Manhattan Associates, Inc.
Q1 2010 Earnings Call Transcript

Published: 21 Apr 2010

[Operator:]

Good afternoon. My name is Chrissie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. (Operator instructions) As a reminder, ladies and gentlemen, this call is being recorded, today, Tuesday, April 20, 2010. I will now like to introduce Dennis Story, Chief Financial Officer of Manhattan Associates. Mr. Story, you may begin your conference.

[Dennis Story:]

Thank you, Chrissie; and good afternoon, everyone. Welcome to Manhattan Associates 2010 first quarter earnings call. 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 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 2009 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 insight 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 disclosure 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.

[Pete Sinisgalli:]

Thanks, Dennis. I will start the call with an overview of our performance in the first quarter, Dennis will follow with details of our financial results, and I will return to cover operating activities for the quarter and then we will be happy to answer your questions. Both Dennis' and my prepared comments will be a bit shorter for this call than we have shared with you during recent calls. With the global economy continuing to stabilize, there are fewer issues for us to share with you, and thus, our comments shorter. We are off to a good start to 2010. In Q1, we posted the best first quarter EPS results in the company's history. We achieved solid revenue growth across all key areas. In particular, we were pleased to see a meaningful uptick in our professional services revenue, as customers stepped up their investments in supply chain improvements. The combination of strong revenue growth and effective expense management led to a very good financial start to 2010. In Dennis' remarks, he will cover the details, as I believe we have performed well across essentially all financial metrics. From my perspective, the fact that we continue to advance our competitive position in Q1 is more meaningful than our strong financial results for the quarter. Our deal win rate continued strong, as supply chain and corporate executives had a very favorable recession to the value of our full suite of solutions on our supply chain process platform. During the quarter, we recognized four deals of $1 million or more in license revenue. I believe these wins reflect the strength of our strategic market position. Here is a high-level snapshot of the deals. One was with a new customer, while three were existing customers. They were spread one each in the United States, Canada, Mexico, and Asia Pacific. Let me provide a little more color on two of the deals to demonstrate my point about our strategic position. The deal with the new customer was for our distribution management, transportation management, order life cycle management, and extended enterprise management solutions. During the sales campaign, it became clear to this customer that no other vendor could meet their broad supply chain needs with a strong return on investment and an attractive total cost of ownership. The other deal I would like to cover was with an existing customer, who implemented our warehouse management for open systems solutions several years ago. Since then, they have become quite interested in further improving their supply chain performance by accelerating inventory turns. To accomplish this, they want to improve how they allocate inventory and collaborate with the suppliers. This led them to purchase our order life cycle management and extended enterprise management solutions. Moreover, this client was quite enamored with our technology direction and our supply chain process platform approach. And so, as part of the same initiative, this customer is upgrading to our 2010 platform warehouse management solution to gain even greater efficiencies and effectiveness as they deploy our other platform-based solutions. I think these types of decisions will increase as clients review their upgrade strategies and come to fully understand a way if they can take advantage of our suite of supply chain solutions on a common business process platform. I believe these two large multi-solution wins as well as the others reinforce our strong market position. I will provide more details about our operating performance following Dennis' comments. Dennis?

[Dennis Story:]

Thanks, Pete. After weathering 2009, it is certainly more pleasant to kick off 2010 with a solid quarter, delivering record earnings per share performance, with revenue growth as the catalyst. While our results over the past several quarters seemed to be a clear signal of improving demand, we and our customers still remain cautious about the global macroeconomic environment. Strong license and services revenue performance drove Q1 adjusted EPS of $0.36, a 5x or 400% gain off of an easy comp of $0.07 in the first quarter of 2009. Our $0.36 performance does include $0.05 or nearly $2 million of deferred services revenue associated with a customer commitment to develop and deliver a new module for an existing installed product. The revenue was budgeted for Q1 2010, but the services were performed in Q4 2009. Q1 adjusted net income of $8.1 million increased 370% or 5x over Q1 2009 net income of $1.7 million. Other first quarter highlights are

[Pete Sinisgalli:]

Thanks, Dennis. In the first quarter, more than half of license revenue was from new clients. That compares to Q1 of last year during the deepest part of the recession, when only about 20% of license revenue was from new clients. We view this as another sign the economy is continuing to stabilize and customers and prospects are beginning to invest more in improving their supply chains. A little more than half of license revenue was from our non-Warehouse Management Solutions and a little less than half from WMS. The retail vertical market made a strong contribution to our license fees this quarter. Retail, along with consumer goods and third party logistics once again accounted for more than half of license fees. During the quarter, we took about 60 client sites live on our solutions. In addition, several customers began implementing our Warehouse Management Solution on our Supply Chain Process Platform during the quarter and we expect our first go-live with that solution in the second quarter. We're quite pleased with how these deployments are progressing. At the end of Q1, we had about 1,800 employees which is a modest decrease since the end of 2009 and down about 250 employees from a year ago. We had 60 sales reps at the end of the quarter, up six from Q4 with five of the six additions in the Americas. Next month, we'll host our annual customer conference which we call Momentum 2010 at the Westin Diplomat Hotel in Hollywood, Florida. The conference theme is Platform Thinking and the content is all about the advantages created by having our complete suite of solutions and a common business process platform. We'll be showcasing numerous ways customers can leverage Manhattan's Platform approach to lower total cost of ownership and extend market advantage. Much of the material will be presented by our customers and registrations are up nicely compared to last year. We're looking forward to sharing time and a little fun with our global customers. So that wraps up our comments about Q1. We're pleased with the beginning of the year and look forward to a solid back three quarters of 2010. Operator, we'll now take questions.

[Operator:]

(Operator instructions) And your first question comes from Terry Tillman from Raymond James. Your line is now open.

[Terry Tillman:]

Good afternoon guys. Nice job on the quarter.

[Pete Sinisgalli:]

Thanks, Terry.

[Terry Tillman:]

First question, Pete, just relates to -- for the financial community, as we look into 2010, aside from maybe just pent-up demand playing out, what kind of financial benefits do we see potentially from the Process Platform? I know you said there will be a go-live in Q2 so maybe you'll give us an update in Q2, but could this start to drive more quicker attach rate of some of these non-WMS products or do you not even think we should expect license benefits from it this year?

[Pete Sinisgalli:]

It's a great question, Terry. The initial response in the customers we presented our suite approach, our platform approach, to the feedback has been quite good, as I mentioned in my prepared remarks. In a couple of cases, we think it was a material benefit to closing large deals in the quarter. We would expect it to continue to have a positive impact on closing large deals over the balance of 2010, but the actual difference or differential between this year and other years is hard to calibrate in this environment. But we certainly feel very good about the initial feedback, the response to the solutions that we've presented to customers and prospects so far and certainly believe over the next several quarters and several years it will have a meaningful positive impact in our win rate and our ability to close larger deals, but hard to tell for the last three quarters of 2010.

[Terry Tillman:]

Okay. And what about the tone of business in the quarter, I mean? Does it feel like even if we're still at reduced levels that there's more normalcy in terms of how the quarters are playing out. Also I'm kind of curious, did you actually see some pent-up demand like right out of the gate in terms of maybe the beaten down retail vertical?

[Pete Sinisgalli:]

Yeah. It's a great question, Terry. There was continuous, we came out of the second half of 2009 in okay shape. And came into the beginning of 2010 in similar condition, where there is certainly some level of pent-up demand activity that we might have expected at normal times to take place in the second half of 2008 and throughout 2009 that customers can't neglect supply chain improvements for too longer period of time. So I believe we're starting to see some of that pent-up demand come back into the close rates within the quarter. I don't know that we're back to any normal level of activity yet. Our pipelines look solid so we're optimistic about that. The activity level is solid, was solid in Q1. And we're off to a pretty good start in Q2 and we're optimistic about that, but I'm not quite sure how to define normalcy at the moment.

[Terry Tillman:]

Okay. And just maybe the last question just relates to -- you guys gave a fair amount of color actually on the rest of the year for us to work on our models. But I guess thinking out loud and I don't want to get ahead of myself, but let's say actually the improvement actually continues and what if you were to get outside of the range on a positive basis than actually see some quarters that were like before the downturn, like in late 2007 or still early 2008 where $15 million to $20 million a license in a quarter, I mean. When do we see potentially a real need to step up the services investment or do you still actually have quite a bit of productivity gains to be had out of the staff you have?

[Pete Sinisgalli:]

Yeah. Terry, as you may recall when we had our call last -- mid-part of last year, we talked about retaining some capacity for extended increased demand and frankly we've used that up. We've talked about having between 75 and 100 excess capacity last summer. With a nice uptake in services in Q1, we've used up that capacity. And as Dennis mentioned in his comments, we're actively recruiting for additional services people. We're quite pleased about that development and look forward to adding appropriately over the next couple of quarters. During Q2, we're likely to add a couple of dozen folks. We're back on campuses looking for the best and brightest engineering grads and I believe there is building demand to absorb that capacity. The exact timing of which is a little hard to predict, but as Dennis mentioned in his comments, sequentially our services revenue up over Q4 was about $10 million increase. So certainly not seeing that kind of increase going forward from here, but we believe there's adequate demand to keep our teams busy and add to those teams in different geographies around the world.

[Terry Tillman:]

Okay. Thanks, guys.

[Pete Sinisgalli:]

Thanks, Terry.

[Operator:]

Your next question comes from Michael Huang from ThinkEquity. Your line is now open.

[Michael Huang:]

Thanks very much. Hey guys. Just a few questions for you, the first of all, in terms of the Momentum Conference, I know you had talked about how tenants trending better. Could you help quantify that year-on-year and is that both for customers and in prospects, as well?

[Pete Sinisgalli:]

Yeah. I would be happy to, Michael. We'll give you a directional comment. As you probably know, most conferences are up in 2010 versus 2009. The economy is a little bit better, people are a little bit more enthusiastic and I think businesses are sending people to conferences to look for real steps they can take to improve their business, so making decisions on investments and so forth. At the moment, we would expect our conference of tenants to be up somewhere in the 20%, maybe as high as 25%, higher than last year and that's for customers and prospects.

[Michael Huang:]

Great. And then in terms of the size of the pipeline and what you saw in Q1 and I know and I appreciate the relative cost this year. But is there a chance that we could see a significant sequential improvement in license performance in Q2, even though you are not guiding for it, just based on historical Q2 seasonality?

[Pete Sinisgalli:]

Well, Q2 is normally a pretty good license revenue quarter for us, better than Q1 and Q3. And usually in line with Q4, but I would suspect that it would not be materially better than the Q1 performance. Could be marginally better, hard to know, there's two-plus months left in the quarter. We've got a nice pipeline and we're optimistic that in time that pipeline will close in Manhattan's favor, but it's difficult to predict exact timing. So I think as Dennis shared with you, using something like the Q1 achievement is probably a good place to start. We would be thrilled if the market rebound is stronger than that, but we're going to take it a quarter at a time.

[Michael Huang:]

Great. And then the final question. With respect to the service work that you're seeing and doing, is it a lot of upgrade work that you're doing? Is it a lot of strategic work that proceeds license spending or is it a lot of deployment work? Could you help us understand just some of the components within services that you're seeing now that you weren't seeing a couple quarters ago?

[Pete Sinisgalli:]

Yes. Similar to our comments a couple quarters ago, what we noticed happening when the recession was in its fiercest moments, people stopped upgrades, stopped rollouts and stopped some of the enhancement work that they normally ask us to do. And we saw that begin to improve in, as Dennis said, the February timeframe. Similar to my comment about our conference, I think also if you check with other professional services firms, you'll find they also saw a nice positive uptick in the first part of the first quarter as companies got their sea legs back and some of the fear in the marketplace began to diminish. So we were quite pleased with the rebound, I think our rebound might have been a little stronger than most, but I think most companies that are in the IT professional services ranks also saw a pleasant uptick.

[Michael Huang:]

Okay. Thank you very much.

[Pete Sinisgalli:]

Thanks, Michael.

[Operator:]

Your next question comes from Yun Kim from Broadpoint. Your line is now open.

[Yun Kim:]

Thank you. Pete and Dennis, congratulations on a great quarter, very impressive that you were able to ramp up your consulting business flat 51% sequentially as you're able to show margin improvement. I know you mentioned that there was some deferred consulting business that got recognized in the quarter, but I think the consulting business ramped up pretty significantly even after accounting for that. So the question is how strong of a ramp are you expecting going forward and is that plan largely based on the business, are you close so far over the past two quarters or are you planning to ramp based on deals you have in your pipeline?

[Pete Sinisgalli:]

It's a little bit of both. Yun, as Dennis mentioned in his comments we have deferred revenue that helped Q1 by about $2 million, but his comments also suggested that revenue will be similar to that in Q2, 3, 4 give or take a little seasonality. So basically we're planning to -- or expecting to replace the deferred revenue that was in Q1 with additional revenue in Q2 and that will come from the build of upgrades and rollouts plus the start of projects that we sold in Q1. It will be a mixture of those kinds of activities.

[Yun Kim:]

Shouldn't we expect just an uptick in consulting demand when you rollout a new product coming soon here?

[Dennis Story:]

You do, Yun, but you also have projects that are going live and coming out of the pool from a revenue generation point of view.

[Yun Kim:]

Okay. Great. So, okay. Got it. And then just thinking outside of the box a little bit, in terms of your traction outside of Americas especially in Europe, can you give us an update on what your current plan is around international expansion, especially in Europe and what your current thinking on that topic?

[Pete Sinisgalli:]

Yeah. As I think probably most folks know markets outside the U.S. are rebounding about in line with the U.S. with the probable exception of the U.K. So we continue to struggle in the U.K. as most of the IT marketplace has. But we've seen some nice success in markets like France and other parts of the continent where we do business. We saw a pretty good quarter in APAC in Q1. As you know our revenue from those markets is not dramatic, but we think they can continue to play in an increasing important role for Manhattan going forward. We're looking to expand in those markets but primarily organically. We look for a few partners in certain geographies, but we don't have a direct physical presence but we're not looking to significantly increase our investments in international markets any time in 2010.

[Yun Kim:]

Okay. And that leads me to my last question, which is how flexible are your investment plans for the year outside of the services business?

[Pete Sinisgalli:]

Well, as you probably know our company expenses are 70-ish-percent [ph] headcount related. So most of our expenses are based on our outlook related to license revenue over several years and the investments we need to make in people to accommodate that. I think as we demonstrated to some degree in 2009, if we do see some changes in our outlook we can adjust our spending commensurately. But I will tell you that we are quite optimistic about the long-term prospects of Manhattan. Dennis shared in his comments that in Q1 we once again invested 14% of revenue in R&D and because of our optimism about the long-run prospects for the company we'll continue to invest in R&D. We think we have a real opportunity, particularly over the balance of 2010 to further differentiate ourselves from our competitors and want to take maximum advantage of that.

[Yun Kim:]

So if your business does pick up materially in the year. You'd rather spend on R&D build out rather than building out sales operations globally?

[Pete Sinisgalli:]

Yeah. Well, let me correct that. It's a great point, Yun. We probably have adequate staff in 2010 to achieve our R&D plans. I was considering if you were going in the other direction, if the market got more difficult. I think we have adequate staff to handle R&D. The place where we probably, if the market is stronger than we currently are planning for sales and professional services support would be helpful. But we have a solid sales team now and I do believe we have the ability to add to our sales results without adding materially to our selling teams.

[Yun Kim:]

Okay. Let me just squeeze in one more question. Dennis, you've got $123 million in cash. Any plans for more aggressive share buyback plans?

[Dennis Story:]

As we mentioned in the script our board increased our authority from $10 million to $25 million. And generally we don't comment on future share repurchase objectives just because of the implications in the market, Yun.

[Yun Kim:]

Thank you.

[Pete Sinisgalli:]

Thanks, Yun.

[Operator:]

Your next question comes from the line of Mark Schappel from The Benchmark Co. Your line is now open.

[Mark Schappel:]

Hi, good evening. Nice job in the quarter. And Pete starting with you, did your planning solutions contribute meaningful in the quarter or are they still lagging the other core products?

[Pete Sinisgalli:]

Yeah. We had an okay quarter Mark with our demand forecasting Inventory Optimization Solution. But our Supply Chain Planning Solution wasn't a meaningful contributor to the quarter. We still have some work to do there. The R&D teams, services teams and product management teams are investing a lot of energy to advance that product. But we still have work to do there. But I do believe our inventory optimization components are making some real progress in the market space. As you know, we have not done as good a job as we would like in getting our brand well known in the planning space. So we've got more work to do there and we've got hopefully some real opportunities over the balance of 2010 and '11 to take advantage of that market opportunity.

[Mark Schappel:]

Okay. Thanks. And in prior quarters, you've discussed some pressures you've been receiving from customers to reduce your maintenance fees. And I was wondering just based on what I see on the maintenance line, excuse me, it appears you're still receiving some pressure from customers on that account. Is that accurate?

[Dennis Story:]

Well, we're up 5% year-over-year. We're down sequentially, which is mainly driven by timing of cash collections on maintenance renewals. I would say that the activity or the pressure from customers so far out of the gate is lighter than it was in 2009, but there are some customers dealing with challenges nothing that's materially impacting our retention rates at this stage.

[Mark Schappel:]

Okay. Thank you. And then finally, Pete as you look out over the next 12 months or so, if there was a product area that could outperform your assumptions. Where do you think that would be or what do you think that would be?

[Pete Sinisgalli:]

Yeah. Probably be -- in a couple areas, Mark. We're quite excited about our order Life Cycle Management Solution. The benefit of this product is it allows companies to look across their extended supply chain to better leverage inventory across, whether it's an online offering, a retail offering, a catalog offering allows them to be much more efficient in managing their extended supply chain and allocating across different demand repositories. In addition to that, our Inventory Optimization Solution I think brings real value to our install base. And our extended Enterprise Management Solution allows our clients to more effectively collaborate with their global supply chain partners. So while we have great confidence and optimism about Warehouse Management Solution on the Supply Chain Process Platform, that release we think is a world beater. We think it does compliment nicely with our other solutions that can help give us greater acceleration in our non-WMS space as well.

[Mark Schappel:]

Thank you. That's all.

[Pete Sinisgalli:]

Thanks, Mark.

[Operator:]

(Operator instructions) There are no further questions at this time.

[Pete Sinisgalli:]

Thank you, operator. And thanks everyone for joining us on the earnings call. We look forward to speaking with you again in about 90 days. Thanks and goodnight.

[Operator:]

This does conclude today's conference call. You may now disconnect.