Earnings Call Transcript - MANH Q4 2022

Operator, Operator

Good afternoon. My name is Robert, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to Manhattan Associates Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. As a reminder, ladies and gentlemen, this call is being recorded today, February 2. I would now like to introduce your host, Mr. Michael Bauer, Head of Investor Relations of Manhattan Associates. Mr. Bauer, you may begin your conference.

Michael Bauer, Head of Investor Relations

Thank you, Rob, and good afternoon, everyone. Welcome to Manhattan Associates 2022 fourth quarter 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 2021 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, the turbulent global macro environment could impact our performance and 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. We have reconciled all non-GAAP measures 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'll turn the call over to Ed.

Eddie Capel, CEO

Okay. Thanks, Mike. Well, good afternoon, everyone, and thank you for joining us as we review our fourth quarter and full-year 2022 results, as well as our outlook for 2023. So 2022 was a remarkable year for Manhattan, setting all-time records in total revenue, RPO, operating profit, cash collections, and earnings per share. To drive future growth and innovation, we also invested record amounts in our people and in R&D. In 2022, we spent over $110 million on research and development, which is up 15% from the previous year. We also increased our total headcount by 16% in response to the high demand for our solutions and services. We are confident that these investments will contribute to our already high levels of customer satisfaction and extend our position as the leading innovator in core supply chain execution, omnichannel solutions, and retail point-of-sale commerce. Given the size of our opportunity and the long-term favorable business momentum, we plan to continue the investments, including hiring between 400 and 600 new associates in 2023, which we are guiding to be our fourth record revenue year since introducing our goal to become a cloud-first company five years ago. While we remain appropriately cautious regarding the global economy, demand for our solutions remains robust, and we are optimistic about our long-term market opportunity. Recall our solutions are mission-critical, and they are key components to our customers' success. Additionally, we are entering 2023 with good visibility in several growth drivers, including the acquisition of new customers; the conversion of our on-premise customers to the cloud; and cross-selling our unified product portfolio into our customer base. Specifically pivoting to our quarterly results, Q4 was a record quarter that exceeded our expectations. Revenue increased 16% as reported to $198 million and was highlighted by 49% growth in cloud, 22% growth in services, and double-digit revenue growth across all geographies. These strong results drove our topline outperformance and solid earnings leverage in the quarter with adjusted earnings per diluted share increasing 69% to $0.81. RPO, the leading indicator of that growth, increased 50% to $1.1 billion at the end of 2022. Importantly, customer satisfaction levels are high. Win rates remain at over 75%, and demand for our cloud solutions continues to be solid across our product portfolio. From a vertical perspective, retail, manufacturing, and wholesale continue to drive more than 80% of our bookings in the quarter. The sub-verticals are diverse. For example, in the quarter, cloud deals won include a global cosmetics manufacturer, a grocery retailer, a diversified automotive company, a manufacturer of home goods, a food wholesaler, and an e-commerce retailer, among others. This contributed to a healthy mix of bookings across sub-verticals for the full year. Additionally, supported by the clear benefits of resilient modern supply chains, over 40% of our bookings were generated from new logos and over 30% from cross-sell opportunities in 2022. Importantly, the pipeline continues to be strong with solid demand across our product suites. Net new potential customers represent about 35% of that demand. As of year-end, we had converted less than 10% of our on-premise customers to the cloud. Turning to the product front, we are coming off of a very exciting National Retail Federation Conference in New York. Customers and prospects were back in force this year, and we have some exciting product innovations to share with them. These include the work we are doing around fully enabling RFID with our Manhattan Active store solution. We've added native support for RFID directly into checkouts and returns, inventory management, and store fulfillment functions so that retailers can make more accurate promises, increase conversion rates, and maximize inventory exposure for selling. The value of RFID in stores has proven to be significant as the digital experience becomes an integral part of brick-and-mortar shopping. It's vital that our customers know how much of a particular product they have and where each specific unit is located inside their store. Furthermore, RFID allows our customers to deliver these improved experiences and to do it with significantly less labor. Speaking of our store technology, we just finished a very successful retail peak season, specifically with our point-of-sale application. A number of our customers are showing very positive results from the rollout of our Omnicart capabilities, which allow items to be sold from alternate locations in a single transaction. Only a unified commerce solution with built-in point-of-sale and order management capabilities can deliver a seamless Omnicart process. Regarding implementations, we are observing positive operational results tied to the first wave of deployments of Manhattan Active Warehouse Management. I want to share a couple of anecdotes on the positive operational impact from these deployments. One early adopter customer who has activated all the features of employee engagement is enabling their associates to complete gamified challenges and accumulate points redeemable for various tangible items in a digital incentive store. This has resulted in an incremental 5% productivity improvement in their distribution center on top of their traditional engineered labor standards and incentive program. Another high-volume apparel customer in Brazil is reporting a double-digit throughput increase in their distribution center after implementing Manhattan Active WM. Even though the facility was already outfitted with extensive automation, the workflow optimization inside Manhattan Active WM is helping them achieve record levels of productivity from their material handling automation. Even in a less automated distribution center, Manhattan Active WM shines. One large wholesale drug customer reports a picking productivity improvement exceeding 30%, attributable to the latest pick path optimization algorithms native to our solution. Before handing off to Dennis, I want to recognize and thank each member of the Manhattan global team. Manhattan is committed to creating an inclusive culture where our team members can advance their careers, contribute to company-wide goals, and feel valued and engaged with the communities in which they live and work. In 2022, they clearly went above and beyond to deliver remarkable results for our valued customers. I am confident in this company's future success largely because of this team. That concludes my business update. Dennis will provide you with an update of our financial performance and outlook, and then I will close our prepared remarks with a brief summary before we move to Q&A. So Dennis?

Dennis Story, CFO

Thanks, Eddie. As Eddie highlighted, in 2022, we set all-time records in RPO, total revenue, operating profit, cash collections, and earnings per share. Congratulations to our team members around the globe for great execution. Overall, for the quarter and the year, we delivered a strong balanced financial performance on topline growth and operating margin, with both results comparing favorably to the Rule of 40. If our revenue growth is normalized for our cloud transition, excluding license and maintenance attrition, both results exceed the Rule of 50. We continue to deliver strong metrics across revenue growth, profitability, and cash flow. I will start with a recap of our financial performance for the quarter and year. All growth rates are on a year-over-year basis unless otherwise stated. We are also providing constant currency growth to demonstrate apples-to-apples comparisons. Q4 total revenue was $198 million, up 16% as reported and 19% excluding FX. Full-year revenue totaled $767 million, also up 16% and 18% removing FX. Excluding license and maintenance revenue, which removes the revenue compression by our cloud transition, Q4 revenue growth was 29% and full-year 25%. Q4 cloud revenue totaled $52 million, up 49%, with full-year revenue totaling $176 million, up 44%. We closed out 2022 with RPO of $1.1 billion, growing 50%. This was at the high end of our guidance. If FX rates remain unchanged from the year-ago period, RPO growth would be 54%. As of December 31, over 97% of our RPO represents true cloud-native subscriptions. Q4 services revenue increased 22% to $100 million, and full-year services revenue increased 18% to $394 million, both records, as cloud sales continue to fuel services growth globally. Shifting to earnings leverage, our Q4 adjusted operating income totaled $60 million with an operating margin of 30.2%. The 740 basis point increase was driven by revenue growth. Full-year adjusted operating margin was 27.6%, up 80 basis points on revenue growth. Our Q4 GAAP operating income was $45 million with a 22.6% operating margin, and full-year GAAP operating income totaled $153 million with a 20% operating margin. Our Q4 earnings per share increased 69% to $0.81. Note, our EPS includes $0.05 of tax benefit associated with expiring tax statutes, lowering our effective tax rate in the quarter to 16%. This resulted in full-year EPS of $2.76, which was up 24%, exceeding guidance. Q4 operating cash flow increased 38% to $55 million, with Q4 adjusted EBITDA margin at 31% and free cash flow margin at 26.6%. Our full-year operating cash flow was $180 million. Adjusted EBITDA margin was 28.5%, and free cash flow margin was 22.6%. Remember, these figures include $58 million in cash taxes paid, roughly doubling the amount of cash taxes paid over last year. For more information on the $26 million incremental cash taxes paid associated with the U.S. Tax Cuts and Jobs Act, please refer to Item 8 in our earnings supplemental information schedules. Turning to the balance sheet, deferred revenue increased 36% year-over-year and 23% sequentially to $209 million. We closed 2022 with $225 million in cash and zero debt. For the year, we invested $175 million in share buybacks, including $25 million in Q4. Our Board has approved the replenishment of our $75 million share repurchase authority. Moving to guidance, as consistently mentioned, our financial objective is to deliver sustainable double-digit topline growth and top quartile operating margins benchmarked against enterprise SaaS comps. As Eddie mentioned, we will continue to invest with a balanced approach to growth and profitability. We are raising the midpoint of the preliminary 2023 revenue, operating margin, and EPS guidance that we provided last quarter. We are also reiterating our 2023 RPO guidepost midpoint of $1.35 billion. Our guidepost can be found in today's earnings release and supplemental schedules. Our bookings performance is impacted by the number and relative value of large deals we close in any quarter, which can potentially cause lumpiness or nonlinear bookings throughout the year. For full-year 2023, we expect total revenue of $820 million to $833 million with an $826.5 million midpoint, up from our prior midpoint of $810 million. Excluding license and maintenance attrition, this represents 16% growth. Our target is 8%. First half and second half total revenue splits are expected to be about 50-50. For Q1, we expect total revenue of $198 million to $202 million, representing 21% growth excluding license and maintenance attrition and 12% growth overall. We continue to track ahead of our original margin expectations. Reflective of our higher revenue outlook, we are increasing our 2023 adjusted operating margin range to 25.5% to 26.5%, with a midpoint of 26%, up from our prior guidance of 25.5%. Included in this range is a 260 basis point headwind from the $35 million reduction in maintenance and license revenue from our transition to cloud. At the midpoint, operating margin on a quarterly basis is expected to be roughly 26% for Q1, 26.8% for Q2, 27% for Q3, and accounting for retail peak seasonality, 24.3% in Q4. This results in a full-year adjusted EPS range of $2.61 to $2.75. The midpoint is $2.68, up from our prior $2.55 midpoint outlook for GAAP EPS, our guidance range is $1.81 to $1.95. For Q1, we expect adjusted EPS of $0.64 to $0.66 and GAAP EPS of $0.46 to $0.48. For Q2 through Q4, we expect GAAP EPS to be about $0.20 lower than adjusted EPS per quarter, accounting for our investment in equity-based compensation. Here are some additional details on our 2023 outlook. For full-year 2023, we are increasing our cloud revenue range to $232 million to $236 million, representing 33% growth at the midpoint, assuming $53.8 million in Q1 with a $3 million sequential increase per quarter throughout the year. For services revenue, we are increasing our forecast to $428 million to $437 million, representing 10% growth at the midpoint. On a quarterly basis, we expect Q1 services revenue of roughly $103 million; Q2, $111 million; Q3, $114 million; and for Q4, $106 million accounting for retail peak seasonality. For maintenance, we expect a range of $122 million to $124 million, or a 14% decline at the midpoint. On a quarterly basis, we expect Q1 to be $33 million; Q2, $32 million; Q3, $30 million; and Q4, $28 million. We expect license revenue to be roughly $9 million or 1% of 2023 total revenue. For Q1, we expect $3.5 million of license revenue; $2.5 million in Q2; and $1.5 million in both Q3 and Q4. For hardware, we anticipate approximately $7 million in revenue per quarter. We are targeting about 54% for consolidated subscription, maintenance, and services margin for the full year. For the quarterly basis, Q1 will be about 53%, Q2 and Q3 are expected to be 54.5%, and accounting for seasonality, Q4 is expected to be about 53.5%. We expect our effective tax rate to be 21.7% and our diluted share count to be 63 million shares, which assumes no buyback activity. In summary, 2022 was a great year, and we expect 2023 to be another year of balanced growth across revenue, profitability, and cash flow. Thank you. Back to Eddie for some closing remarks.

Eddie Capel, CEO

Terrific. Thanks, Dennis. Well look, 2022 was a very good year for Manhattan. While we remain appropriately cautious regarding the volatile macro conditions, we are entering 2023 with solid business momentum, and we are very excited about the many opportunities that lie ahead. To recap, the strategic demand for our solutions is solid and seems resilient. Our global teams are executing very well, and we are continuing to invest in our business to deliver leading innovation to help our customers with their digital and supply chain transformation journeys. In closing, again, thank you to all of our employees across the globe for a fantastic 2022 as your dedication and commitment to our growing customer base continues to be one of Manhattan's key differentiators. Robert, with that, we are now ready to take any questions that might be out there.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Terry Tillman with Truist Securities. Please proceed with your question.

Terry Tillman, Analyst

Yes. Hey, Eddie, Dennis, and Mike. Congratulations on the results. I'm going to do my standard annoying preamble, and then I'll get to my questions. First, Eddie, I love the different examples of the customers. That helps a lot in terms of understanding how the business has evolved. I hope you keep doing that. Dennis, modeling, we don't really have anything to do. You basically told us every line item across all four quarters. So thanks for making that easy. Now finally, to my questions. Maybe the first question for you, Eddie, is just given what you've done with the platform, the cloud products, and nowadays the business models are a lot different and you have omnichannel. When you bring on a new logo and you've been bringing on more than you had in the past, what does the new logo look like versus three or five years ago in terms of the size and scope of that initial deal or project? And then I had a follow-up for you, Dennis.

Eddie Capel, CEO

Yes. Great question, Terry. The situation tends to be a little bit different. In the old world of license revenue, it was more typical for customers to buy multiple products simultaneously. In a subscription-based world, however, it seems to be more popular to buy one product at a time, with follow-on upsell later. You can see that in the results with 30% of our revenue coming from upsell. This is also indicative of the unified platform we have, where the bridge from one solution to another is not very long.

Terry Tillman, Analyst

Okay. And maybe my follow-up for you, Eddie, and then I had a quick one for Dennis. You did mention in your prepared remarks visibility for solid or strong visibility, I forgot exactly the description there. But I'm curious about the installed base, and we will see this maintenance start to decline more meaningfully, so that's one driver. And then the cross-selling. How is the visibility changing or improving? Is one much more notable than the other in terms of driving this visibility?

Eddie Capel, CEO

You mean customer base versus new logos? No, I don't think there's a huge difference in visibility, or frankly, confidence of visibility, because we're close to our customers. Whether it be an on-premise to cloud conversion, or expansion of capability within the customer base, we maintain long-term relationships with these clients. Generally, they share their road maps with us, so no significant difference in visibility across the two.

Terry Tillman, Analyst

Okay. And then finally for you, Dennis, in terms of the free cash flow margin, maybe you could either answer or give a perspective on how to think about free cash flow margin for the year, or just incremental headwinds on that $56 million plus in cash taxes in 2022 and how that looks in 2023? Thank you.

Dennis Story, CFO

Yes. The free cash flow will follow the operating margin by about two to three points. Regarding cash taxes, we are past the worst of it. We are now in a mode of maintaining about the same amount of taxes on an annual basis.

Eddie Capel, CEO

Thank you, Terry.

Operator, Operator

Our next question is from Joe Vruwink with Baird. Please proceed with your question.

Joseph Vruwink, Analyst

Great. Hi, everyone.

Eddie Capel, CEO

Hi, Joe.

Joseph Vruwink, Analyst

I wanted to go back to NRF this year. One thing that really stood out to me was all the attention given to order management and store-related solutions. I would imagine WMS is still going to be the primary driver of bookings for you this year. But do you anticipate an uptick in interest related to the omni and inventory suites?

Eddie Capel, CEO

We certainly hope so, Joe. I don't know that there's going to be a massive step-up. Order management is sort of number 2 on the pecking order of solutions for us. There certainly is a lot of interest. We’ve continued to invest significantly in that solution, particularly the integration with our brick-and-mortar store solutions. There is significant interest there, and we hope for continued growth and momentum in that specific area.

Joseph Vruwink, Analyst

I think at one point in time, as you were considering migrating the installed base, the timeline was contemplated to be maybe six or seven years. If it's less than 10% of the base today, how long do you think it will take for most of your installed base to have a cloud solution from Manhattan?

Eddie Capel, CEO

When I look into the future, I think most of our existing customers will migrate from on-premise to the cloud over the next six to seven years. There are always a few laggards, but the bulk of our customers will transition over this period. As for our customer base owning something in the cloud from us, we are now a cloud-first company. As we cross-sell and upsell, an on-premise customer for WMS might well buy a cloud TMS solution or a cloud point-of-sale solution, which shortens that timeline.

Joseph Vruwink, Analyst

Any thoughts on RPO quarter-by-quarter, if you expect seasonality or if customers might view budgets more on a quarterly basis? Just a way to think about the cadence of RPO bookings throughout 2023?

Eddie Capel, CEO

We've always said RPO bookings may experience some lumpiness, similar to license revenue in the past. We haven't seen a ton of seasonality with RPO bookings. These are strategic purchases, and customers tend to get going whenever they're ready. Generally, there isn't a particular slowdown in any specific quarter, as these are significant decisions.

Operator, Operator

Our next question is from Brian Peterson with Raymond James. Please proceed with your question.

Unidentified Analyst, Analyst

Hi. Thanks for taking the question. This is John on for Brian. I wanted to first touch on cross-sell. Eddie, you referenced really good cross-sell numbers here in 2022. I think you said 30%. But I’m curious if you’re seeing a change in cadence with customers coming back for additional products? Any geographic differentiation where you’re seeing faster cross-sell? Any color there would be great.

Eddie Capel, CEO

Not particularly, John. The cross-sell across geography is pretty consistent year-over-year and aligns with the 30% in 2022. More recently, we've seen a small uptick in cross-sell because, as we move into a cloud-first environment, customers are now acquiring smaller pieces of the product portfolio upfront, but they move more quickly into a larger portfolio.

Unidentified Analyst, Analyst

Great color. Thank you very much. I also want to touch on the TMS product. I recall you mentioning prior strength outside of the U.S. How are customer conversations progressing within the U.S.? Any insights there?

Eddie Capel, CEO

Pretty good. The reason we previously highlighted TMS growth outside the Americas is that historically this has not been our strongest market. We have recently improved our presence and effectiveness with TMS outside the Americas. We have achieved significant success particularly in Europe, Latin America, and Australia/New Zealand. The unification of Manhattan Active WM with Manhattan Active TM is generating interesting conversations among customers, benefitting growth in that area.

Unidentified Analyst, Analyst

Thank you very much, and congrats on a great quarter.

Eddie Capel, CEO

Thank you, John. Appreciate it.

Operator, Operator

Our next question is from Matt Pfau with William Blair. Please proceed with your question.

Matthew Pfau, Analyst

Great. Thanks for taking my questions, guys, and great quarter. I wanted to ask about the new customers you're signing; it seemed like this year was a particularly strong year for net new customers. Is there any particular product that you're landing the majority of those with? Where are those customers coming from?

Eddie Capel, CEO

The great news is we’re finding strong net new customers across our product portfolio. It’s encouraging across sub-verticals. In the distribution side, we see growth in verticals we've not been as strong in historically, particularly CPG and industrial manufacturing, as they modernize their supply chains, especially focusing on direct-to-consumer strategies. Similar trends are noted in the OMS area as companies traditionally not selling direct-to-consumer become ready to do so, or are at least preparing for it.

Matthew Pfau, Analyst

Just to follow up on the operating margin guidance and commentary. It seems that excluding the impact of the cloud transition, you'd still show year-over-year margin improvement in 2023. Is that correct? What else should we consider in terms of expenses regarding wage inflation and investment areas, especially with the hundreds of people you plan to add this year?

Dennis Story, CFO

Yes, we guided across all key metrics above 2022 performance. We expect operating margin to increase throughout the year. Investments in people will primarily be customer-facing, largely in our professional services and customer organizations. We will also invest more in R&D this year. Another area for investment remains sales and marketing, aimed at increasing awareness for solutions with which we are not as well known, as well as expanding sales coverage with our growing customer base. Overall, personnel investments will largely be customer-facing but also cover sales, marketing, and R&D.

Matthew Pfau, Analyst

Got it. Thanks for taking my questions. Appreciate it.

Eddie Capel, CEO

Thank you, Matt. See you.

Operator, Operator

Our next question is from Mark Schappel with Loop Capital Markets. Please proceed with your question.

Mark Schappel, Analyst

Hi, thank you for taking my questions and nice job on the quarter.

Eddie Capel, CEO

Thank you, Mark.

Mark Schappel, Analyst

With respect to the macro environment, there was very little commentary in your prepared remarks on that front. Based on the strong results and guidance, it seems you are encountering very few headwinds. Can you provide additional insights on your macro view?

Eddie Capel, CEO

There is some turbulence out there, but when we look at the demand for our solutions and pipeline, driven by investments in innovation, we feel good about where we stand. We have pretty good visibility, and that forward motion feels positive, but it’s not without challenges.

Mark Schappel, Analyst

Just shifting gears to your point-of-sale solution. In last year’s user conference, you mentioned achieving around 10 to 12 go-lives would be significant. Can you give an update on that front?

Eddie Capel, CEO

We are making good progress there. We’re not quite at that number, but we're nearing the target. We have some go-lives planned for Q1 and early Q2. Certainly, by fall, we expect to have met that initial milestone. Overall, momentum in our point-of-sale and store solutions feels positive, especially after the National Retail Federation Conference where there was notable interest.

Mark Schappel, Analyst

On the point-of-sale, fiscalization is an important capability for international customers. Can you provide an update there?

Eddie Capel, CEO

You're correct. Fiscalization is crucial for both international and domestically headquartered companies with global operations. We're progressing well with fiscalization; it involves multiple processes and technical integration with government agencies, which can limit speed. We're primarily focusing on Europe initially but are moving rapidly into APAC and Latin America as needed.

Mark Schappel, Analyst

Thank you. That’s all from me.

Eddie Capel, CEO

Thank you, Mark.

Operator, Operator

Our final question is from Blair Abernethy with Rosenblatt Securities. Please proceed with your question.

Blair Abernethy, Analyst

Thanks for taking the question. Nice quarter, guys. Just following on the point-of-sale product lines, I'm curious about the competitive landscape as you're bidding for new projects. What are you displacing with your solution?

Eddie Capel, CEO

There's a lot of legacy competition in this space, but our main differentiation comes from our omnichannel solution. We're not just providing a traditional cash and carry solution. The industry transitioned from hardware-centric to software-based solutions. Our advantage lies in integrating personalized service with inventory management and customer demand fulfillment.

Blair Abernethy, Analyst

In terms of the macro environment, is there a vertical that seems a bit squishier than others?

Eddie Capel, CEO

There is a bit of uncertainty everywhere. However, our diverse customer base has helped us navigate these macro changes better than in the past. We provide mission-critical systems and are focused on maximizing inventory utilization alongside customer demand.

Blair Abernethy, Analyst

Thank you for the extra color.

Eddie Capel, CEO

Thank you.

Operator, Operator

We have reached the end of the question-and-answer session. I would now like to turn the call over to Eddie Capel for closing comments.

Eddie Capel, CEO

Very good. Thank you, Robert. Again, we appreciate your joining us this afternoon, especially for our year-end earnings call. We are very pleased with the 2022 results and appreciate your support throughout the year. We look forward to discussing our path ahead. Thank you, everyone.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.