Manhattan Associates, Inc.
Q3 2008 Earnings Call Transcript

Published: 22 Oct 2008

[Operator:]

Good afternoon. My name is Renita, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates third quarter 2008 earnings conference call. (Operator Instructions). As a reminder, this call is being recorded today, Tuesday, October 21, 2008. I would now like to introduce Mr. Dennis Story, Chief Financial Officer of Manhattan Associates.

[Dennis Story:]

Thank you and good afternoon, everyone. Welcome to Manhattan Associates’ 2008 third quarter earnings call. Before we launch into the results discussion, I will review our cautionary language, and then turn the call over to Pete Sinisgalli, our CEO. During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or 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 those in our forward-looking statements. I refer you to the reports that 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 2007, and the risk factor discussion in that report. We are under no obligation to update these statements. In addition, our comments will cover certain non-GAAP financial measures. These measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by other companies. We believe that this presentation of certain non-GAAP measures facilitates investors’ understanding of our historical operating trends with useful insights into our profitability, exclusive of unusual adjustments. Our Form 8-K filed today with the SEC and available from our website, www.manh.com, contains important disclosures about our use of non-GAAP measures. In addition, our earnings release filed with the Form 8-K reconciles our non-GAAP measures to the most directly comparable GAAP measures. Now I will turn the call over to Pete.

[Peter F. Sinisgalli:]

Welcome to our third quarter earnings call. I will start by reviewing highlights from the quarter. Dennis will then get into details of our financial results. I will follow with additional details about our business and provide a view of the fourth quarter of 2008 and then we will move to questions. Despite entering the third quarter with a strong pipeline, toward the end of the quarter we saw a significant number of deals slip into the fourth quarter and perhaps beyond that, given the global economic crisis and tightened capital markets. As a result, we posted license revenue of $13.8 million, down 20% from the prior Q3. While we are disappointed with this result, the silver lining to this cloud is that our competitive win rate remains quite strong. We expect that as capital markets and the global economy return to healthier levels, our license revenue performance will improve substantially. Overall, Q3 revenue was $82.7 million, down 2% versus last year. We were able to offset the revenue decline by a combination of expense management, tax planning, and a lower share count aided by our share repurchase program, which allowed us to post adjusted earnings per share of $0.34, flat with last year and at the low end of our Q3 guidance range of $0.34 to $0.42. While our Q4 pipeline, which includes opportunities we expected to close in Q3, is very strong, our current market outlook assumes that market pressures similar to those we experienced in Q3 will continue through Q4 and we have prepared for them to continue into 2009 as well. Therefore, the expectations for new software and services revenue that we built into our original 2008 plans are no longer aligned with our current market outlook. Because we staffed our business based on those higher expectations, particularly in areas such as professional services, which must be staffed and trained in advance, we created capacity beyond our current view of market demand. To more appropriately align our staff size with our revised outlook, earlier today we eliminated 150 positions across Manhattan. In doing so we have taken a careful and studied approach to preserve our ability to meet current customer expectations and to protect investments central to our strategic short- and long-term goals. I will provide details about our right-sizing plan and cover our Q4 outlook following Dennis’ remarks. Now, let me turn it back over to Dennis.

[Dennis Story:]

I will cover adjusted financial results first and then summarize our GAAP earnings. We delivered $0.34 in adjusted EPS for the third quarter, which was at the low end of our guidance range and represented flat performance over the prior year quarter. Adjusted net income of $8.4 million in the quarter decreased 10% over Q3 2007 on lower revenues. As Pete mentioned, a significant number of license deals slipped in the quarter. The resulting lower revenues and operating earnings accounted for about $0.05 of EPS decline year-over-year which was offset by $0.05 of EPS benefit gained through a lower overall effective tax rate and a lower share count due to our stock repurchases. Year-to-date adjusted EPS of $1.12 is up 19% over the prior year on adjusted net income of $27.6 million, which is a 6% increase over 2007 year-to-date. Our 19% growth, or 18% increase in EPS, also benefited from share repurchases, a lower overall effective tax rate and FX gains, while operating EPS contribution was break-even year-over-year on flat operating profit. Diluted shares for the quarter were 24.6 million shares, down 9% over Q3 2007 and down 1% sequentially. In the quarter we repurchased 511,404 common shares totaling $12.6 million at an average price of $24.73, thereby completing our $50.0 million buyback program approved in October 2007. Year-to-date we have repurchased about 1.1 million shares at an average price of $23.72. In addition, this month our Board approved a new repurchase authority up to a total of $25.0 million of Manhattan Associates stock. For Q4 2008 we expect diluted shares of approximately 24.5 million and for the full year we expect diluted shares of approximately 24.75 million shares. These estimates depend on a number of variables, such as stock price, obviously, option exercises, forfeitures, and share repurchases that can significantly impact our estimates. The current forecast estimate does not assume any common stock repurchases for the remainder of 2008. Now I will move to revenue and operating results. Total Q3 revenues of $82.7 million decreased 2% compared to last year. Currency did not have a material impact on our Q3 growth rate. Year-to-date total revenues of $261.6 million are up 4% over the comparable period a year ago, with a favorable currency impact of 1%. The Americas segment reported total revenues of $68.0 million, declining 3% over Q3 2007 on lower license revenues and slowing services revenue growth. Year-to-date Americas total revenue of $213.6 million is flat with the prior year. Overall, our international operations continue to post a very solid year, despite a modest Q3 decline of 4% in EMEA revenues overall, stemming from lower license revenues versus a tough comp in 2007. APAC delivered 10% year-over-year growth. On a combined basis our international operations were flat in Q3 with total revenue of $14.8 million versus $14.7 million in Q3 2007. Year-to-date EMEA revenues are up 30% and APAC revenues are up 12% over 2007 and both theaters continue to deliver solid operating profits and margins. License revenues in Q3 were $13.8 million, down 20%, or $3.5 million, compared to $17.3 million in Q3 2007. On a year-to-date basis, license revenue is down 5%. In the Americas Q3 license revenue was $10.8 million, down 25% over Q3 2007. While significant deals pushed from the third to the fourth quarter, we did close four deals with license revenue exceeding $1.0 million each. We are encouraged by the fact that our ratio of license sold to new and to existing customers remains strong at about 60/40 for the year. In EMEA, licensed revenue totaled $1.4 million in Q3, which was down about $900,000 compared to Q3 2007. Our APAC regions delivered its third best license revenue quarter on record, totaling $1.6 million and up about $1.0 million year-over-year. This marks the third consecutive quarter of $1.0+ million in license revenues delivered in APAC showing positive momentum in the region. While we are planning for macro economic challenges to persist, our Q4 2008 deal pipeline is very solid across all geographies, including the Americas. Now transitioning to services revenue, total Q3 services revenue of $60.0 million increased 3% over Q3 2007. Year-to-date services revenue growth is 8% on solid first half growth of 10%, largely driven by our double-digit growth in maintenance revenues. In or Q2 earnings call I noted the following

[Peter F. Sinisgalli:]

While our revenue result for Q3 was disappointing, there were some important highlights. We added new customers, such as Cherry Automobile Company, Crete Carrier Corp., Lennox International, Republic National Distributing Company, [San] Trade, Select Carrier Group, and the Men’s Warehouse. In addition we expanded partnerships with existing customers such as Amerisource Bergen, Anvil Knitwear, Belk, David’s Bridal, DHL, Estes Express, Giant Eagle, Gold Toe, HoMedics, Jones Apparel, LeSaint Logistics, Natasha, Olympus America, Osborne Hennessey Logistics, Ralph Lauren, The Apparel Group, and Walgreens. As Dennis mentioned, we had four $1.0+ million deals close in the quarter. All four were with new customers and all were in the Americas. All included our Warehouse Management Solution for open systems, plus one included Transportation Management and Extended Enterprise Management. The retail, consumer goods, and logistic server provider verticals were once again strong contributors to our license fees, and together these sectors represented more than half of license revenue in the quarter. About 60% of the quarter’s license revenue was from new customers and about 40% from existing customers. About one half of the quarter’s license revenue was for Warehouse Management Solutions and the other half for our other Supply Chain Solutions. Importantly, our Q4 active pipeline is quite large. I am confident our sales teams are doing all possible to help customers complete deals, but I’m not sure how much of the pipeline will close during the quarter. In any case, the potential is tremendous. And with our strong competitive win rate, when this pipeline of activity does close, we should post impressive results. In the last two weeks we hosted customer conferences in the United Kingdom, France, and Holland. All three were well attended and it was very clear that customer satisfaction with Manhattan Associates is quite good in each market. We will be hosting similar meetings in the next few weeks in Japan, China, and Australia, and anticipate similar results. While the global economy is quite difficult, we have performed reasonably well outside of the United States and are optimistic this will continue. The U.S. still represents about 75% of our total revenue, but our international markets continue to grow in importance. During Q3 we delivered two important product releases. Both of the new releases were on our Supply Chain Process Platform and fully leverage our go-forward technology strategy. We introduced Extended Enterprise Management and Total Cost To Serve as Scope products this quarter. Extended Enterprise Management is the next generation of Trading Partner Management. This solution included functionality for supply chain visibility, supply management, supplier enablement, and customer collaboration, all leveraging the common business objects and web services capability of our Supply Chain Process Platform. The second release was Total Cost To Serve, which is an entirely new product from Manhattan. It is a Scope platform application that provides supply chain executives with detailed cost data from the time a product is ordered until the time it is delivered to a customer or a retail store shelf. This enables companies to assess product, customer, and channel profitability to make better sourcing, routing, and fulfillment decisions. We are quite enthusiastic about the potential for this new solution to significantly extend our value proposition to customers. And we’re quite excited about adding two new solutions to our Scope Suite. We are making solid progress on our product and technology roadmaps and believe we are creating very real differentiation from all other supply chain solution providers with our investments in research and development. We continue to expand our market share and extend our lead in supply chain solutions markets and we look forward to the time when our markets return to normal buying patterns. But we’re also realistic and recognize the need to adjust our plans to today’s realities. As I mentioned in my opening comments, earlier today we eliminated about 150 people from Manhattan Associates. All were existing employees and not open positions. All but about a dozen were in the United States. More than half of the eliminated positions were in our professional services organization. We had staffed our professional services teams for a higher level of demand and so that this action has right-sized our organization to match our current forecast. The other cuts were spread over our remaining functions. The one-time cost of the reduction is about $7.0 million and includes employee benefits, outplacement services, and some other costs. The savings will amount to about $14.0 million annually on about two times the cost for a six-month payback. I believe that after these reductions we retained the appropriate staff to meet all customer needs from our professional services organization. Moreover, while some cuts were made to research and development, we have the capacity to deliver on our strategic product and technology goals. We did eliminate eight quota-carrying sales reps from our global sales team, with seven of the eight in the United States. In the current environment we expect the remaining teams to be fully capable of delivering on the market potential. We anticipate adding sales talent at a future date once the market shows signs of growth. At the end of September we had about 2,300 employees around the world with 70 quota-carrying sales reps. With this action we now have about 2, 150 employees and 62 sales reps. We are quite confident about our company’s ability to deliver strong financial results once the market regains confidence. However, we don’t expect that to happen in Q4. We anticipate market conditions in Q4 to be similar to the difficult conditions of Q3. As a result, we are lowering our annual EPS guidance for the full year. Our previous guidance called for adjusted EPS of $1.54 to $1.60. We are lowering that to a range of $1.36 to $1.46. Our 2007 adjusted EPS result was $1.30 so the new guidance range represents growth of between 5% and 12%. The revised annual guidance translates into Q4 adjusted EPS of between $0.24 and $0.34 per share. Included in our Q4 guidance is about $0.04 of benefit from two months of savings from our right-sizing program. Our Q4 2007 adjusted EPS was $0.37 so our guidance range represents a decline of 35% to 8% for the quarter. So to summarize, we were disappointed with the number of software deals that did not close in Q3 and now expect a similarly difficult environment in Q4. We believe we have taken appropriate actions to rebalance our capacity for the new outlook. At the same time we have retained sufficient capacity to meet customer demand and continue to make the important investments that will enable us to continue to beat the competition. We remain very confident in our long-term future. We will now take question.

[Operator:]

(Operator Instructions) Your first question comes from Michael Huang – ThinkPanmure.

[Michael Huang:]

Of the four large deals that you closed, were these ones that had pushed out of Q2 and how did the size and the number of large deals fare versus your expectations?

[Peter F. Sinisgalli:]

Of the four deals that did close, $1.0+ million, in Q3, one was a deal that we thought we might close in Q2. The other three were deals that were slated for Q3 closure. The number of deals is comparable to the number that we have closed in previous quarters. We generally close somewhere between three and five or six $1.0+ million deals per quarter. The number was comparable in this quarter as it has been to past quarters.

[Michael Huang:]

And would you say that going into Q3 you thought you would be doing more or did you think that these large deals might be bigger?

[Peter F. Sinisgalli:]

Yes, a combination of both. Frankly. Going into the quarter we had a substantial pipeline which had multiple million dollar deals and several deals greater than the number we would normally have in the pipeline going into the quarter. So we felt quite bullish going into the quarter that the pipeline was substantial and we would have impressive results. And we felt pretty good about the quarter until the early part of September, latter part of September, when it became clear that it was going to be difficult for our customers to be able to pull the trigger on business they wished to do.

[Michael Huang:]

And in terms of the type of deal that was pushed out, is there anything you can add to help us understand whether it was tied to a particular vertical or whether it was tied to a new customer versus existing or any particular product area?

[Peter F. Sinisgalli:]

It was more or less across the board. I will tell the one area that we didn’t see much a delay in deal closure was with logistic server providers. Those customers tend to have a more time line for meeting their end customers’ expectations so they tend to close more in line with their original goals and objectives to meet the end customers’ expectations. But other than that, in the retail vertical, consumer goods vertical, in each of the vertical markets in which we serve, deals did get delayed. Also true across the product portfolio. In the quarter we had our typical 50/50 deals close, warehouse management, non-warehouse management, and basically the type of deals that closed also reflect that basic 50/50 kind of perspective. For the most part, as I said, we felt pretty good about the quarter, certainly in July when we spoke with you. And as late as the latter part of August. As we moved into September, some of the credit markets seemed to tighten up, there was more confusion in the market and more than a few customers started to express concerns about their ability to get business closed in the quarter. We continued to work with them to try to provide compelling reasons for them to move forward as quickly as possible but the last week of September didn’t provide the opportunity to actually close much of that business.

[Michael Huang:]

So with respect to Q4 guidance and some assumptions around product performance, it’s probably fair to say that you are being pretty conservative with respect to assumptions. If there were a product area that could outperform your assumptions, could you talk about which product area you think probably fares better, through the end of the year?

[Peter F. Sinisgalli:]

We would love, in hindsight, come January to mention that our guidance for Q4 for license revenue was quite conservative. As I mentioned, we do have a very strong pipeline going into the quarter, but we were also optimistic going into Q3. We are assuming at the moment that our close rates in Q4 will be comparable to our close rates in Q3. As I mentioned, we are expecting the difficulties of Q3 to carry through the fourth quarter, so we’re expecting a close rate well below our historic close rates. Having said that, the pipeline does have active deals across all the product areas, warehouse management, transportation management, order management, extended enterprise management. We have a very nice pipeline and think we could see substantial deal activity in all of those areas. But probably, like everyone else at the moment, coming out of Q3 with the amount of deal slippage we are not quite sure exactly what in the active Q4 pipeline will actually close.

[Operator:]

Your next question comes from Mark Schappel - The Benchmark Company.

[Mark Schappel:]

You mentioned you had a favorable assessment of your pipeline going forward despite the deals not closing. How does the large-deal pipeline look with respect to the broader pipeline?

[Peter F. Sinisgalli:]

The large-deal pipeline is quite attractive. It’s quite large. The overall pipeline is quite large as well but we do have many $1.0+ million opportunities in the pipeline. We continue to be optimistic about those deals choosing Manhattan ultimately. Not sure of the number that will choose us in Q4 but ultimately we believe we are well positioned in the vast majority of the deals we are working and so we are quite optimistic about those headed in our direction. Again, timing is a critical issue for us, but the large-deal pipeline activity is quite good. One of the things that gives us some optimism is the deals that are in our pipeline are active, meaning that customers are investing time and resources to evaluate their go-forward strategies, so it’s not as if people are doing a fly-by or just kicking some tires. We have got very good activity, our sales teams around the world are quite engaged and we believe we are making very good progress in convincing customers and prospects that we are the right choice for their supply chain solutions. So we continue to be guardedly optimistic about the long-term selection of Manhattan in those deals. It’s a question of when in most cases, not if.

[Mark Schappel:]

Do you have any sales initiatives or sales efforts underway to try to break those deals out? To make it easier for them to close?

[Peter F. Sinisgalli:]

I’m not sure what you mean by that, by break those deals out. We certainly are working very closely with our customers, working hard to make sure that we help them quantify their near-term return on investment from solutions like ours that lead to meaningful cost savings, working with them to make sure they understand the benefits to customer satisfaction. We are getting the right product at the right place at the right time to help Q4 and 2009 sales activities. So our sales teams, with the support of our marketing teams, are quite active and aggressive trying to help our customers finalize those decisions and put ink to paper. So I’m not sure there’s a lot more we can do. I think our teams are quite good at this and in normal environments I think we would be posting impressive results, but in this environment I think it’s a little more challenging.

[Mark Schappel:]

Do you see any indication that customers might be just waiting and seeing how the JDAIQ acquisition plays out before they decide to pull the trigger? Any indication there?

[Peter F. Sinisgalli:]

Actually we don’t. We really don’t compete with JDA very much. We do in some of our newer products, supply chain planning area, which includes our demand forecasting, inventory optimization and planning applications. But I the vast majority of our revenue comes from our supply execution solutions, warehouse management, labor management, slotting, extended enterprise management, visibility tools, and so forth so we don’t compete with them very often so I don’t think there’s many folks in our pipeline that are waiting to see what becomes of that pending transaction.

[Operator:]

There are no further questions.

[Peter F. Sinisgalli:]

Thank you all for attending our third quarter conference call. We look forward to updating you all in 90 days.

[Operator:]

This concludes today’s conference call.