Earnings Call Transcript - MANH Q1 2023

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 the Manhattan Associates First Quarter Earnings Call. 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

Great. Thank you, Robert, and good afternoon, everyone. Welcome to Manhattan Associates 2023 first 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 filed 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 2022 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 a 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 Eddie.

Eddie Capel, CEO

Thank you, Mike. Good afternoon, everyone, and thank you for joining us to review our first quarter results and our updated outlook for the full year 2023. Manhattan Associates has made a strong start in 2023, reporting record results. Our total revenue for Q1 was $221 million, reflecting a 24% increase as reported and a 33% increase when normalized for our cloud transition. Earnings per share stood at $0.80, also up 33%. Both our top and bottom line results exceeded expectations. Demand remains strong, customer satisfaction is high, and our increased investment in research and development has established Manhattan as a leading innovator in supply chain execution, omni-channel solutions, and retail point-of-sale. These favorable factors contributed to Q1 being our eighth consecutive record revenue quarter, featuring a 53% growth in cloud revenue year-over-year, a 29% growth in services revenue, and a 20% growth in revenue across all our regions. These impressive results drove our strong top line performance and solid earnings leverage this quarter. Our remaining performance obligations, a key growth indicator, increased by 42% to $1.2 billion over Q1 2022, as demand for our essential cloud solutions remains strong and resilient across our product portfolio. From a vertical standpoint, retail, manufacturing, and wholesale accounted for over 80% of our bookings this quarter. Our sub-verticals across solutions are well diversified. In Q1, we secured cloud deals with various businesses, including a discount retailer, a health solutions company, a grocery retailer, an industrial manufacturer, a specialty automotive parts retailer, and a fashion brand, among others. Our win rates for the quarter were approximately 75%, with 25% of new cloud bookings coming from new customers. While the mix of bookings may fluctuate quarterly, we experienced significant cross-selling strength during this period. Our cloud-native platform enables the integration of mission-critical commerce and supply chain systems, transforming what was once an aspiration into a concrete goal for our customers, leading to reduced IT complexity, increased revenue, and improved profitability. This gives Manhattan Active Solutions a clear competitive edge. Our robust product activity continues to enhance our services pipeline and growth. Our Professional Services team has performed excellently, successfully launching over 100 projects in the quarter. Our solution pipeline remains strong with promising demand across our product suites, with new potential customers making up around 35% of our total pipeline. While we are cautious about the global economy, we are committed to aggressive growth and investment goals, including strategic investments in innovation, enhancing customer success, and expanding our addressable market. We expect to add approximately 400 to 500 new employees this year, having already welcomed over 150 new employees to the Manhattan family in just Q1. Regarding our product efforts, we participate annually in definitive vendor landscape studies for our WMS, TMS, and OMS applications. Although the results of the WMS Magic Quadrant will not be released until early next month, we are hopeful to be recognized as a definitive leader for 15 consecutive times. I am pleased to announce that for the fifth consecutive time, we have been named a leader in the TMS Magic Quadrant. Our substantial investment and innovation in TMS are reflected in both our impressive placement in the Magic Quadrant and robust project activity across four continents. The Forrester Omnichannel OMS Wave was published this month, where for the second consecutive time, Manhattan Associates stands alone as the leader. The rarity of a single leader across consecutive Waves, given that the report is released every two years, highlights our technical capabilities and unmatched functionality stemming from 18 years of substantial investment in this critical solution. The Forrester analysis indicates that no other vendor comes close to matching our abilities in customer service, inventory availability, real-time order promising, fulfillment optimization, and in-store execution. We deliver WMS, TMS, and OMS on our industry-leading and unified Manhattan Active platform, which is built on our cloud-native application architecture. Manhattan Active WM continues to perform strongly, as evidenced by new wins and successful customer adoption and go-lives. With over 100 customers utilizing Manhattan Active WM, we maintain a strong record of being chosen to support the largest and most complex supply chains while enhancing our industry and geographic diversity. In terms of our omni-channel solutions, we are excited to share that we successfully launched another significant customer with our point-of-sale solution this quarter. Along with deploying our cloud-native point-of-sale across their stores, we also executed a simultaneous go-live for three-channel order management. Our OMS is uniquely capable of optimizing retail, wholesale, and e-commerce orders at the same time. This, combined with our point-of-sale system, enables us to help this customer achieve operational excellence in their omni-channel endeavors and provide a technological framework for other notable specialty apparel brands within their network. During Momentum this year, we eagerly anticipate point-of-sale customers sharing the value they have gained from implementing our omni-channel point-of-sale solution. Speaking of Momentum, our annual user conference will take place in about a month in Scottsdale, Arizona, which is one of our preferred locations. This year's theme is "Moving Life and Commerce Forward," and we, along with our customers and partners, will bring that theme to life in many inspiring and informative ways. We will also showcase the unique advantages we deliver by integrating multiple Manhattan Active applications. The Manhattan Active architecture empowers our customers and partners to utilize their creativity and technical skills, starting with our leading application functionality and extending it to foster positive change for their businesses and customers. We are equally excited about our advanced initiatives utilizing modern natural language models like ChatGPT and Bard, which will also be a significant topic of discussion at Momentum. That wraps up my business update. Dennis will now provide an update on our financial performance and outlook for the remainder of the year, and then I will give a brief summary before we move to Q&A.

Dennis Story, CFO

Thanks, Eddie. Our Manhattan global teams continue to execute exceptionally well in a challenging macro environment. For the quarter, we delivered a strong, balanced financial performance across top line growth, operating margin, and cash flow. On an as-reported basis, our Q1 results compare favorably to the Rule of 50. If our revenue growth is normalized for our cloud transition, excluding license and maintenance revenue, our results exceed the Rule of 60. FX in the quarter was a 1-point headwind to revenue growth, a nearly 2-point headwind to year-over-year RPO growth, and about 40 basis points of tailwind to sequential RPO growth. Now to our Q1 results. Growth rates are reported on a year-over-year basis unless otherwise stated, and I'll let the numbers speak for themselves. Total revenue was a record $221 million, up 24%. Excluding license and maintenance revenue, which removes the compression driven by our cloud transition, our total revenue was up 33%. Cloud revenue totaled $57 million, up 53%. As Eddie highlighted, we ended the quarter with RPO of $1.2 billion, up 42% compared to the prior year and up 10% sequentially. As of March 31, 98% of our RPO represents cloud-native subscriptions. Our global services revenue was a record $116 million, up 29% as cloud sales continue to fuel services revenue growth globally. Operating profit totaled $64 million with an adjusted operating margin of 28.8%, up 190 basis points year-over-year. Our performance was driven by strong cloud and services revenue growth combined with operating leverage as our cloud business scales. Importantly, we continue to invest for future growth, resulting in Q1 earnings per share of $0.80, up 33%, and GAAP EPS of $0.62, up 29%, a company that generates GAAP earnings. Turning to cash, operating cash flow was $59 million, up 85%. This resulted in a 30% adjusted EBITDA margin and a 26% free cash flow margin. Remember, like full year 2022, full year 2023 cash taxes will be negatively impacted by the US Tax Cuts and Jobs Act. Moving to the balance sheet, deferred revenue increased 34% to $218 million. We ended the quarter with $182 million in cash and, notably, zero debt. Accordingly, we leveraged our strong cash position, investing $74 million in share repurchases in the quarter. Our Board has approved the replenishing of our $75 million share repurchase authority. This covers the Q1 quarter, so on to our updated 2023 guidance. Our financial objective is to deliver sustainable double-digit top line growth and top quartile operating margins benchmarked against enterprise SaaS comps. This includes a balanced investment approach to growth and profitability. With our strong start to the year and increasing visibility, we are raising our 2023 revenue operating margin and earnings per share guidance. We are reiterating our 2023 RPO guidepost range and midpoint of $1.35 billion. 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 non-linear bookings throughout the year. For full year 2023, we expect total revenue of $860 million, up $34 million or 4% from our prior midpoint of $826.5 million. Excluding license and maintenance attrition, this represents 20% growth. Our target is 12%. For Q2, we expect total revenue of $216 million, or 21% growth, excluding license and maintenance. Our target is 13% growth. For operating margin, we are increasing the midpoint to 26.5%, up from our prior midpoint of 26%. This outlook includes roughly 200 basis points of headwind from the reduction in license and maintenance revenue. Given our demand and size of our opportunity, we continue to invest in our business. We believe this near-term margin trade-off positions Manhattan Associates well to expand our TAM, deliver long-term recurring revenue growth and cash flows. At the midpoint, we are targeting Q2 operating margin of 26.5%; Q3, 26%; and accounting for Q4 retail peak seasonality, 24.5%. Our full year adjusted EPS outlook increases by $0.20 to $2.88, up 7% from our prior midpoint of $2.68. On a quarterly basis, we target Q2 and Q3 to be $0.72; accounting for Q4 retail peak seasonality, $0.64. For GAAP EPS, our midpoint increases by $0.15 to $2.03, up 8% from our prior $1.88 midpoint. For Q2, we are targeting GAAP EPS of $0.50. Here are some details on our 2023 outlook. We are increasing our cloud revenue midpoint to $240 million, representing 36% growth; up 3% over our prior midpoint of $234 million. On a quarterly basis, we are targeting $59 million in Q2, $61 million in Q3, and $63 million in Q4. For services, we are increasing our forecast from $455 million to $463 million. The $459 million midpoint represents 17% growth; up $27 million or 6% from our prior $432.5 million midpoint. On a quarterly basis, we are targeting Q2 services revenue of $118 million; Q3, $119 million; accounting for Q4 retail peak seasonality, $106 million. Moving to maintenance, we are targeting a range of $126 million to $128 million, reflecting an 11% decline at the midpoint. For a quarterly basis, we target Q2 at $32 million, Q3 at $30.5 million, and Q4 at $29 million. We expect hardware revenue of $5 million per quarter and license revenue of $2 million in Q2, and $1.5 million in Q3 and Q4. For consolidated subscription, maintenance, and services margin, we target about 54% for the full year, approximately 54.5% in Q2 and Q3, and 54% in Q4. We expect our tax rate to be 21.5% and our diluted share count to be 62.8 million shares, assuming no buyback activity. In summary, fantastic execution by the Manhattan team, thank you.

Eddie Capel, CEO

Yes. Terrific. Thanks, Dennis. We're very pleased; we're pleased with the strong start to the year and our record financial results. As always, we expect this year to be one of great accomplishments. Before opening up the call to questions, I'd like to share a couple of recent highlights. Earlier this week, Manhattan Associates celebrated an important milestone: 25 years as a NASDAQ-listed public company. We're very proud of that. Additionally, for the 11th consecutive year our team members voted Manhattan as a top workplace in Atlanta. This award follows similar recognitions that Manhattan has earned around the globe over the past 12 months. Congratulations to all our team members, and thank you for all the great work and your dedication to our customers. Now, that concludes our prepared remarks. Rob, we'd be happy to take any questions now.

Operator, Operator

Thank you. Our first question comes from Terry Tillman with Truist Securities. Please go ahead with your question.

Terry Tillman, Analyst

Yes. Thanks. Good afternoon. Really strong results, congrats on that, and I guess happy birthday, MANH. The first question, I guess, Eddie, do you still have that office in Manhattan Beach, that little cute office? Is that still in the office portfolio?

Eddie Capel, CEO

We don't, Terry, and we've been very happy with our financial performance over the last 25 years. If only we had owned that real estate, I think it might have outstripped us. But no, we don't, unfortunately.

Terry Tillman, Analyst

Okay. Fair enough. So yes, just a quick question for you, Eddie. I think in the prepared remarks you were talking about the increased cross-selling. What I'm curious about now is, you've got 100-plus customers on the cloud WMS, so that's great to see. The idea here is, these become unified workflows when folks get on the microservices architecture. How are the conversations going in kind of the light bulb or the aha moments in terms of, wow, these are integrated workflows and really kind of starting to tip the scales and getting them to buy then the OMS or the TMS or other solutions? Just maybe an update on where you are in those kind of, hopefully, aha moments and then I had a question for Dennis.

Eddie Capel, CEO

Yes. I believe our customers and the marketplace have been seeking integrated workflows for a long time, and it's been challenging to achieve them. We now have a solution that enables us to make that goal a reality, transforming it from an aspiration to a viable option. Discussions are progressing well, especially with our strategic customers. Typically, when we talk about warehouse management, transportation management, or order management systems, we also explore our other solutions and the pathway to transition between them. The cross-selling was particularly strong this quarter; while it may fluctuate, those discussions are very promising.

Terry Tillman, Analyst

Got it. And I guess, Dennis, for you, congrats on DSOs and GAAP earnings. My question relates to the cloud subscription revenue which has been accelerating strongly, and it accelerated again in Q1. I'm curious if there were accelerated go-lives, maybe more users, or expansion deals? Just anything more on the level of positive variance? Thank you.

Dennis Story, CFO

The primary drivers were the ramp and the compounding starting with these ramp deals, which have been highly successful for us. That's the big driver.

Eddie Capel, CEO

We've had a few. I wouldn't say it's a landslide, but some projects moved more quickly than they were expecting. That was helpful as well.

Terry Tillman, Analyst

Congrats again. Thanks.

Eddie Capel, CEO

Thank you, Terry.

Dennis Story, CFO

Thanks, Terry.

Operator, Operator

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

Brian Peterson, Analyst

Hi, gentlemen, thanks for taking the question and congrats on the results. So Eddie, I wanted to start on point-of-sale. You've had some success there. I'd love to hear about the ramp of that product and how we should think about that contributing to RPO or growth over the long term? How excited are you about that portfolio and how it can ultimately fit in?

Eddie Capel, CEO

Yes, I’m very excited about where we are with point-of-sale. The goal is to have 10 or a dozen live and referenceable customers by the end of the year, and we're on track for that. Currently, the financial impact of point-of-sale on our results is minimal, but there's strong potential for growth in the future. Conversations about modern technology in retail stores are ramping up, and I'm more excited than ever about the opportunities ahead.

Brian Peterson, Analyst

Understood. Maybe a follow-up to Terry's question on cross-sell. How do you think about what was really strong this quarter? As you build out the portfolio, does the cross-sell strategy change? I'm curious about how that could evolve over the next three to five years. Thanks.

Eddie Capel, CEO

It was a nice balance this quarter. Nothing really stood out. For us, it is not particularly important which product goes first as we have a unified suite that meets any client's needs. Our cross-sell was a little over 35% of our new bookings this quarter, which is very encouraging.

Operator, Operator

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

Joe Vruwink, Analyst

Great, thanks. I guess I'll start with a macro question. The general indications we've heard this year are that larger enterprise customers are still forging ahead with modernization, while stresses are seen at the lower end. Any changes you're seeing from a macro sense or within particular segments of the business?

Eddie Capel, CEO

No changes really, Joe. We've diversified over the last few years, reducing retail focus but still seeing lots of work in that area. A lot of manufacturers and wholesalers are moving direct-to-consumer. Regarding softness, we haven’t seen specific concentrations across our customer base, geographies, or verticals. There's a mix of winners and losers across all tiers. About 35% of our pipeline comes from new logos, many outside our typical vertical focus, which is good. We recognize the macro challenges; however, we've seen no particular concentration in any segment.

Joe Vruwink, Analyst

Okay, great. I'll also ask about the cross-sell in a broader context. How do you think this changes your financial model? Will it increase service utilization? Does new cloud revenue activate more quickly? What timeframe do you expect for these shifts to impact your revenue model?

Eddie Capel, CEO

In the last quarter, a little over 35% of our new bookings came from cross-sell, while 25% came from new logos. The balance comes from existing customers. We're seeing a strong mix and feel good about this. Our bookings fluctuate quarter-to-quarter but remain solid overall.

Operator, Operator

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

Matt Pfau, Analyst

Nice results and thanks for taking my questions. When you look at your business, what sort of tie is there to your new build out of warehouse or fulfillment space? As capital costs have increased and some developers have pulled back, does that affect you? Is it more about conversion of existing warehouse space?

Eddie Capel, CEO

It's mostly the conversion and modernization of existing space. I don't have the exact percentage, but it's probably around 10%, maybe even less of our implementations going into new buildings. The majority of what we're doing focuses on modernizing software or retrofitting with additional automation.

Matt Pfau, Analyst

Got it. That's helpful. The number of net new customers or bookings from new customers this quarter is lower than the 35% in the pipeline this quarter. How do you think about the ideal mix for bringing in enough new customers to sustain cross-sell opportunities?

Eddie Capel, CEO

It's essential to observe these numbers annually rather than quarterly. Our target is about a third. If we can reach that with new bookings, it will fuel future cross-sell opportunities significantly.

Dennis Story, CFO

For the past 10-plus years, we've maintained about a 30% to 35% new logo balance in our pipeline.

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 question, and good job on the quarter. Eddie, you mentioned that many of your new customers are coming from verticals outside of your core market. Could you elaborate on those verticals? How are these new customers finding their way to Manhattan?

Eddie Capel, CEO

Industrial manufacturers, life sciences, and high tech are three verticals now bigger for us than they historically were. A lot of this development comes from these companies becoming more direct-to-consumer. Our life sciences and healthcare solutions are particularly adapted to meet this demand, necessitating high levels of sophistication, control, and precision. These companies are shipping high-value goods in smaller quantities, which require advanced solutions.

Mark Schappel, Analyst

On the marketing front, your company is very well known in the warehouse space but less so in order management. Can you provide some insight into your marketing efforts to promote your order management and point-of-sale solutions?

Eddie Capel, CEO

We feel strong about our order management space. Forrester, our main analyst firm, has consistently named us as the only leader in that area. We actively promote our next generation of point-of-sale solutions. We're aiming to establish around a dozen referenceable customers in that space by year-end. Our strategy is to leverage our previous installations, which exist in over 20,000 stores, to propel our point-of-sale implementation.

Blair Abernethy, Analyst

Thanks. Nice quarter, guys. Following on your point-of-sale comments, with 20,000 stores today, how much penetration have you achieved with point-of-sale? What's the opportunity there for Manhattan?

Eddie Capel, CEO

The penetration, while we are very proud of the 20,000 stores, is around 2% to 3%. This figure illustrates the tremendous opportunity we have ahead, and we believe our advances in this area will positively impact our future financial results. Yes, good question. We offer cloud services across the globe. Many of our customers are international or global organizations rolling out services. In EMEA, performance varies by country; the UK is somewhat suppressed. In APAC, Australia and Southeast Asia are doing well, but China has been slower. Nonetheless, we manage these region-specific fluctuations well and achieve solid performance internationally.

Dennis Story, CFO

We're seeing nice growth rates and generating earnings.

Eddie Capel, CEO

Thank you, Rob, and thanks everyone for joining us to review the Q1 results. We feel good about the start we've made to 2023, but we're just getting started. We have big aspirations and are expecting an exciting year ahead. We'll look forward to speaking with you in about 90 days to review the next chapter of the year. Thanks. Bye, bye.

Operator, Operator

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