Manhattan Associates, Inc.
Q4 2010 Earnings Call Transcript

Published: 2 Feb 2011

[Operator:]

Good afternoon. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates fourth quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, February 1st, 2011. I would now like to introduce Dennis Story, Chief Financial Officer of Manhattan Associates. Sir, you may begin your conference.

[Dennis Story:]

Thank you, Simon, and good afternoon, everyone. Welcome to Manhattan Associates 2010 fourth 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 risk 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, 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’ll turn the call over to Pete.

[Pete Sinisgalli:]

Good afternoon, everyone. Overall, 2010 was a very successful year for Manhattan Associates. Financial results were good, our competitive position improved, customer satisfaction increased, and we are well positioned for the future. For the fourth quarter, we posted total revenue of $71.5 million, up 15% over last Q4. And, for the year, we posted total revenue of $297.1 million, up 20% over 2009. Adjusted earnings per share was $0.32 in the quarter, up 4% over Q4 of 2009, and for the year with $1.38, up 44%. License revenue in Q4 was lower than we expected at $12.7 million, as caution returned to the segment of the software market we serve, but we were still able to post solid Q4 results. Our competitive win rate remains strong all year. In head-to-head sales cycles against our major competitors, we won 75% of the time. I’m particularly pleased with the market’s excitement over our platform-based suite of solutions. Our win rate for our new release of warehouse management on our platform was exceptional during 2010. And, I believe, we are very well positioned for 2011 and beyond. We are not expecting the economy to improve in the first half of 2011, with only modest improvement over the second half. But even in that scenario, we are optimistic about our financial outlook for 2011. We’ll talk more about that later in the call. But first, I’ll turn the call back over to Dennis, to provide details about our financial results.

[Dennis Story:]

Thanks Pete. Q4 marked our fourth consecutive quarter of double-digit revenue growth, as Manhattan delivered $71.5 million in total revenue and $0.32 in adjusted earnings per share. For the full year, we grew total revenue 20% to $297.1 million, delivering adjusted EPS of $1.38 to match our 2008 record adjusted EPS year. As Pete mentioned, the 2010 mid-cycle economic slowdown dampened license revenue in the second half of 2010. The good news is customers and prospects are active in planning supply chain capital investment. The challenge remains forecasting large deal timing as management’s investment decisions continue to be hedged by global economic caution. Some financial highlights for the fourth quarter and full year are

[Pete Sinisgalli:]

Thanks Dennis. First, a bit of color on the deals we closed in Q4. Our one large deal in the quarter was with an existing customer, for our warehouse management solution. We had and continue to have a strong pipeline of large deals we’re working. But we’ve been challenged getting clients across the goal line. The current environment doesn’t provide much of an opportunity cost to putting off decisions, so several large deals continue to wait in the balance. The good news is, we’ve been selected in many cases and simply wait the client’s final decision to close the contract. Hopefully, we’ll see a stronger push to move forward over the balance of 2011. While mid-sized deals continue to move along well, we need the larger deals to fuel the kind of results we think we can achieve over a multiyear period. For comparison, in 2007, we closed 16 deals of $1 million or more in recognized license revenue, 15 in 2008, five in 2009, and nine in 2010. We’re confident the markets we serve will bounce back to levels exceeding previous years and we are poised to capture a greater share of that activity. In the near term, we’re very focused on closing large deals, but acknowledge, we must work with our clients on their timelines. Overall, about 70% of license fees in the quarter were tied to warehouse management solutions and 30% tied to our other solutions. Similarly, existing customers made up about 70% of license sales in the quarter and new customers about 30%. The one large WMS deal to an existing customer in the quarter had a meaningful impact on these statistics. For the year, about 60% of license revenue was for our WMS software and 40% for the rest of the solutions in our portfolio. Similarly, 60% of the year’s license revenue was from existing customers and 40% from new clients. Together, the retail, consumer goods, and logistics service provider verticals were once again strong contributors to our license fees and made up more than half of license revenues for both the quarter and the year. We had a successful quarter adding new clients and extending our relationship with existing clients. The companies that have permitted us to share their names with the public are included in our press release. As you may recall, we rolled out our warehouse management solution on our supply chain process platform early in 2010 and offered it only in the Americas, where it was very well received during the year. We won 12 new clients for our platform-based WMS solution, essentially all of the key competitive of the WMS deals in the Americas in 2010. Of course, we won additional business with our iSeries and Microsoft-based warehouse solutions as well. Today, we have three clients live on our platform-based WMS solution and expect to have several more live by our next quarterly earnings call. I’m very pleased with the strong year we’ve had helping clients, utilize the power of our solutions. For the quarter, we had more than 60 customer sites go live with our software, and for the year, more than 300 successes. Following the successful rollout in the Americas of our warehouse management solution on our platform, in 2011, we will rollout that solution to our Europe, Middle East, and Africa geographies as well, and expect to have similar success winning key deals in that region. For the year, we invested about $40 million in research and development, which is about 13% of our total revenue. And, because we house about two-thirds of our R&D team in India, where costs are lower, we are able to dedicate over 600 people or about one-third of Manhattan’s overall staff to research and development. I’m quite pleased that in all product areas, we delivered new, more robust, more efficient solutions to our markets in 2010. I believe our significant investment in our supply chain process platform clearly distinguishes us from all other competitors and positions us for a strong future. For 2011, we’ll continue to invest about 13% of revenue in R&D, as we push to further distance ourselves from other solution providers. At the end of the year, we had about 1,925 employees around the globe. That’s about 50 more than we had at the end of the third quarter and just over 100 more than at the end of 2009. Essentially, all of the headcount growth during the year and the quarter was in our professional services group. We finished the year with 66 people in sales and sales management, with 56 of those quota carrying sales reps, that’s down two sales reps from the Q3 figure and up two sales reps from the Q4 2009 figure. In early January, we announced the promotions of Dennis Story to Executive Vice President and Chief Financial Officer; and Eddie Capel to Executive Vice President and Chief Operating Officer. Both men do an outstanding job for Manhattan Associates. While Dennis responsibilities are unchanged for 2011, Eddie picks up responsibility for our Europe, Middle East and Africa, and Asia-Pacific regions, as well as our Americas professional services operations. He also retains responsibilities he had in 2010 for R&D, customer support, and product management. Our Americas sales operation under Jeff Mitchell continue to report to me. Eddie’s new role aligns operational responsibilities worldwide and allows us to further improve the quality and efficiency in our solutions and services. Turning our sights now to 2011, we’re planning for a relevant and stable global sales environment, with the global supply chain market growing at about 5%. While we know how to perform well in that type of climate, we’re also confident that when the market economy begins to heat up and the late projects get mobilized, we will continue to capture significant market share and drive even further improvements in our financial results. With an attractive pipeline for both large deals and mid-sized deals and a strong and improving competitive run rate, we look forward to 2011 and beyond. As we did in 2010, we remain focused on delighting our customers, delivering market-leading innovations in our software and extending our sustainable competitive advantage to our platform-based approach to supply chain excellence. With that, operator, we’ll now take questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Terry Tillman with Raymond James. Your line is open.

[Terry Tillman:]

Yes, good afternoon, guys. Thanks for taking my questions. Pete, I guess, the first question is just around the license business in the fourth quarter. You gave a lot of color there, but, maybe, you can help us reconcile what is seemingly a pretty solid budget flush situation for many companies. And also assuming that if some of these large deals had slipped the retail, or part of retail focus, your sweet spot, I would think that they’d want to sign those in the quarter so they can get going on the implementations and be done before the holiday season in ’11. So can you maybe help us understand a little bit more on the weakness if there is any common corollaries between these deals that flipped?

[Pete Sinisgalli:]

Yes, sure, Terry. We’ll be happy to. It’s a great question. And we were disappointed, but the overall closed license revenue result in the fourth quarter. But, pleased frankly with the activity we had particularly in the Americas. The large deal activity level was quite good and we believe we have preference in many deals that just weren’t – we weren’t able to close in Q4. I guess one of the differences between Manhattan Associates and probably other companies that participate in the technology space and the software space is a majority of our deals are for our warehouse management software. And, Terry, as I think you know well, in many cases for larger deals in the WMS space, the overall capital requirement for clients is in many cases considerably greater than the software price they purchase from Manhattan. I’ll give you one example of a deal in the quarter, I can’t give you too many particulars, but we had one deal that we thought could close in Q4, that was more than $1 million in license revenue for Manhattan Associates. But, because its a well-known prospect is transforming their supply chain, the total capital required for their Board to approve the supply chain transformation program was closer to $50 million in total. And so – and that’s one example. They’re not always that dramatic, but that was certainly an example, that impacted us in Q4. And, in this current environment, I think people are taking their time before those kind of capital commitments. As you’ve noticed over the last couple of quarters, we’ve had good success in our mid-sized deals that generally don’t require that kind of a capital commitment. But in the larger deals, particularly the supply chain transformation deals, there is often a bigger capital commitment than just the commitment to Manhattan Associates. So while we were disappointed in the Q1 close rate, we were quite pleased with the activity level. And, as I suggested, pleased with the number of instances where we believe we’ve been chosen or preferred, and confident when the client is ready to make the decision to move forward and sign a contract, we will be the provider of choice.

[Terry Tillman:]

When we look at the top line growth guidance for 2011, and if I’m operating under an assumption that’s accurate that license revenue could be similar to, or at least in the ballpark of the total revenue growth, it sounds like large deals though will be an important swing factor, I guess, what gives you confidence in kind of 10%-ish type growth in license revenue. I mean is the pipeline for the larger deals and/or the medium-sized deals notably better or at least better than heading into 2010 the levels were?

[Pete Sinisgalli:]

Yes, actually, Terry, their pipe is quite strong, certainly compared to – heading into 2010. I’ll tell you the one challenge we have in some regards it’s larger than we’d like frankly, because of our – the timing of closing deals, we would have liked some of those deals in the pipeline have closed in Q4 and frankly Q3. Having said that, we’re pleased with the large deal activity in the pipeline as well as mid-sized deal. So we’re optimistic that activity level in our space is going to be good over the next couple of years, and the question becomes how much of that will close in the near term.

[Terry Tillman:]

Okay, I appreciate the color. And then, just one last question, I guess, just relates to – when the folks are moving to WMS on the platform, I know it’s still early and we’ve got a small sample size, three live and a couple more going live. I know it’s hard, because it’s just only about five so far customers. But any early signs of when they’re upgrading, clearly there is probably service revenue attached to it. But did you see with those customers, the conversation that was provoked in around other products add-on sales, and have you seen any kind of up-selling that has occurred with those first five and/or do you think that is the phenomena that will happen with, maybe, let’s say, the next wave of upgrades to the platform? Thank you.

[Pete Sinisgalli:]

Sure, Terry, it’s a very good question, thanks. It is, as you suggested, a little early to be drawing major conclusions. But I am quite optimistic about our ability to sell additional solutions to clients that move to the platform. We’ve had several of the early adopters of the platform. As mentioned, one of the key things that encourage them to move to the platform is their ability to get more of their supply chain solutions on their common technology stack. So I’m cautiously optimistic that will happen in the near term, but quite confident over the intermediate term that we’ll see significant additional activity because of the strength of our platform offering.

[Operator:]

Your next question comes from the line of Yun Kim with Gleacher & Company. Your line is open.

[Yun Kim:]

Thank you. Hi Pete, can you talk about just a overall – just quality of your sales force, maybe the turnover rate, if you had any? And then, also, the level of experience and the maturity level of your sales force. Do you feel comfortable with the level of sales experience that you have currently within your sales force right now?

[Pete Sinisgalli:]

Yes, Yun, sure. Be happy to answer that question. I would say – the first comment I would make is, I would certainly not draw any conclusion about our slight disappointment in our license revenue result in Q4, with the quality of our sales force. I’m very pleased with the strength and depth of our sales team. A couple of specifics to reinforce that, we probably have the most tenured experienced application software sales force in the world. The average tenure for our sales team is – with Manhattan Associates is about 10 years. Now, the reason that we have such good tenure and strength in our sales team is we do grow several of our sales associates up to the ranks of professional services. So our sales team have more skilled sales or experienced executives have in many cases worked for us for several years in things like professional services, customer services, product management, solution consultants, and have evolved into market leading sales reps. So we’ve had very, very low attrition this year in our sales team that have a lot of a grade domain knowledge and experience in our sales team, and I’m highly confident when customers are ready to putting to paper, a lot of that ink will be on Manhattan Associates contracts.

[Yun Kim:]

Okay, good to hear, thanks. And then, in terms of your hiring plans for your services organization this year, can we expect the – obviously you mentioned that the demand is outpacing capacity right now, can we still expect Q1 to be the low point in terms of services margin for the year, even though you’re still hiring? And then, also, can you confirm that the services revenue in Q1 will be up sequentially?

[Dennis Story:]

Hi Yun, it’s Dennis Story. Of course, services revenue will be up sequentially. Just pretty typical of traditional trends and the company key four seasonal holiday period services revenues declined as clients are not doing implementations in their busy. So we’ll see a sequential increase there. In terms of margins, my full-year guidance was 53% to 54%. Typically, Q1 and – Q1’s pretty good margin wise, because you’re getting the ramp. Generally, Q4 is your lower services margin profile.

[Yun Kim:]

Okay. And then, you mentioned that, in Q1, you expect the cost of services to be up five basis points.

[Dennis Story:]

Yes, that’s right. That’s right.

[Yun Kim:]

Okay. So the question is would that be the low point for the year in terms of services margin?

[Dennis Story:]

No.

[Yun Kim:]

Okay.

[Dennis Story:]

Q4 will be our low point.

[Yun Kim:]

Okay, got it. Thank you, Dennis. And then, while I have you’re here, I want to make sure that I got the flow out of deferred revenue balance in Q1 and Q2 correct. You said you expect to see $700,000 in Q1 from that large deal that you closed in Q3.

[Dennis Story:]

Yes.

[Yun Kim:]

Did you say – what?

[Dennis Story:]

The $700,000 will be – it will be recognized ratably over the five-year period of the contract, and that amortization will likely start in Q2 or that recognition.

[Yun Kim:]

Okay, great, thanks.

[Pete Sinisgalli:]

And, just for clarification, Yun, that $700,000 was not the entire cash that client will pay us for software, that was the first payment and that was what Dennis is relating to, it was a larger deal than that, and that larger deal in total we recognized over five years.

[Yun Kim:]

Okay, great. And then, what’s the $2.4 million of revenue that you also referred to within the deferred revenue balance that, then you said, you expect to start recognizing in Q2?

[Dennis Story:]

Yes, that’s – some clients, there is some business that we closed in 2010, with promised functionality that didn’t exist in the base software. So were prevented or precluded from recognizing revenue until we deliver that to the customers. And that will come sometime in Q2, and we’ve already factored that into our overall revenue guidance.

[Yun Kim:]

So, the whole on that will be recognized in Q2 then?

[Dennis Story:]

It will begin in Q2.

[Yun Kim:]

Begin in Q2. All right, great, thanks for the clarification. That’s it. Thanks.

[Pete Sinisgalli:]

Thanks Yun.

[Operator:]

Your next question comes from the line of Mark Schappel with The Benchmark Company. Your line is open.

[Mark Schappel:]

Hi, good evening.

[Pete Sinisgalli:]

Hi Mark.

[Mark Schappel:]

Dennis, starting with you, I didn’t catch your comments regarding your 2011 operating expenses in your prepared remarks. I was wondering if you could just repeat those comments.

[Dennis Story:]

Yes, the – what we talked about is, is a 4% increase sequentially from Q4 2010 to Q1, which is pretty typically, you have your FICA, you have myriad promotion increases, we’ve got a 401(k) restatement, and then some of that’s partially offset by our bonus reset for the new year.

[Mark Schappel:]

That’s only applicable to Q1 then.

[Dennis Story:]

That’s correct, that’s correct.

[Mark Schappel:]

Okay. And then, also, on your tax comments, with respect – I think, Q1 you mentioned it was going to be 34.5%, is that just for Q1, or is that for the year?

[Dennis Story:]

No, we’re forecasting 34.5% for the year right now.

[Mark Schappel:]

Okay, great. And, then, Pete, is it – moving on you, Pete –

[Dennis Story:]

And, Q1 as well, Mark.

[Mark Schappel:]

Thank you. And, Pete, is it fair to assume that you have enough sales capacity for probably the next 12 months or so in your view?

[Pete Sinisgalli:]

Yes, the 66 in total I mentioned headcount that we’ve gotten about 56 of those quota carrying reps, I think is fully capable of delivering out our license revenue expectations for the year.

[Mark Schappel:]

Okay, thanks. And, I guess, if I go back to a couple of quarters ago, there was a lot of comments regarding multichannel merchandizing, kind of, some of the changes there driving some of what – some of the demand in the WMS market in particularly. I was wondering if you’re still seeing that or if that’s still a factor of your business?

[Pete Sinisgalli:]

Sure, Mark. Yes, it is. It’s a big push of a lot of activity that we have going on within our sales channel at the moment. Very true in the Americas, but also becoming a bigger factor in Europe as well, and we’re optimistic that that will continue to grow in each of those markets, and ultimately also become a meaningful factor in Asia-Pac. We had a couple of nice deals close in Q4 that qualify in that mid-size range that the multi – our multi-channel expertise and solutions were – be competitive differentiator, separating ourselves with some competitors for those deals, so that is an important growth opportunity for us over the next couple of quarters and years.

[Mark Schappel:]

Okay, and then finally, I think a couple of quarters ago, you came out with a product called FieldSCOUT, which was basically a mobile solution. And I was wondering if you could just give us an update on that product, and were there was any meaningful traction you’re getting in that yet?

[Pete Sinisgalli:]

Yes, yes, it’s still early in its evolution, Mark. So we really don’t have any market success that we point to at the moment, but we’re quite optimistic about some of our mobile technology abilities to help our customers turn their businesses into mobile supply chains, whether that’s store workers, warehouse workers, anyone within their supply chain to enable their supply chain to be more flexible, adaptable and that create a visibility. So we’re enthusiastic about FieldSCOUT and the way we can deploy that over the next couple of quarters and years. But it’s very early in its existence with Manhattan.

[Mark Schappel:]

Thank you. That’s all from me.

[Pete Sinisgalli:]

Thanks Mark.

[Operator:]

(Operator Instructions). And your next question comes from the line of Alan Weinfeld with Kern Suslow. Your line is open.

[Alan Weinfeld:]

Hi. Have –

[Dennis Story:]

Hi Alan.

[Pete Sinisgalli:]

Hello Alan.

[Alan Weinfeld:]

Hi guys. Glad to see you’ve had so many meetings with, hopefully, those large deals you’re talking about at the National Retail Federation, and also would like to really good job on the promotions. I know people aren’t on the conference hall, but I did talk to them earlier in the month and well deserved.

[Pete Sinisgalli:]

Great, thank you, Alan. We thought the National Retail Federation show was a great success for ourselves and optimistic that will help build real opportunities for us, but thanks for stopping by the booth while you were there.

[Alan Weinfeld:]

So I remember when your company – maybe updating myself – had 20% operating margins. Is that an unrealistic goal for the future or can we get back there in a few years when you say we’re going to have an economy that’s back to normal or growing say 3% instead of 1.5%?

[Pete Sinisgalli:]

Sure, sure. Alan, we’ve had a goal of getting to a 20% operating margin, three year goal of getting to a 20% operating margin that we continue to strive for. Dennis had mentioned earlier in his comments about our change in the way we publish adjusted earnings per share to exclude the impact of restricted stock. That adds about 2 percentage points to the adjusted operating margin, because we are going to continue to operate on an apples-to-apples basis that revises our three year goal from a 20% operating margin to a 22% operating margin goal. So we certainly think that’s possible and that’s what we’re trying to strive for. I will think if you’ve looked over the last couple of years, absent that major dip in macro economy, we’ve made good progress and we’re optimistic we’re on the right path to get to a 22%-ish operating margin in the next few years.

[Alan Weinfeld:]

And you’ve made some acquisitions in the past, in replenishment even some of that has gotten you closer to the inside of the store. I know you bought back some stock at, I think, attractive price, and it looks you’ve been authorized for another 50 million. But do you think there is also opportunity to get more inside the store where you clearly own the market as far out of the store as you can be. Is there too much competition in there? I don’t see Oracle or SAP as terrible competition in the store. What do you think about that with the $127 million of cash?

[Pete Sinisgalli:]

Thanks for asking that question, Alan. It’s a great question. We probably should have thought about including more comments in our prepared remarks. It was also a question that Mark alluded to in his question about our multichannel retail strategy, and that’s our ability to be able to help our clients do more wherever they’re distributing product from, whether their customers are buying online, shipping from a warehouse, buying online want to pickup at the store, buy online return to the store, any of those different permutations. The multichannel retail strategy is an important part of our competitive differentiator. And frankly, also, coming back to Mark’s question, FieldSCOUT, our mobility solution will give us additional capability to help store employees, help clients throughout the retail chain, so we’re quite excited about that, and very excited about our distributed order management solution that helps clients manage distribution of product through all of their different channels. So we certainly think we have a real opportunity to extend further into the supply chain out to the store shelf, and we’re making some important investments to be able to do that well. We haven’t made an acquisition. I think you know, Alan, in a few years, it’s not that we are not looking, we are trying, we are looking very hard for to find the best use of our cash to improve shareholder value. And if the opportunity present itself to make a strategically important acquisition, we’re very much inclined to do that. In the interim period of time, we have bought back shares to give our shareholders back from awards we’re getting from the market performance. And with the authorization from our Board this quarter, at $50 million, we’ll look for opportunities to continue to do that. But we’re excited about the possibilities for our company. We think we’re well positioned, we think the R&D investments we’ve made over the past couple of years are really paying off, and believe our competitive position gives us a great opportunity to capture share. Little disappointed that the Q4 license revenue was better than it turned out, but continue to be quite optimistic about our ability to drive a very strong financial performance and shareholder return over the next couple of years. Sorry folks, we’re running a little long this evening, we look forward to speaking with you in about 90 days. And if you have any questions, certainly reach out to Dennis and myself, we’ll be happy to grab you. But thanks very much for participating in our Q4 conference call. Look forward to speaking in 90 days. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.