Earnings Call Transcript - MANH Q2 2020

Operator, Operator

Good afternoon. My name is Jason, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates Q2 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, ladies and gentlemen, this call is being recorded today, July 23, 2020. I would now like to introduce Eddie Capel, CEO; Dennis Story, CFO; and Matt Humphries, Senior Director of Investor Relations. Mr. Humphries, you may begin your call.

Matt Humphries, Senior Director of Investor Relations

Thanks, Jason and good afternoon, everyone. Welcome to Manhattan Associates' second quarter 2020 earnings call. I will review our cautionary language and then turn the call over to Eddie Capel, our CEO. During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or the future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance, and that actual results may differ materially from the projections contained in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-K for fiscal year 2019 and the risk factor discussion in that report, as well as any risk factor updates we provide in our subsequent Form 10-Qs. We note in particular that uncertainty regarding the impact of COVID-19 pandemic on our performance could cause actual results to differ materially from our projections. We are under no obligation to update these statements. In addition, our comments include certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You'll find reconciliation schedules in the Form 8-K we submitted to the SEC earlier today and on our website at manh.com. Now, I will turn the call now over to Eddie.

Eddie Capel, CEO

Thanks, Matt. Well, good afternoon, everyone, and thank you for joining us as we review our second quarter 2020 results and discuss our outlook for the balance of the year. And before we go into detail about how the business performed in the quarter, I wanted to take a step back for a moment and just make a couple of high-level comments. Now at Manhattan Associates, we're committed each and every day to serving our customers. Frankly, our customers depend on us to execute every single day and deliver on our promises so that they can deliver on their promises. Their customers, consumers depend on them to deliver the goods and services that they need to live, and never has this been more critical than during this global pandemic. And it's more apparent than ever that there's a growing market need for modern, adaptable supply chain inventory and omnichannel solutions. And the criticality of that need is not lost on us. And we believe that we're very well positioned at the intersection of this changing world. So now back to the discussion of our results. Manhattan reported a solid quarter despite the visible effects that COVID-19 is having across the global economy. Specifically, we reported total revenue of $136 million and adjusted earnings per diluted share of $0.40, both of which exceeded our expectations. Cloud, license and services revenue, combined with disciplined expense management, drove solid earnings leverage, delivering an adjusted operating margin of 25.3%. That's about 200 basis points higher than the same period last year. And while we've seen better-than-expected demand for our supply chain and omnichannel products and services, the near-term timing and continued pace of economic recovery is somewhat unclear. But in our world, there are signs that seem to be encouraging. And as such, we're raising our full year total revenue and adjusted EPS guidance to reflect our views for the balance of the year. Now we continue to invest in the business to drive long-term sustainable growth while focusing on profitable execution and diligent capital allocation in order to capitalize on the evolving market trends. Furthermore, our dedication to innovation remains. We expect to invest nearly $80 million in R&D this year, even with this macro backdrop. Now looking at our current pipeline, we see a pretty healthy set of global opportunities, with our cloud pipeline trending favorably, giving us confidence in reinforcing our belief that the mission-critical products that we offer are needed now more than ever. Specifically, over 60% of our pipeline at the end of the quarter is comprised of cloud opportunities, and that's compared with 40% a year ago. And while we've seen some delays in closing pipeline opportunities, we haven’t experienced any notable cancellations. And our second-half pipeline is trending somewhat favorably relative to our first half. Additionally, we're seeing a broader and more diverse set of opportunities in our pipeline as interest grows from non-retail verticals such as automotive, third-party logistics, life sciences, automotive and then all the way to manufacturing and wholesale. Finally, about 50% of our deal opportunities continue to be represented by net new logos globally. Now turning to our services business. Despite having the restriction of limited face-to-face engagements with our customers, we remain active, providing real-time support and delivering a variety of project work while executing system go-lives remotely. In the second quarter we conducted nearly 130 system go-lives, reflecting solid execution in the current environment. By the way, build travel which is margin-neutral, but does contribute to the overall services revenue, is down significantly versus last year for obvious reasons. This represents about a 4% headwind to year-over-year services revenue growth. While the lack of travel and face-to-face engagement is challenging, the ability of our professional services team to continue to deliver high quality complex work remotely underscores our ability to adapt and deliver in this dynamic and difficult time. Now on the sales and marketing front, our competitive win rates remain strong at about 70%-plus against our head-to-head competition, with about 30% of our license and cloud deals representing net new customers. Then here we are at the halfway point, really, of our 5-year cloud transition, and we're experiencing a significant shift in market demand for our cloud solutions across all of our verticals. Vertical markets that collectively drove more than 50% of our cloud and license revenue in the quarter were retail and consumer goods, government, and food, beverage, and grocery. Within these verticals, we saw robust demand for specific capabilities within our active omni suite, such as buy online, pick up in-store, curbside pickup, and store inventory fulfillment. With so many physical stores closed during Q2, the ability of retail and consumer-facing brands to fulfill orders in creative ways was really in great demand. We were able to stand up these solutions in a very short amount of time. The ability of these brands to have flexible distribution and selling channels is more critical than ever. The solutions that we offer have become a key enabler of these activities. I would like to, just for a minute, pivot a bit and give you some updates on recent advancements across our product portfolio. Let's start with maybe one of the most significant announcements in our company's history. During our online user conference in May, Momentum Connect, we unveiled Manhattan Active Warehouse Management, the next generation of warehouse management, re-architected from the ground floor up as cloud-native, microservices-based, and a versionless application. Manhattan Active WM is a step change in agility and speed of innovation within the supply chain execution landscape. With Manhattan Active WM, we deliver new feature functionalities every single quarter while still offering full extensibility of the core application. While our customers continue to be extremely satisfied using our base capability inside of warehouse management, we see that customer-driven extensibility as a solution imperative, with the ability for our customers to add their secret sauce and innovation on top of our platform while taking advantage of new capabilities that we deliver every single quarter. We believe this is a really winning combination, as well as a first-of-its-kind in the supply chain execution industry. The underlying technology that makes this all possible is our Manhattan Active application architecture that debuted in 2017 when we launched Manhattan Active Omni. Now relative to the live customers, we had an early adopter customer live on Manhattan Active WM prior to our release announcement of Manhattan Connect, Pet Supplies Plus. They went live in April, and due to unforeseen events associated with the pandemic, they've been shipping record volumes with Manhattan Active WM ever since. They are now planning to roll out the remaining distribution centers in their networks. Additionally, we've also signed several other customer implementations of Manhattan Active WM that are underway. They include large Tier 1 global brands, and we closed them during the quarter. In addition to its groundbreaking technology, Manhattan Active WM delivers a number of next-generation feature function enhancements including customer grade configurable mobile applications for the associates inside the distribution center, a suite of in-line analytical user interfaces built right into Manhattan Active WM, which we call our Unified Control screens, and a next-generation algorithm focused on taking operational optimization to the next level. Finally, we have a brand-new set of capabilities that we call employee engagement; a whole new way for distribution center managers and associates to interact with one another throughout the day. So in brief, that's Manhattan Active WM. As you'd imagine, we're very excited about this release, which has been the largest product investment in the history of Manhattan Associates. While the time frame and expense of the undertaking were significant, we felt that it was undoubtedly the right path to position both Manhattan and our customers to deliver best-in-class performance for the next decade. While Manhattan Active WM was admittedly our focal point of attention in recent times, I'm excited that we've made significant strides across other applications within our portfolio. I'll touch on just a couple of those. First, staying with our supply chain suite, we recently shipped an exciting new version of our transportation management solution that included an all-new major update to our dispatch capability and a significant update of our transportation modeling solution. For our customers who operate their own delivery fleet, dispatch management is integral to the transportation management operation. A number of our fleet-operating customers have already signed up to move to this completely redesigned and rebuilt solution. We're excited to help them power the ever-growing last-mile delivery network of today and tomorrow. Next, a quick update on Manhattan Active Omni. As I mentioned in Q1, Manhattan Active Omni customers are innovating at record pace to adapt their order fulfillment, delivery, and pickup methods due to the changing regulations associated with the pandemic. The volumes we're seeing so far for buy online, pickup-in-store orders are off the charts, with some of our customers experiencing tenfold increases in volume. In Q2, we accelerated the release for curbside pickup into both our digital self-service and store fulfillment modules. Consumer research indicates that curbside pickup is one of those fulfillment methods likely to persist even after the pandemic. Having an industrial-strength process and technology in place is a must-have for omnichannel retailers. Due to the Manhattan Active architecture, we were able to make curbside pickup support available to all Manhattan Active Omni customers in record time. Last but not least on the product side, we launched a completely new application within our inventory suite, Momentum Connect, this quarter. It's called Manhattan Active Allocation and its purpose is built for our fashion and apparel retail customers. While we've had best-in-class forecasting and replenishment applications for customers managing relatively static product assortments, Manhattan Active Allocation provides a sophisticated inventory optimization offering for fast fashion customers who manage their inventory using a completely different process. Manhattan Active Allocation launches with major differentiating features. Omni-channel is built right into the core of its design and it also resides on the Manhattan Active application architecture, which we discussed earlier. We think this is a game changer for the soft lines allocation space, and we plan to make it generally available a little bit later in the year. Hopefully you'll agree that it was a big quarter for the evolution of our product portfolio. We’re excited to work with our customers to activate all these new capabilities. That covers my broader business update. Dennis is going to provide you with an update on our financial performance, discuss 2020 full-year guidance, and I'll close with a few prepared remarks and a brief summary. So Dennis?

Dennis Story, CFO

Thanks, Eddie. For the second quarter, total revenue was up $135.6 million, down 12% over the prior year, solely related to COVID-19 impacts. Our total revenue estimate for the third quarter is a range of $136 million to $140 million. Adjusted earnings per share was $0.40. GAAP earnings per share was $0.30 with stock-based compensation accounting for the difference between adjusted and GAAP EPS. Our adjusted earnings per share target for third quarter is $0.39 within a range of $0.38 to $0.40. License revenue was $5.7 million in the quarter, above our expectations but down year-over-year as demand for our solutions continues to shift to the cloud. We signed two, $1 million plus deals in the quarter with roughly 20% of all licensed deals coming from new customers. For the third quarter, we expect between $5 million to $7 million in license revenue. For the full year, we now estimate license revenue will be approximately $28 million to $31 million. As we pointed out in our release and earlier in the call, uncertainty about the COVID-19 pandemic could affect our performance against our estimates. Cloud revenue was a record $18.5 million, up 105% year-over-year and 7% sequentially, driven by continued customer demand for our cloud solutions across all of the verticals we serve. Notably, we signed two new Manhattan Active Warehouse Management deals in the quarter, both with global Tier 1 customers. There's no question WMS in the cloud momentum continues to build. Over 70% of our deals in the quarter came from WMS and approximately 45% of our bookings were from either net new customers or net new product sales to existing customers within our install base, with a diverse set of opportunities to continue to sell into our existing customer base. For Q3, we estimate our cloud revenue will be $19.5 million to $20 million, which represents about 40% growth year-over-year against a very strong comparison driven by our FEMA deal we signed last year. Ex-FEMA, the year-over-year growth rate is about 50%. For the full year, we estimate our cloud revenue will be $76 million to $78 million, up about 65% at the midpoint. We estimate our cloud and license software mix will be approximately 70% cloud to 30% license for the full year, with total software revenue in the range of $104 million to $109 million. At the midpoint of $106.5 million, total software revenue is up 11%, representing a record software year while facing a pandemic and absorbing a 40% decline in license revenue versus 2019. Turning to bookings, as we discussed, remaining performance obligation or RPO is the leading proxy for our cloud booking performance and represents the value of contractual obligations required to be performed, otherwise referred to as unearned revenue or bookings. Our RPO for the quarter totaled $225 million, up 87% over prior year and 11% sequentially. We continue to estimate that our year-end RPO will fall within a range of $265 million to $275 million. For Manhattan, this disclosed value represents our cloud bookings value of unearned revenue under non-cancelable contracts greater than one year. Contracts with a non-cancelable term of one year or less are excluded from the reported amount. Lastly, on the license and cloud front, our performance does depend on the number and relative value of large deals we closed in any quarter. While this is positive, deal sizes may be slightly smaller as subscription revenue is recognized over time. Some customers have longer implementation cycles associated with large distribution footprints requiring a wrap subscription model, which can impact sequential and year-over-year revenue growth. We retain appropriate caution around slow decision-making by some clients and prospects, particularly retailers, in light of COVID-19. Moving on to maintenance, revenue for the quarter totaled $35.9 million, down 4% versus the prior year. Our customer retention rates remain strong at greater than 95%. For the third quarter, we estimate our maintenance revenue for Q3 will be approximately $36.5 million to $37 million. For full year 2020, our estimate is $145 million. Turning to services, consulting revenue for the quarter totaled $71.8 million, down 24% year-over-year as expected, solely driven by COVID. Again, excluding billed travel, we're down about 20% year-over-year. We expect near-term services revenue trends will continue to be governed by the pace and degree of normalization of economic activity impacted by COVID-19. We estimate our services revenue for Q3 will be approximately $72 million to $73 million, and our full year 2020 services revenue will be in a range of $292 million to $303 million. At the midpoint of $297.5 million, services will be down about 17% versus 2019; excluding billed travel, services revenue is down 14%, including our expected seasonal fourth quarter decline due to the retail peak season. Our consolidated subscription maintenance and services margin for the quarter was 52.4%, driven by operating leverage as our cloud revenue begins to scale. Our third quarter estimate is approximately 52.4%, approximately 270 basis points higher than 2019. Our full-year estimate is approximately 51.2%. Moving to operating income and margin, Q2 adjusted operating income totaled $34.3 million, with an adjusted operating margin of 25.3%. For the third quarter, we estimate our adjusted operating margin to be within a range of 24% to 24.2%, a nice tight range there. Our Q2 adjusted effective income tax rate was 24%, and our third quarter and full year tax rate will be approximately 24% as well. Regarding our capital structure, we suspended our share repurchase program effective April 1, 2020, as previously discussed. Our repurchase authority remains at $50 million, and this program continues to be an important part of our long-term capital allocation strategy. We will continue to evaluate the appropriate time for a resumption of our buyback program. For the third quarter and full year, we estimate our diluted shares outstanding will be approximately $64.5 million. Turning to cash, we closed the quarter with cash and investments of $124 million and zero debt. Our current deferred revenue balance totaled $119 million, up 13% sequentially on maintenance and cloud billings. Q2 cash flow from operations totaled $49 million. CapEx for the quarter totaled $0.5 million. We estimate full-year capital expenditures to be in the range of $5 million to $7 million. I'll now turn to our updated annual guidance. We continue to model and review multiple scenarios to provide the investment community with our best estimate of financial performance for the remainder of the year. While these estimates have been rigorously vetted, certain external factors are out of our control and may produce results that differ from what we've modeled. Specifically for annual guidance, our full-year total revenue range is now expected to be between $554 million to $570 million. Our target objective is to achieve $562 million in total revenue. Our full-year adjusted earnings per diluted share range is expected to be between $1.53 to $1.59, with a target objective of $1.56 compared to our previous guidance midpoint of $1.54. Our full-year GAAP earnings per diluted share range is expected to be a $1.17 to $1.23 with a midpoint of $1.20. Our full-year adjusted operating margin is expected to fall within a range of 22.9% to 23.1%. That covers my financial update. I'll turn the call back over to Eddie.

Eddie Capel, CEO

Okay. Thank you, Dennis. As we close out today's call, we recognize that the world is evolving quickly, from changing cultural norms to diverging consumer tastes and behaviors. There's never been a more crucial time to have a modern, adaptive, and flexible supply chain and omnichannel commerce set of solutions. To win today means investing in the future, and we recognize this. We continue to see customers adapt to this paradigm. As a leader in the digital commerce space, our goal is to enable our customers to succeed and to be resilient through continued innovation and by investing in a talented global workforce. We believe we are well positioned to capitalize on these trends and see no shortage of opportunities as we progress on the path of long-term sustainable growth for our stakeholders. At Manhattan, we never settle. In these difficult times, we remain focused on delivering on our commitments, advancing our product portfolio through market-leading innovation, and ensuring our customers are equipped to succeed in this challenging macro-dynamic. We've experienced challenges like this before. While this one is a bit different, admittedly, we've consistently emerged stronger and better positioned, and we see no reason as to why this time is any different. People, innovation, and culture are the heart and soul of our organization. That's why I'm so excited about what the future holds for all of us here at Manhattan Associates. So Jason, I'm ready now to take any questions.

Operator, Operator

Excellent. Your first question comes from the line of Terry Tillman from SunTrust Robinson. Your line is open.

Terry Tillman, Analyst

Yes. Hey gentlemen. Good afternoon, Eddie. It's nice to see the early traction with the cloud WMS product and calling out Tier one wins. What I'm curious about is a two-part question, then I'll have a follow-up or two. On the Tier one wins, are they going enterprise-wide with the rollout of the cloud-native WMS, or is it more isolated to site? How do you see the rate of adoption of the cloud WMS versus other cloud products in the past? And then I had a couple of follow-ups?

Eddie Capel, CEO

Yes. Both of the deals are definitely with Tier one global customers. They are substantial deals, but there is still a lot of upside behind them for the global rollout, for sure. Regarding adoption, it's enthusiasm, adoption, and momentum. I would say it's early, of course, given that we just announced in mid-May. But it feels very strong, great enthusiasm from really across the board—customers, prospects, and industry analysts—pretty excited about the solution. The pipeline seems pretty strong, and engagement with both prospects and customers is high. So the prospects are pretty good.

Terry Tillman, Analyst

That’s good to hear. Two follow-ups. The first one on the non-retail strength. What we see a lot is new business models from wholesalers and manufacturers really starting to do direct-to-consumer at their end customers. They’re building websites to sell. I'm assuming that has big implications on the fulfillment side and supply chain side. But what are you seeing in non-retail segments going forward? Do you see a growing total addressable market around that that you weren’t really serving?

Eddie Capel, CEO

Well, there are two pieces. You've made the point about the branded companies going direct-to-consumer. There are also industries that are starting to go direct-to-consumer that we maybe would not have expected and haven't seen as retailers. For example, automotive spare parts, which traditionally were captive to the dealer network. You're starting to see those secondary markets begin to look like direct-to-consumer, which is a great opportunity for us. As we release our new solutions, particularly WM, along with the cloud-native innovation that we're delivering on a quarterly basis, we certainly see the opportunity for penetrating verticals where we may not have been the strongest in the past. CPG is one that comes to mind where we're seeing some good early interest.

Terry Tillman, Analyst

Yes. Just my last question. Thanks Eddie so far for the answers. Is on the services side. I thought I had in my notes that you all were looking for about 100 or maybe a little under 100 go-lives. I think Dennis said 130. It seems like you beat expectations. You did raise services for the year. What’s driving that to be ahead of expectations, just given the pandemic? Are people more efficient in services, doing it virtually than you thought? Or are there just more projects moving forward than you expected? That’s it for me. Thank you.

Eddie Capel, CEO

Yes. A few more projects than we thought, Terry. Honestly, we were unsure coming into the quarter as to how things would pan out. They firmed up a little bit as the quarter went on. Personally and professionally, there was uncertainty, but things firmed up for us. So we’re pleased with that and very pleased with the ability of the team to execute under unusual circumstances. But thanks for your questions.

Matt Charles, Analyst

Hey guys. Thanks for taking my questions. I wanted to first start off with a follow-up on the Active WM product. Can you talk about the interest you’re seeing there in the pipeline? Is that more weighted towards new customers or existing WM customers looking to move their on-premise deployment to a cloud one?

Eddie Capel, CEO

Yes, that's an interesting question, Matt. It is about smack down the middle—50% existing customers and 50% new logos. It's encouraging.

Matt Charles, Analyst

Got it. When you talked about the higher volumes in Active Omni from some of your retailer customers, can you remind us if you're able to monetize those from a revenue perspective? How do those contracts work when customers are doing sort of 10x fulfillment or other activities that they previously did?

Eddie Capel, CEO

Yes. There's definitely upside for us there. Most of our contracts are annual volumes, so when you see a short-term pickup in volume, there is no immediate impact for us. It reconciles at the end of the year, but certainly it's a positive.

Matt Charles, Analyst

Got it. Last one for me.

Eddie Capel, CEO

Yes.

Yun Kim, Analyst

Thank you. Eddie, regarding the migration of on-prem WMS to Active WM within your installed base, do you expect faster adoption of Active WM among your active Omni installed base? Or is that really not a factor?

Eddie Capel, CEO

I don't think it's much of a factor, Yun. We will see Active Omni customers adopt Active WM. It makes sense for them. They're already running the platform. It is the exact same technology underpinnings. So there's a combination of confidence, familiarity, and common sense to consolidate on a common platform.

Yun Kim, Analyst

Okay, great. Obviously a lot of focus on Active WMS, but sometimes we forget about your main cloud business that’s driving your IPO, that’s Active Omni. I believe the Active Omni business is maybe a little bit more driven by the retail vertical than WMS, but your RPO growth remains pretty solid. Any particular trends that you were seeing such as between new and existing, or any kind of changes that you made in terms of go-to-market around Active Omni since the emergence of COVID? Any particular vertical that’s adopting Active Omni or planning to adopt it because of COVID?

Eddie Capel, CEO

No major shifts. Whether for existing customers or new ones, we’re looking for quick wins. Those customers, and prospects, simply did not have a buy online, pickup from store strategy or curbside pickup strategy. They need something quickly. We are seeing those quick hit high-value initiatives the market is asking for, mainly inside retail.

Yun Kim, Analyst

Okay. Just stepping back, a lot has happened to your target markets since COVID. Can you update us on your latest thoughts on the strategic acquisitions? Given how fundamental the fundamentals of your target market have quickly evolved due to COVID, do you feel that you may need to beef up on certain capabilities like traditional forecasting to better target manufacturers or grocery-oriented solutions?

Eddie Capel, CEO

We are always interested in M&A that fits strategically within our footprint and could increase our total addressable market. But we won't buy more of what we've already got or aging technology. Our vision is to deliver brand new innovation to the market to meet the changing needs, not old capabilities repackaged. The opportunity for us is to continue investing in brand new innovation and delivering it to the marketplace every 90 days.

Mark Schappel, Analyst

Hi, good afternoon, and nice job on the quarter. With respect to Active WMS, are you seeing customer interest from a particular industry? I know it’s early, but are you seeing any particular industry latch onto that?

Eddie Capel, CEO

The interest is broad, really across industries—retail, wholesale, 3PL, life sciences, pharma. It’s widespread. Concentration of interest would be great, but even better is broad interest. The interest is global across verticals.

Mark Schappel, Analyst

Last quarter, you noted that some of your customers, such as grocers or distributors, were delaying some projects. I assume that this has subsided somewhat. Could you comment on that a little?

Eddie Capel, CEO

Yes. It has subsided a little. They’re still busy, but the panic buying has eased. The grocers and pet supply retailers have adapted to these higher volumes and aren't being surprised every day anymore. We're starting to see those guys refocus on strategic initiatives and think about opening up those programs again.

Operator, Operator

There are no further questions at this time. I turn the call back to the presenters.

Eddie Capel, CEO

Okay. Very good, Jason. Thank you. Thank you, everybody for joining us on our Q2 call. As always, we appreciate your support and interest in Manhattan Associates. We’ll look forward to updating you again in about 90 days or so. In the meantime, please, everybody make sure that you stay healthy and safe. We'll look forward to speaking to you again in about 90 days. Thank you.

Operator, Operator

That concludes today's conference call. You may now disconnect.