Manhattan Associates, Inc.
Q1 2019 Earnings Call Transcript

Published: 24 Apr 2019

[Operator:]

Good afternoon. My name is Deadra, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Q1 2019 earnings call. [Operator Instructions]. As a reminder, ladies and gentlemen, this call is being recorded today, April 23, 2019. I would now like to introduce Eddie Capel, CEO; and Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

[Dennis Story:]

Thank you, Deadra, and good afternoon, everyone. Welcome to Manhattan Associates' 2019 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' 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 2018 and the Risk Factor discussion in that report. 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'll turn the call over to Eddie.

[Eddie Capel:]

Well, good afternoon, everyone, and thank you for joining us to review Manhattan Associates' 2019 first quarter results. We delivered record Q1 total revenue of $148 million. That's applying ASC 606 retrospectively and $0.41 of adjusted EPS. Q1 2019 revenue grew 14% and that's versus a fairly weak 2018 comp and EPS was up 11% over 2018. License, cloud and services revenue results all exceeded Q1 revenue targets on strong demand for our products and services. Sequentially, Q1 2019 total revenue grew about 3% over Q4 2018 as services revenue growth continue to strengthen on strong demand from new license and cloud sales. Our operating margin exceeded expectations modestly on our revenue performance and continued focus on investment in the business to deliver long-term growth objectives. Despite appropriate cautions regarding the global macro volatility, we're bullish on our outlook for 2019, and we're raising our 2019 full year total revenue and earnings per share guidance whilst maintaining our operating margin. We're still early in our transition to cloud with aggressive transformative goals and investments earmarked for driving our customers success and in turn, our long-term future growth and earnings. We continue to be very encouraged by our progress on our cloud transition and so far a positive business momentum highlighted specifically by the following 4 growth areas

[Dennis Story:]

Thanks, Eddie. As Eddie mentioned, we reported Q1 total revenue of $148 million, up 14% versus Q1 of 2018. Excluding FX, total revenue was up 15.5%. Adjusted earnings per share was $0.41, up 11% over Q1 2018. Our EPS performance includes a $0.02 benefit from an annual R&D payroll tax credit we had forecast to receive in Q2 of this year. Our GAAP earnings per share was $0.32 in the quarter compared to $0.33 in Q1 2018 with stock-based compensation accounting for the difference between adjusted EPS and GAAP. License revenue was $12.4 million, exceeding the $9 million target discussed in our Q4 call. For Q2 2019, we are targeting $9 million in license revenue recognized. And for full year 2019, our estimate of $36 million to $40 million remains unchanged with license gross margin to be about 89%. Q1 cloud revenue was a $7.9 million, up 76% over Q1 2018. For Q2 2019, we are estimating our recognizable cloud revenue to be about $8.7 million, up about 62% over prior year. For full year 2019, we are still targeting a cloud revenue recognized range of $36 million to $40 million, representing 56% to 73% growth over 2018. Our 2019 full year estimate for total combined license and cloud revenue recognized remains at $76 million, up 11% over 2018. As a reminder, remaining performance obligation or RPO is the U.S. GAAP disclosure requirement. Our RPO disclosure is the leading proxy for our cloud bookings 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 $101 million, up 196% over prior year and 30 -- up 31% sequentially over Q4 2018. For Manhattan, this disclosed value represents our cloud bookings value of unearned revenue under noncancelable contracts greater than 1 year. Contracts with a noncancelable term of 1 year or less are excluded from our reported amount. One last point on license and cloud. Our performance continues to depend on the number and relative value of large deals we close in any quarter. While large deals remain important, we expect the mix to continue to shift towards subscription models in 2019 and beyond. While this is a positive, deal sizes maybe a bit smaller as subscription revenue recognized over time and product components are also easier to add over time in contrast to one-and-done enterprise deals. We also retain some caution around slow decision-making by some clients and prospects, particularly retailers and potential global macro and geopolitical events that could impact business investment cycles. Turning to maintenance. Revenue for the quarter totaled $36 million, essentially flat versus Q1 and Q4 2018 comps. Our strong retention rates continue at greater than 95-plus percent and for 2019, we are estimating maintenance revenue to be about $145 million to $146 million, down about 1% over 2018 impacted by our cloud transition. We estimate Q2 2019 maintenance to be about $36 million. Overall, our maintenance results will be influenced by perpetual license deals closed during the year, existing customer conversions to cloud, retention rates and timing of cash collection. For services, consulting revenue for the quarter totaled $88.6 million, up 13% over Q1 2018 on improving global demand. We're targeting Q2 revenue growth of 7% to 8% over prior year with a midpoint target of $88.5 million. We expect second half 2019 year-over-year growth comps to be tighter, reflecting improving America's demand exiting 2018. With services demand and pipeline increasing, we are raising our full year growth estimate to 5.5% to 8% over prior year with a midpoint value of about $352 million. Our prior growth estimate was flat to 3%. Our consolidated subscription, maintenance and services margin for the quarter was 51.4%, driven by increased head count investment in cloud and consulting services. For 2019, we expect Q2 subscription maintenance and services margin to be about 51.5% and full year margin to be about 52.4%. Our 2019 services gross margin reflects our investment in cloud operations, performance-based compensation and increased capacity to meet demand. Turning to operating income and margin, our Q1 operating income totaled $35.6 million with an operating margin of 24%. For full year 2019, we are targeting operating income in the range of $122 million to $126 million, up from our previous estimate of $118 million to $122 million. Our operating margin should be in the 21% to 21.2% range with operating income of nearly $124 million at the midpoint. For Q2 2019, we are estimating operating income of $28.6 million to $31 million with a $29.7 million midpoint and operating margin of 20% to 21% with a midpoint of 20.5%, two-zero-point-five percent. Our margin forecast is driven by our continued focus on making growth investments across our business and people, IT and facilities, including R&D, sales and marketing, cloud ops, consulting services and performance-based compensation. So that covers the operating results. Our Q1 adjusted effective income tax rate was 24.5%, and we're estimating a 24.5% effective tax rate for both Q2 and 2019 full year. Regarding our capital structure, we invested $25 million in Q1 2019 share buybacks. Last week, our Board approved replenishing our repurchase authority limit to a total of $50 million. We are estimating about 65.5 million diluted shares full year and about 65.4 million per quarter, which assumes no buyback activity. Turning to cash. We closed the quarter with cash and investments totaling $105 million and 0 debt. Our current deferred revenue balance totaled $94 million, up 15% over Q4 2018, driven primarily by increased maintenance and cloud billings. For the quarter, cash flow from operations totaled $35 million, down from prior year on 2018 annual bonus payout and cash income taxes paid in this past quarter Q1 2019. Capital expenditures for the quarter totaled $600,000 and for 2019, with the assumption of incremental facilities investments in both India and the U.S., we estimate capital expenditures to be approximately $15 million. So I'll wrap up with our updated 2019 guidance, and then I'll turn it back to Eddie for his closing remarks. We will continue to provide annual guidance on total revenue, operating margin and earnings per share. As we've previously stated, the more short-term success we have with subscription adoption, the weaker our near term reported income statement results will be, effectively masking a significant level of underlying value creation. For revenue, we are raising our 2019 total revenue guidance from our previous range of $564 million to $576 million to $582 million to $592 million targeting 2019 revenue growth of 4% to 6% over prior year with a midpoint estimate of $587 million. Our previous guidance pegged year-over-year growth at 0% to 3%. For EPS, we're raising our adjusted EPS range to $1.42 to $1.46 with a midpoint estimate of $1.44. Our previous range was $1.38 to $1.42 and our GAAP EPS guidance is $1.05 to $1.09. For operating margin, we are targeting a full year margin range of 21% to 21.2% and a GAAP operating margin range of 15.6% to 15.8%. Our margin objectives reflect our business transition to cloud, continuing to ramp in 2019, including related incremental growth investments with the objective of driving long-term sustainable growth and earnings leverage. Lastly, as we mentioned in our Q4 call, we will update our long-term aspirations at the end of the year based on our 2019 performance. That covers the financial update. Thank you. And back to Eddie.

[Eddie Capel:]

Okay. Thanks, Dennis. So in summary, we're pleased with the quarter and our progress on our cloud transition. Our underlying business fundamentals is solid and we remain focused on extending our market-leading position in supply chain, inventory and omnichannel commerce solutions. Our success continues to be driven by delivering innovation that anticipates the needs of an evolving market, focusing on our customers success and leveraging our deep domain expertise. We're off to a solid start in 2019, and we remain confident in the significant and expanded business opportunity in our core markets driven by the ongoing retail evolution that is also driving the need for supply chain modernization. Our competitive position is strong and we continue to invest in innovation to extend our addressable market as well as the market leadership and our differentiation, and customer feedback and win rates continue to validate our investment strategy. As always, we remain focused on our customers success and on driving sustainable, long-term growth for our shareholders. With the world's most talented supply chain commerce employees, the best software solutions and market dynamics that require customer investment in supply chain innovation, we do believe that we're very well positioned. So with that, Deadra, we'd be happy to take any questions.

[Operator:]

[Operator Instructions]. And our first question comes from Terry Tillman with SunTrust Robinson.

[Terrell Tillman:]

Can you hear me okay?

[Eddie Capel:]

We can, Terry. A little muffled, but we can hear you just fine.

[Terrell Tillman:]

Okay. All right. Well -- and nice job in the quarter. The first question, Eddie, just relates to, I think, you all talked about 50% of the cloud business is related to Active Omni in that platform. I historically thought of that mostly as just your OMS business and traction there, it feels like you're talking more about point-of-sale in front of the store type technology and success in closing business. What I'm curious about is, what if anything was an inflection point there? Was it some additional capabilities in your products at the front of the store or is it just an upgrade cycle that's occurring now versus in the prior year, too? Maybe just a little bit more color on some of the diversifying of Active Omni success.

[Eddie Capel:]

Yes. I wouldn't call it diversifying, Terry. I mean it is a suite of solutions. At the core of that suite is the order management solutions, but no question that we are seeing advanced or enhanced, I should say, traction in the front of the store with store inventory in fulfillment, store inventory management and we are beginning to see traction with point-of-sale. Obviously, we've been talking about this for several quarters now, but fortunately, we had a very first point-of-sale customer go live recently, so that was -- it's been very helpful. Now we've closed another couple of point-of-sale deals early in the year here. I mean, these are all for pretty large footprint stores frankly, so we're -- and large store counts. So we're pleased with the progress there, but it's still all anchored around the omni suite of solutions.

[Terrell Tillman:]

Okay. And maybe, Eddie, just a -- maybe a report card on how you are doing in terms of sales execution and selling cloud products. Maybe a report card in terms of, do you have all the sales resources? Do you need more of a newer breed of a salesperson or is it existing salespeople are just getting them to kind of talk a different language and cloud solutions? Just maybe an update on just where do you think you are in terms of the report card on sales activity?

[Eddie Capel:]

Yes. I think the activity is -- first of all, activity is very good, Terry. Our ability to execute -- win rates is still strong. I think the team is doing a terrific job along, frankly, with the sales team along with the rest of the company transitioning to the cloud. We are actively looking for additional sales team members mostly in the domain areas in which we are newest, so front of store and so forth. But frankly, I would give very high marks to our sales organization as we transition to the cloud. I think not only we got great win rates, but we're getting the appropriate value for our solutions as well.

[Terrell Tillman:]

Okay. And maybe just a final question, I'll turn it over. Dennis, as it relates to RPO, that sequential change was significant it rivaled 2Q '18. What I'm curious is, can you give us an update on -- did anything change on contract duration in terms of some of the new business on the cloud side or was that relatively constant with prior quarters?

[Dennis Story:]

Relatively constant with prior quarters, Terry. But very good volume in the quarter for sure.

[Operator:]

And your next question comes from Brian Peterson with Raymond James.

[Brian Peterson:]

Congrats on the quarter. So wanted to hit on the services upside this quarter, it was obviously a lot better than we had modeled. I'm curious how much of that is coming from newer or more recent wins versus maybe some of the projects a few years ago, that had been delayed and are now coming back into the pool?

[Eddie Capel:]

Yes, good balance. Good balance, Brian, frankly. So great services attach rate for the new cloud and license sales. Projects getting kicked off swiftly. So that's certainly helping, and I do think also we are seeing a little bit of rebound, if we would want to call it that, a little rebound from some of the sluggishness that we saw in 2017. So a little bit of both, but as I say -- I would say that the new cloud and license sales are fueling the bulk of that.

[Brian Peterson:]

Yes. Maybe just one follow-up on the point-of-sale business. So how should we think about that in terms of maybe upsell versus kind of the core order management for Active Omni in to these deployments, are they a little bit more staggered versus Active Omni? And should we think about these as kind of update 1 quarter rollout? Or should it be made multiyear, how should we think about that?

[Eddie Capel:]

Yes. Well, so two pieces of that, Brian. One is, we're just getting started. We think there's really terrific upside for that business as retail continues to evolve. So a fantastic upside over the next several years as we continue to acquire customers, the market continues to transform #1. And -- but the synergy is really between, for us, is between OMS and point-of-sale. I think being able to get a single view of the customer across all channels, getting a single view of inventory across the entire network that permeates through from order management into all of those customer-facing tools, frankly, whether they be point-of-sale, call center. All customer engagement is a real strategic differentiator for us and for our customers. So we're off to a great start, but it is going to take some time for this flywheel to really pick up momentum.

[Operator:]

And your next question comes from Matt Pfau with William Blair.

[Matthew Pfau:]

I wanted to follow up on the point of sales. Well, so can you just give us an idea of how we should think about the size of point-of-sale deal, maybe compared to get WMS or, I guess, another way to think about it would be if you're selling another product to a WMS customer, would point-of-sale be the -- typically the most incremental product in terms of total deal size relative to the other products you could potentially crossover?

[Eddie Capel:]

Yes, I think it's a little early to tell and a little early to be talking about average deal sizes specifically for a point-of-sale and so forth, Matt. But when we think about the total addressable market, right, now and that includes kind all of the systems that are in the retail store because remember retail store specific transactional base point-of-sale has been at the center of the retail store for the last 125 years. As stores transition from being single function facilities that to being multi-function facilities, we believe it calls for a new system, and those -- and that's the suite of solutions that we are offering to front of store. With that said, we believe that being able to offer that frontal store suite of solutions, approximately doubles our total addressable market from somewhere in the range of $8 billion a year to somewhere in the range of $16 billion a year. So it's a market worth going after. It is still evolving, but candidly a little too early to be talking about ASPs specifically for that model.

[Matthew Pfau:]

Got it. And then with the customers that you've signed so far, maybe you can just talk about what drove them to reevaluate their point-of-sale solution and then is there anything out there that could potentially, I guess, accelerate or increase the number of deals that potentially come up for a bit over the next several years for you guys?

[Eddie Capel:]

Yes, I don't know the last question for us, I don't know other than continuing to invest in innovation and bringing new capability to market. I don't know that we can really create an opportunity to really accelerate other than the market transition. Clearly, as we get referenceable customers and we're able being -- we're able to deliver value for them, I think, that certainly can increase the rotational gravitational pull of the flywheel. But it's the -- in answer to your question around what sort of driving -- what's driving the decision and so forth? Frankly, our customers are buying into our consolidated suite of solutions. So it's not about just replacing current PMS -- POS with kind of new POS, it's reinventing that selling platform strategy and having OMS aligned with call center, customer engagement and the next generation of multi-channel point-of-sale.

[Operator:]

[Operator Instructions].

[Eddie Capel:]

All right, Deadra. It seems like we have a wrap with no more questions. So with that, I'd just thank everybody for joining us on our Q1 call. We're excited about the future and we'll be looking forward to sharing the results of Q2 in about three months or so. Good afternoon.

[Operator:]

This does conclude today's conference call. Thank you for your participation. You may now disconnect.