Manhattan Associates, Inc.
Q3 2011 Earnings Call Transcript

Published: 19 Oct 2011

[Operator:]

Good afternoon. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Mr. Story, you may begin your conference.

[Dennis B. Story:]

Thank you, Felicia, and good afternoon, everyone. Welcome to Manhattan Associates 2011 Third Quarter Earnings Call. Before we jump into the call, I want to apologize to everyone for the premature issuance of our earnings press release at about 2 p.m. this afternoon. Normally, we issue our press release after the market closes at 4 p.m. followed by this call at 4

[Peter F. Sinisgalli:]

Thanks, and welcome to our third quarter call. I'll start by reviewing highlights from the quarter. Dennis will then get into the details of our financial results. I'll follow with additional details about our business, and then we'll move to questions. We posted strong results across essentially all financial metrics in our third quarter. License revenue was $13.6 million, up about 12% versus last year. We recognized 3 $1 million-plus license revenue deals in the quarter. All 3 are well-known retailers in United States. Two are new customers and one is an existing customer. I have permission from the 2 new customers to use their name

[Dennis B. Story:]

Thanks, Pete. I'm going to cover off our non-GAAP results for Q3 2011, then I'll review 2011 guidance and our preliminary thoughts for 2012 and then turn the call back to Pete for a business update. As you can see, we delivered another exceptional quarter of financial performance, delivering record Q3 revenue, operating profit and earnings per share, both adjusted and GAAP. Our financial results reflect great execution by our Manhattan team and demonstrate the strength of our operating model and our supply chain software leadership position in our target markets. We posted record Q3 total revenue of $85.6 million, increasing 16% over Q3 2010 on double-digit growth in license and services of 12% and 19%, respectively. On a regional basis, Americas grew total revenue, 13%; EMEA, 21%; and APAC, 53% over Q3 last year. We are continuing to experience strong momentum in our target markets, and the demand environment continues to remain quite positive. On strong revenue and operating leverage performance, we delivered record Q3 adjusted earnings per share of $0.67, representing 76% growth over the prior year. Apples to apples, Q3 adjusted EPS increased 62%, excluding $0.04 of positive impact from unrealized FX gains and other income and nonrecurring income tax expense adjustments. Year-to-date, adjusted earnings per share of $1.72 is up 43% over 2010 and has exceeded our 2010 full year performance of $1.58. Apples to apples, excluding the impact of foreign currency gains and losses, and other income and nonrecurring income tax impacts, year-to-date adjusted EPS growth is up 30%. License revenue for the quarter totaled $13.6 million, up 12%, compared to the $12.1 million we delivered in Q3 2010, and as expected, down sequentially from Q2 2011, untypical Q3 seasonality for our markets. From a regional perspective, Americas posted license revenue of $11.5 million with 14% growth over the $10 million delivered in Q3 2010. EMEA's Q3 license revenue totaled $1.8 million versus $1.7 million in Q3 2010. And our APAC team delivered license revenue totaling $281,000 compared to $363,000 in Q3 2010. Our license performance continues to depend heavily on the number and relative value of large deals we close in any quarter with global economic swings continuing to shake buying decisions. Estimating sales cycles for large deals remain somewhat less predictable than in prior years, but overall, large-sized deal activity remains quite strong. Services revenue of $63.6 million grew 19% and is up 13% year-to-date. As you know, within our services revenue, consulting services revenue of $41.4 million increased 24% for the quarter, while maintenance services revenue of $22.2 million improved 10%. Our consulting services business momentum is reflected in our second consecutive quarter of 20-plus percent revenue growth as strong demand continues to exceed capacity. We are continuing to increase our professional services resources to satisfy current and foreseeable customer demand. As we formulate our outlook for 2011, we expect Q4 2011 consulting services revenue will post 20-plus percent year-over-year growth at about the same year-over-year growth rate as our Q2 and Q3 2011 performance. Consistent with prior years, our Q4 total services revenue, which includes maintenance services revenues, will be down sequentially by about 4% to 6% as consulting services experiences its typical Q4 slowdown due to the seasonal holiday period. Consolidated services margins for the quarter were 56.5% compared to 54.6% in Q3 2010. Of the nearly 75 net new associates hired in Q3, the vast majority is in our professional services practice, and the full cost of these added resources will not manifest until Q4. We also are onboarding and training new hires in Q4 to meet 2012 demand. With the timing of the new hire additions and the impact of Q4 holidays, we expect Q4 2011 services margins to be in the 51% to 52% range, which is consistent with prior Q4 services margin performance. Regarding full year 2011 services margins, we are raising our range estimate 50 basis points to 54.5% to 55.5%, up from our previous expectation of 54% to 55%. Now turning to operating leverage. Through strong revenue growth and exceptional services productivity, we achieved record Q3 operating income of $19.7 million and 23% operating margin. Year-to-date, operating margins are at 20.8%. For the year, we expect to finish 2011 strong with full year operating margin in the range of 19.9% to 20.4%, that's 2-0-point-4 percent representing about a 200-basis-point improvement over our 2010 adjusted operating margin of 18%. Now this blows away our 2011 margin expansion objective of 100 basis points or 19%. So just to set expectations, we continue to be committed to margin expansion in 2012 but not at 2011 heightened level as we harmonize the services demand-supply equation. Other income, which includes net interest income, net gains or losses on asset disposals and the net impact of realized and unrealized foreign exchange gains or losses, was unusually high at $862,000 in Q3 2011. Volatility and foreign exchange rates throughout the period resulted in nearly $600,000 in net foreign exchange gains and about $0.02 in unexpected incremental EPS in the quarter. On the income tax front, our effective income tax rate for the quarter was 31.3%, which represents an underlying rate of 33.5% less discrete tax items we recorded in the quarter. In the current quarter, we recorded a net tax benefit of $448,000 for the combined impact of our annual provision to return adjustment and a reduction of tax reserves associated with the expired tax statutes. The $448,000 tax benefit provided a nonrecurring $0.02 of incremental EPS benefit in the quarter. We continue to expect our Q4 2011 effective rate to remain at 33.5%. Now transitioning to diluted shares. We continue to efficiently manage our capital structure with our share buyback program, which is highly accretive to our shareholders. Year-to-date, we have reduced our common shares outstanding by about 6% by buying back 2.8 million shares against option exercises of 1.3 million shares. In addition, last week, our board approved raising our share repurchase authority limit to a total of $50 million. For the quarter, diluted shares totaled 21.1 million shares, down from 21.8 million shares in Q2 2011. We are estimating full year and Q4 2011 diluted shares to total about 21.2 million shares. An important point about our full year diluted shares. Our 2011 full year adjusted and GAAP earnings per share guidance range will be about $0.03 to $0.04 higher than the sum of our individual quarters reported EPS, reflecting the benefit of share buyback earnings leverage. Also, 2011 full year diluted shares will be lower than the average of diluted shares reported in each of our quarters due to the compounding impact of our buyback program. Our diluted share estimate for Q4 and full year 2011 does not assume any common stock repurchases and depends on a number of variables, including stock price, option exercises, forfeitures and share repurchases, which can significantly impact estimates. That covers the adjusted results. And just a quick update on GAAP earnings per share. We delivered record Q3 GAAP earnings per share of $0.70, representing 150% growth over the prior year. An apples-to-apples comparison excludes $0.14 of positive EPS impact in the quarter as follows

[Peter F. Sinisgalli:]

Thanks, Dennis. Here are some of the business highlights of the quarter. We added many new customers and expanded relationships with many existing customers across all regions during the quarter. A list of those that have agreed to allow us to use their names is included in our press release. As I mentioned in my opening comments, we closed 3 $1 million-plus deals in the quarter. The retail category, plus food and grocery, were strong contributors to our licensees. 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. That makes 2 quarters in a row where more than half of license revenue was from new customers. About half of the quarter's license revenue was for Warehouse Management solutions and the other half from our new supply chain solutions. Our order management solution had a particularly good quarter. Our professional services teams continue to drive customer satisfaction across the globe. Today, we've had more than 10 clients live and more than 20 sites live with our platform-based Warehouse Management solution and many more in various stages of implementation. These implementations continue to progress quite well. I believe our relative competitive position has never been stronger. The primary way we strengthened our position and will continue to improve it is through important investments in our products, our technology and our people. About 1/3 of our global staff, or more than 600 people, are in research and development. And in the third quarter, they delivered 6 important releases of our solutions. Let me highlight 3. One, Warehouse Management on our platform. This release features enhanced integration with Distributed Order Management, Extended Enterprise Management and Transportation Planning & Execution, which will help our customers use these solutions across their business operations to improve decisions and work flows. The integrations are supported by our supply chain process platform, common business objects and our integration framework. The release also includes important enhancements to core warehouse functionality to our management features and transportation execution functionality. Two, Distributed Order Management. This release features several improvements to our distributed selling solution, including customer communication tracking that imports all order-related e-mail so it can be viewed within our screens along with the ability to capture notes while on a customer call, so that customer service reps have a quick and easy way to view all communication and notes related to an order. Also, we've added an easier to use payment screen that includes eCheck support so that orders can be paid for by a direct draw from a bank checking or savings account. And three, Extended Enterprise Management. This release is primarily focused on key improvements in our store order fulfillment module. Site to store order visibility helps stores associates see what inventory is being shipped to their stores specifically for customers to pick up, while our ship-only parcel functionality help stores associates make efficient shipping decisions. Moving to headcount. At the end of September, we had about 2,100 employees around the world. That's an increase of about 75 in the last quarter, especially all in billable professional services positions. Today, we have about 64 people in sales and sales management, the same as last quarter. And as I mentioned in my opening comments, we hope to add about 100 positions in the near term to fill existing customer demand for professional services. Last week, we completed our European customer conferences. We started October 4 in the United Kingdom, progressed to France on the 6th and finished in Holland on October 11. Attendance was good at all 3 conferences and the mood was positive, especially given the state of the local economies. While we expect the economies across Europe to continue to struggle, particularly in the U.K., we're encouraged by our customers' enthusiasm about our solutions and our partnerships with them. So let me wrap up my comments. As Dennis mentioned, looking to Q4, we expect another solid financial quarter. And as we look out to 2012 and beyond, we're excited about our strong competitive market position in our market momentum. Operator, we'll now take questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Eric Lemus with Raymond James.

[Eric Lemus:]

First off, just looking at the large transformative deals going into the last quarter and potentially in 2012, are you guys seeing any sort of hesitancy around the large initiatives, the larger than $1 million sized deals or any lengthening of sales cycles? And any chance to -- for expectations around close -- on close rates assumptions in the fourth quarter?

[Peter F. Sinisgalli:]

We are quite pleased with the size and the activity in our large deal pipeline. As we mentioned on previous calls, that's been building for quite some time, and the large deal pipeline activity level today is quite good. We've not yet seen real hesitancy in those targeted customers to slow down activity. Now that, of course, could change. It's -- there's a lot of noise in the marketplace at the moment, and it concerns us to a degree. But having said that, the activity level continues to be quite good, and we're optimistic that the close rates in Q4 will be comparable to what we've seen over the last couple of quarters.

[Eric Lemus:]

Okay, great. And then on the license revenue side, you said, sequentially, it could be down in the fourth quarter. Is there any sense of -- I know it's early in the quarter, but is there any sense of potential upside attributable to the potential budget flush in the fourth quarter?

[Peter F. Sinisgalli:]

Yes, I think Dennis' comments about down sequentially related to the services business. I think he also mentioned we should be up sequentially for license revenue, and I think the target was in the neighborhood slightly lower than our Q2 result of $16.3 million. There's always the upside potential of budget flush. We're always a little bit cautious to plan on that, but we'd love to see some of the major players in the target markets we focus on gaining confidence and wanting to spend a little bit more of capital that they have on their balance sheets. So we're working very hard, particularly on the larger deals, to encourage companies to move more quickly and would love to see a meaningful year in budget flush.

[Eric Lemus:]

Okay, great. And then just lastly, you mentioned the 2x growth of the broader industry. Is there any sort of indication, especially with the overall macro right now, that the broader industry could be slowing? And if that's the case, would you still be comfortable with the 2x growth going forward?

[Peter F. Sinisgalli:]

Yes. It's another good question, Eric. At the moment, we'd be comfortable with that. And it will, of course, depend. As Dennis mentioned, it's early in the budgeting cycle, planning cycle for 2012. Historically, we've tended to do well in tough economies. We believe we're doing well in this difficult economy and believe we will continue to do so. So we're cautiously optimistic that even in a tough economy, we can post solid results in 2012 and '13. We're quite enthusiastic about our current market position. Our competitive position is quite strong and the platform message is resonating very well in the markets that we target. So we're optimistic that even in a tough environment there, we can post numbers along the lines of what Dennis had suggested. But quite frankly, we're looking forward to the place and time when the global economy is on better footing and we can post even stronger results.

[Eric Lemus:]

Okay. And just one more last question. On a -- on the headcount increase for this quarter, you said 75. I think last quarter, the guidance for the balance of the year was about 100, but it seems like you guys are saying that you need 100 more potentially as far as the strategy going for the rest of the year. Is that correct to look at? Is there an upside from what you said on the prior quarter?

[Peter F. Sinisgalli:]

Yes, that's correct, Eric, directionally correct. We've had a very strong quarter in services business in Q3, and we have good visibility of our Services business out several quarters. And we'd very much like to sign 100 or so talented folks there to our professional services teams to address forecastable demand among our customers in the relative near term.

[Operator:]

Your next question comes from the line of Alan Weinfeld with Suslow Securities.

[Alan Weinfeld:]

So we've seen such diversified companies as IBM during every single business you're in, they couldn't avoid the economic macro issues. And if you want to go to a company that's more your size, last quarter, Judy's software they couldn't avoid the macroeconomic issues. And they missed. What is different, special going on in the last 2 quarters that you clearly didn't have trouble in Europe and you're signing new customers and you're just really cooking on the margins getting back to historical margins much quicker than any of us expected? And what's the secret sauce because I think a lot of companies would really want to know.

[Peter F. Sinisgalli:]

Yes, it's a great question, Alan. We certainly do feel the tough macro environment in general, particularly in some of our international markets -- I think what's different -- and the difference really started showing up in the early part mid-2010 with the launch of our new suite of platform-based products and our straightening relative competitive position. That's just probably a little over simplistic. But as I mentioned in my prepared remarks, historically, we're winning 2 out of every 3 deals, and more recently, we're winning 4 out of every 5. So I probably would agree that the market activity isn't as robust as we'd like. It's probably down from where it was 3, 4 years ago but with our stronger relative competitive position, which is winning more business and taking more market share. And I think that is probably the biggest difference between ourselves and some of the folks that you spoke about. IBM, being such a big player, it's hard for them to take a whole lot of market share. But I think in our case, we believe there is still plenty of market share for us to capture. We've invested an awful lot of money over the last 5 years or so in developing our suite of solutions, and we believe we're at the early stages of being able to capitalize on that investment and believe our strong market position and the message we send about platform applications is really, really resonating well. And also, we have 1 or 2 really important initiatives in our target market. You hear a lot about multi-channel retailing, the growth -- its growth in e-commerce and the need to integrate e-commerce delivery with their broader brick and mortar channels and doing that from an efficient perspective, from a supply chain optimization perspective. And our solutions really help in that regard as well. We've got some unique capability that we believe no one else on the planet has, and that also helps us better defend our financial position in a tough macro environment.

[Alan Weinfeld:]

So looking into the future, it looks like you guys are moving well into -- I mean, not huge new markets but the things that certainly should do a lot of revenue in this order management market. I think I choose to do a lot of business there but who knows how much business I choose to now, probably not too much. And talking about transportation, those and other-- actually Manugistics used to do a lot of business transportation. They aren't around anymore. So I mean, besides the core market, there's that 40%, 50% of the nonwarehouse market where you guys should continue to grow. So who do you really see as today's true competitors because it's not, maybe just because it's not too -- And Oracle seems to be doing a great job in things that are -- they're working on hardware now with Sun or SAP is working on mobile computing and analytics maybe. Who are the real competitors? Are you -- really get to the last 5, last 3, and you guys seem to beat 80% of the time.

[Peter F. Sinisgalli:]

Yes, it's a very good question. I think there were 2 parts with that question. Let me see if I can answer them both. The first was a little bit about new markets and solutions and so forth and where we're competing. Very pleased in -- to share in my opening comments some of the new big wins and the competitive wins and the platform successes there. And one that I kind of glossed over quickly though that we're all very proud to have achieved is one of the big wins in the quarter was a client who first purchased from us our Inventory Optimization solution, a little bit of that solution, and then added warehousing and transportation. So a cool opportunity for us to cross sell into that part of our customer base and, of course, the same thing is true for all of the WMS clients we have, the ability to cross sell solutions into that market space. I consciously chose the 3 releases to focus on in my discussion of our investment from R&D talking about Warehouse Management, Distributed Order Management and Extended Enterprise Management because those 3 applications are quite core to differentiating Manhattan Associates from all of our competitors in that multi-channel space. So the buy online, pick up in store, the ability to shop from mobile devices and to fully integrate that requirement into a broader supply chain, I think, is just a real competitive advantage. So those are some of the new markets for ourselves and we're pretty, pretty excited about it. But to your question about competition there, of course, is a very good competition in our market spaces. We've got the 2 big ERPs that are very capable firms; SAP and Oracle are larger than we and part of people's pockets. We're cautiously approaching the market space today and competing well with them. I believe both of those firms have their hands full with higher priorities than supply chain, and that continues to be the case. I think our relative competitive position strengthens. Of course, we'd also have other so-called best-of-breed competitors across the broad product suite areas that we compete. And they're all solid companies that compete aggressively with us. I happen to believe at the moment our relative competitive strength versus those other best-of-breed competitors has never been stronger, but we certainly are very aware that they are good companies and good competitors and we need to stay quick and innovative and with high quality to continue to do well in that market space.

[Operator:]

Your last question comes from the line of Mark Schappel with The Benchmark Company.

[Mark W. Schappel:]

Pete, starting with you, during your prepared remarks, you noted that your order management application had a good quarter. And I just wonder if you could just give us a little more color on the buying patterns there. Are customers buying that application as a stand-alone module? Or are they deploying it as part of a larger or broader supply chain initiative where other people are buying the broader suite?

[Peter F. Sinisgalli:]

Yes. We've sold it both ways, Mark. And we have a number of instances where the client first chose our Order Lifecycle Management solution, but in the majority of cases, it's part of a multi-product purchase. As I just mentioned, I do believe that the combination of our Warehouse Management solution, Extended Enterprise Management solution and our Order Management solution, that the combination plus benefits from our other solutions, but those 3 in particular, really do bring a truly unique value proposition to the marketplace. And in a couple of cases in the quarter, we sold those products to clients.

[Mark W. Schappel:]

Okay. And Pete, if you could just give us an update on your perspective on the SaaS supply chain market. In the past, I believe you thought it was or there just wasn't that much enthusiasm for it or for SaaS delivery models and supply chain space. Is that still your view?

[Peter F. Sinisgalli:]

Yes. We continue to monitor that very closely, Mark. There's a lot of energy around the whole cons of the SaaS and cloud and so forth. And so we continue to monitor it very closely. I think as you and I have discussed, we do offer SaaS solutions today, primarily in our transportation states. We've been doing that for more than a decade, so we have a lot of experience in how best to deliver on a Software-as-a-Service model. However, as we've also discussed before, to date, our target market, that is larger companies with sophisticated supply chain needs, have not shown much of an appetite for multi-tenant Software-as-a-Service offerings. So we'll continue to monitor it very closely if there's any move in that direction. I believe our applications would be as easy or easier than any of our competitors to place in a hosted environment. But to date, there's not a lot of energy in our target markets for Software-as-a-Service.

[Operator:]

And there are no further questions at this time.

[Peter F. Sinisgalli:]

Thank you, all, for joining. Appreciate your time this evening. I look forward to speaking with you again in about 90 days. Good night.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.