a good, strong uptick and improvement in that space. So that's an area that we continue to be excited about as the renewal opportunity continues to get bigger and bigger.

Got it. Maybe on the new logo side, I think we touched a little bit on how additions maybe unlock some new markets there. I think it's been an area that's been relatively strong over the last year. When you think about going forward, how would you kind of stack rank where you see the most opportunity going forward? I think, downmarket, maybe expansion into some new verticals, maybe there's international side leaning on some of your partner investments. Where does your mind go?

Yes. So new logo is still a massive opportunity for us. We continue to take business from our competitors at a very fast clip. I talk about that 5-year renewal cycle that everybody is on. Well, our competitors customers are on that renewal cycle also. And when they come up for renewal, they are recompeting and they are talking to us, and we're winning those at a very fast clip. We talk about a competitive win rate against our top competitors at 70-plus percent that's held for years now, and that continues to be strong. And if you look at kind of the past 6 quarters, we've got roughly 50% of our new cloud bookings came from new logos. And we always talk about this. Historically, over time, about 1/3 comes from new logos, 1/3 comes from conversions and 1/3 comes from cross-sell and upsell. We do see over time that probably this is the place that we'll kind of get back to but not because new logo gets smaller. It's because we have invested in those conversions and invested in that cross-sell upsell opportunity so that we can perform at that same high level that we're performing in new logo. And I think in Q2 that we just announced, you really started to see that come to fruition where we had 40% of our bookings in Q2 come from conversions. So we're seeing really strong showings across the board. And that happened while new logo held strong, right? Overall, it was a record bookings quarter. So we're seeing the volume of deals across all deal types continue to grow.

Great. Just on that kind of new logo and go-to-market side, in general, you guys have been investing some resources with the high win rates. It just makes sense that the more deals you can be and the better. Can you just talk us through how that process has been in terms of adding more resources? Do you feel like you're towards the end of that journey and kind of the productivity you've seen from those investments?

Yes. So I've announced 1.5 years ago that we would invest in sales and marketing, and we've continually invested every quarter since then. And the goal was always let's grow at a pace that we can consume because we really like our sales culture. We really like the efficiencies that our sales team creates. So we don't want to break that. But we absolutely want to expand it. Again, to your point, with 70-plus percent win rates, we want more at bats, right? We want to be competing for more deals. So the expansion that we've done across our sales and marketing team as well as the investment and maturation of our partner ecosystem. I mentioned in our Q2 call that our partner-sourced deals were up 4x in the first half of this year over the first half of last year. So we're seeing more and more opportunity come through the partner ecosystem and then add to that what we just announced with additions so that we've got the ability to meet our customers where they are and really, I think, 1.5 years ago when I joined, our business was more aligned to going after the big whales and closing the biggest, most complex deals in the market. And we didn't have as much focus on the smaller deals in the market now across our sales environment across our partner environment across the additions, we are truly set up to go after both. And that really is a big unlock of cloud revenue growth as well. One of the things that I always talk about is when you close a, say, a $50 million well out there in the market, it might take 2, 3, 4 years to get that deal to the full revenue ramp whereas if you close $51 million deals, every 1 of those could get to their full revenue ramp in year 1. So that creates a whole lot faster cloud revenue growth. And now really for the first time we're set up to do both.

Interesting. You referenced the partner ecosystem. It seems like that's also been an area where you spent a lot of time in terms of developing -- maybe you could talk about how that ecosystem has changed? How do you think about kind of the rules of engagement, how that's shifted between where your services team comes in versus what you would hand off to partners?

Yes. So the good news on our services partner ecosystem. When I got here 1.5 years ago, we had the right partners. We had Accenture and Deloitte and Cap at all the big global SIs that you would want, and we had a lot of more strategic partners that are more boutique and many that are former Manhattan people that have started their own companies that are purely focused on Manhattan. So we had the right array of partners, but we weren't really working with them as partners too many times, they were following us looking for opportunities behind the business that we sold. So a year ago, we kind of reset the expectations and said, we expect you to treat us and work with us the same way that they work with other large cloud SaaS companies, right? And we're going to value them based on the pipeline they bring. And we're going to write them based on their CSAT with our customers and how many certified professionals do they have by product and how many successful deployments do they have by product -- so -- and when they bring us opportunities, we're not going to compete with them for services. We're going to help them win that business. And we really reset the expectations and we're seeing partners lean in, in a big way and really invest in terms of the number of people in their business and the number of certified individuals and the number of deals that are bringing us. So all of that has led to a larger expansion of the total pie of services revenue. Our services business is growing because we're selling more deals. All of the services business that we're doing, we're doing it faster and cheaper than we could do it a year ago. But we're doing more deals and our partners are doing more deals. So we've got partners that are happy with Air growth, and we're happy with our growth.

Interesting. I think that's quite contrary to maybe the common investor perception that as partners are successful to sort of like a zero-sum game that you must be giving a larger amount of business to them, but it seems like the ideas let's grow together.

Yes, it's quite the opposite of that. And I think the easiest way to look at it is, as I mentioned, 4x improvement year-over-year in number of deals that partners brought us. So those deals that they're bringing us, we were never going to see any services revenue. We weren't in those deals. So that's just net new pipeline and net new revenue in the business.

Got it. A few minutes left. If there's any questions in the audience, I'd be happy to take them. Okay. A few maybe kind of AI topical things I wanted to touch on. Open source models have been a big subject. It seems like the gap between them has kind of fluctuated ebbed and flowed. Maybe Sanjeev, if you could talk about, is that something that you guys leverage within the product set today? How do you think about rolling that into the road map?

We are not using right now any open weight models, but we are obviously looking at all of these things, both from a cost perspective. And we do use a slow models across. We are on GDP, and we use them a lot. So we used a lot of models. And GP does give you a variety of models you can use, not just from Google, but from other vendors, too. So we use a set of models. And we will look into open weight models when it makes sense.

Got it. Linda, maybe on the -- you've given obviously the guide for this year, I think a lot of people think about Manhattan as, in many ways, a fairly predictable business. Can you just help us think through kind of maybe a more medium-term framework. You don't necessarily have to put numbers around it, but just in terms of durability of cloud growth and the margin progression from here, how should we think about that beyond 2026?

Yes, sure. So I mean, as we've stated on our earnings calls, our overarching objectives are to continue to drive double-digit top line revenue growth as well as that top quartile operating margin as compared to other SaaS companies. So we definitely are focused on margin expansion and so forth. And I guess just as 1 example, if we think back a year ago, we were talking about 20% cloud growth and I think there was concerns as to whether we could really do that. If we take a look at the first half of the year, we did that and then some. So I think we feel good about that 20% growth in cloud. And then also on the services side, I think we still feel good about that low single-digit services revenue growth as well.

Great. We have about a minute left. Maybe, Eric, if you could leave us with just some final closing thoughts. Like what gets you most excited about this business for the next 3 to 5 years?

Yes. I think what we're really excited about is the opportunity to continue to accelerate that cloud growth. And in the second half of this year, for the first time, our cloud revenue will surpass our services revenue. And clearly, our cloud revenue is a higher margin. So that just creates the opportunity for not only a different pace of growth but also more margin expansion. So I think we're in a really unique position in a market that's growing double digit on its own. We're taking business from our competitors and growing at even faster rate than that. And I think we've got a sales team that's found a new gear firing on all cylinders, and we're excited about the future.

Great. I'll leave it there. Thank you, everyone, for joining.

Thank you.

Thank you.