Manhattan Associates Inc (MANH) 2015 Q2 法說會逐字稿

Good afternoon. My name is Kyle, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the Manhattan Associates' second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this call is being recorded today, July 21, 2015.

I would now like to introduce Mr. Dennis Story, CFO of Manhattan Associates. Sir, you may begin your conference.

Thank you, Kyle, and good afternoon, everyone. Welcome to Manhattan Associates' 2015 second-quarter earnings call. I will review our cautionary language, and then turn the call over to Eddie Capel, our CEO.

During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risk and uncertainties that are not guarantees of future performance, and that actual results may differ materially from projections contained in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-K for FY14 and the risk factor discussion in that report. We are under no obligation to update these statements.

In addition, our comments include certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You'll find reconciliation schedules in the Form 8-K we submitted to the SEC earlier today, and on our website, at MANH.com.

Now I'll turn the call over to Eddie.

Good afternoon, everyone. We continue to be quite pleased with the financial performance, and optimistic about our near-term and long-term growth prospects. We are very encouraged by the strong demand from customers and prospects, as they continue to invest in omni-channel commerce enablement, including supply chain, retail store operations, and point-of-sale. Our success is driven by delivering leading innovation in an ever-changing commerce market, focusing on our customers' success and leveraging our deep domain expertise.

We delivered record total revenue in Q2 of $139.1 million, increasing 14%, and record adjusted earnings per share of $0.37, increasing 28% over Q2 2014. Software license revenue for the quarter was $19.8 million, up 10%, and we closed four $1-million-plus deals in the quarter, three with existing customers and one with a new customer. All four of these large deals were in the US, and our large-deal activity was driven by a healthy mix of platform-based warehouse management solutions, transportation management, and omni-channel initiatives. And in two of the four large deals, we were successful head-to-head against very strong competition.

Our sales teams executed well, and our competitive win rates in head-to-head sales cycles against our major competitors remained strong, at 75% or so, for the quarter. Overall for the quarter, 30% of our license revenue was from net new customers.

Now, while we do remain cautious regarding the global economy and the associated ForEx headwinds, with strong 2015 first-half performance, we are raising our revenue and earnings-per-share guidance for the full year. And Dennis will share the specifics of our guidance adjustments in a moment.

Our license pipeline is solid, services business demand is strong, customer satisfaction is solid, and we continue to be the leading innovator in core supply chain, retail store operations, and point-of-sale commerce solutions. And I'll provide more color in my business update following Dennis's review of our financial results.

Thanks, Eddie. I'll cover our Q2 2015 results, and then review our updated 2015 full-year guidance.

We posted organic revenue growth of 14% in the quarter, totaling $139.1 million. Pretty strong, when you consider we took a 3-percentage-point haircut on negative currency. And year to date, with our top line being clipped for $7 million in FX, we've generated 15% organic growth -- pretty strong.

For the quarter, Americas continued its solid momentum, with 19% growth, while EMEA and APAC markets are trailing the Americas, largely influenced by paucity of macro economic growth. Europe posted 8% total revenue growth, and APAC was down 40% on lumpy license revenue comps.

Adjusted earnings per share for the quarter was $0.37, up 28% over prior year. Excluding negative currency impact, adjusted EPS grew 31%. We expect the currency headwinds to continue in the second half.

Our Q2 2015 GAAP diluted earnings per share was a record $0.35, growing 30% over Q2 2014. For your reference, a detailed reconciliation of GAAP to non-GAAP adjustments is included in our earnings release today.

So, on license revenue for the quarter, we totaled $19.8 million. Americas posted license revenue of $17.3 million, EMEA $2.1 million, and APAC $350,000. As always, our license performance depends heavily on the number and relative value of large deals we close in any quarter. And with the sluggish global macro and FX headwinds, we are targeting a license growth goal of about 9% for full-year 2015.

Shifting to services, demand continues to be solid. Q2 services revenue totaled $107.3 million, increasing 15% over prior year. Our services revenue is comprised of two revenue streams: consulting and maintenance.

Consulting revenue for the quarter totaled a record $76.5 million, growing 17% over Q2 2014. With strong demand and visibility, we continue to focus on hiring additional services resources to meet our customers' needs and grow our future business. Maintenance revenue for the quarter totaled $30.8 million, increasing 11% over last year on strong collections pull-through on year-over-year comps.

License revenue growth, cash collections, and retention rates of 90% plus contributed to year-over-year growth. As a reminder, we recognize maintenance renewal revenue on a cash basis, so timing of collections can cause inter-period lumpiness from quarter to quarter.

Consolidated services margins for the quarter were 57.4%, benefiting from solid productivity, currency, and maintenance collections impact. Excluding currency and maintenance collections timing, services margins were about 56.4%, or 100 bps lower from our 57.4% in the quarter. We expect our full-year 2015 services margins to normalize into the 56.8% to 57% range.

Turning to operating income and margins, Q2 adjusted operating income totaled a record $44.1 million, with operating margin of 31.7%, up from 28.5% in Q2 2014. Apples to apples, excluding currency and maintenance collections timing, operating margins were 30.5%, up 200 basis points over Q2 2014. And year to date, excluding currency and maintenance timing, our adjusted operating margin is 30.2%, versus our reported 30.9% -- still pretty [doggone] strong.

With strong first-half results, we are raising our 2015 full-year margin expansion goal to about 200 basis points, representing a 60-basis-point increase over our previous estimate. We should exit 2015 with full-year operating margin of about 29.8%, versus 27.8% in 2014. Our second-half operating margin will improve 110 to 120 basis points over 2014.

Sequentially from 2015 first half, margins will be lower as we factor in traditional summer and holiday seasonality in Q3 and Q4, respectively, and investment in services and R&D personnel for continued growth in 2015 and 2016. We currently are in an aggressive hiring mode to fulfill ongoing customer demand and growth objectives. We also are looking to strategically add R&D talent to increase our investment in innovation, particularly focused on our omni-channel platform for the modern retailer.

Regarding taxes, our adjusted effective income tax rate was 37.7% for Q2. We are projecting a full-year effective tax rate of 37.6% due to higher state income tax expense, and expiration of the US R&D tax credit effective January 1, 2015.

Diluted shares for the quarter totaled 74.1 million shares, down from Q4 2014 shares of 75 million. We repurchased about 458,000 shares of common stock in the quarter, totaling an investment of $25 million. We estimate second-half diluted shares to be $74 million for Q3 -- or 74 million shares, sorry -- for Q3 and Q4, and the full-year weighted average diluted shares to be about 74.1 million shares. This estimate does not assume additional common stock repurchases. And lastly, on shares, last week our Board approved raising our share repurchase authority limit to a total of $50 million. That covers the P&L results.

Now turning to cash flow from operations: Q2 2015 was $27.5 million, up from Q2 2014's $1.9 million of cash flow from operations. First-half operating cash flow totaled $42.7 million, compared to $21 million in 2014. DSOs improved to 54 days versus 56 days in Q1 2015. Capital expenditures were $2.7 million in the quarter, and we estimate full-year 2015 CapEx to come in between $8 million and $10 million.

To say the least, our balance sheet continues to support stability and long-term strategic flexibility, with cash and investments totaling $108 million at June 30, 2015, and zero debt. That compares to $107 million of cash reported last quarter in Q1 of 2015.

Now, I'll update our 2015 guidance, and then hand the call back to Eddie for the business update. As Eddie mentioned, while we remain cautious given the global macro and FX currency headwinds, we are raising our full-year guidance. For total revenue, we are raising guidance from our previous range of $541 million to $550 million to a new range of $553 million to $558 million, representing 12% to 13% growth over 2014 versus previous guidance of 10% to 12%.

Our total revenue guidance factors in a 3-percentage-point decline from FX headwind, totaling about a $14-million impact for the full year. At the midpoint of guidance, we expect our first-half and second-half total revenue percentage split to be 49% first half and 51% second half. With the Q4 holiday season, as in prior years, we're modeling a sequential decline in services revenue of about 3% from Q3 2015 to Q4 2015.

For adjusted diluted earnings per share, we are raising our guidance range $0.06 to $1.40 to $1.42, representing 20% to 22% growth over 2014 adjusted EPS of $1.16. Our previous guidance was for 16% to 17% growth. Our full-year forecast includes about $0.03 of negative FX impact. We expect our first-half and second-half percentage EPS split to be about equal, 50% first half and 50% second half.

For GAAP diluted earnings per share, we expect to deliver $1.29 to $1.31, representing 19% to 21% growth over 2014 GAAP EPS of $1.08. The $0.11 full-year EPS difference between GAAP and non-GAAP adjusted EPS represents the impact of stock-based compensation.

So, in summary, achieving the midpoint of our guidance will result in a full-year 2015 growth profile of total revenue of about 12%, adjusted operating profit 21%, and adjusted earnings per share of 21%. That covers our 2015 guidance. Now I'll turn the call back to Eddie.

Thanks, Dennis. As I mentioned, we posted strong 2015 first-half performance, with solid execution despite a pretty tepid global macro environment, particularly in Europe and Asia. Digital commerce and technology and modernization programs continue to drive significant long-term growth opportunities for Manhattan Associates.

And through innovation, Manhattan is driving the fusion of core supply chain, retail store operations, and point-of-sale capabilities into the market. And we've been quite active in the first half, growing our Business, integrating our mobile clienteling and point-of-sale platforms, driving market awareness of our retail store and POS capabilities, and taking market share from our competition.

We continue to see solid progress in our core verticals, led by retail, with a meaningful portion of our WMS and non-WMS license and services revenue continuing to be driven by existing and new customer omni-channel initiatives and the reinvention of their supply chains.

As I discussed at the beginning of the call, we recognized four large deals in the quarter. All four were in retail; two were in what we would consider classic retail, one in pure play eCommerce, and one in drugstore retail. All deals were driven by strategic technology modernization programs, with two of the deals driven by omni-channel initiatives and one led by transportation.

In Q2, our license fee mix was weighted at about a 55%/45% split between warehouse management and our other solutions, with a meaningful portion of both WMS and non-WMS license and services revenue driven by existing and new customer omni-channel initiatives and legacy supply chain modernization. The retail, consumer goods and third-party logistics verticals were our strongest license fee contributors, making up more than half of our Q2 license revenue.

Q2 software license wins with new customers that have permitted us to share their names include: Banaja Holdings, Costa Del Mar, Gold City Footwear, Grupo Exito, Hy-Vee, IEH Auto Parts, M Block and Sons, Order Nordic, PT Super Lion Indo, Tarsus Technology Group, and Thirty One Gifts. Q2 expanding relationships with existing customers included: Arcadia Group, Avery Dennison, Belk, Best Buy, Cdiscount, Eileen Fisher, Exel, Five Below, Forever Direct, Groupe Dynamite, Kane Warehousing, L Brands, Legacy Supply Chain Services, Maggy London International, Northern Safety, PVH Corp, Rite Aid, Schneider Electric, Thomas Cook Airlines, Toys "R" Us, and Wolverine Worldwide.

As you can imagine, our professional services business around the world is performing very well, posting record revenues in Q2, with revenue up 17%; and they continue to receive very high marks for customer satisfaction. Our global services team have been very busy with core supply chain and retail omni-channel enablement initiatives, with 335 or so system go-lives over the past 12 months.

Demand and visibility continues to be quite strong, as we added 60 associates to our global team in Q2. And plans for the balance of 2015 call for adding about 200 more associates to meet the needs of our customers.

Adoption of our omni-channel solutions continues at a pretty rapid pace. Our order management, and store inventory and fulfillment applications, continue to provide our customers best-in-class solutions for pickup in store, site to store, ship from store, and even the ability to offer same-day delivery.

The great news for our customers is they don't need to rip and replace their web storefronts in order to implement key omni-channel business processes like the ones I just mentioned. Rather, the Manhattan omni-channel applications are highly complementary of existing web storefronts and point-of-sale applications, increasing the time-to-market capability for our customers.

Now, speaking of point-of-sale, we continue to make great progress in our quest to create the omni-channel operating platform for the modern retailer. We're in flight right now with a leading apparel retailer who's chosen Manhattan for their next generation of point-of-sale, clienteling and order management system. It's an exciting time for this customer, and it's an exciting time for us at Manhattan as well, as we continue to push the boundaries and offer industry firsts at the intersection of order management and point-of-sale. More to come on this over the next couple of quarters, because we believe this is a real game-changer.

We also kicked off a flurry of activity from customers waiting to take advantage of the newest 2015 release of our core supply chain solutions. At the time of general availability, we experienced a record number of existing WM customers awaiting the availability of the new release for their upgrades and new installation projects. And much of this was driven by retail customers wishing to take advantage of key innovations that we developed, targeted at streamlining eCommerce warehouse fulfillment operations, an obviously critical pillar in the retail omni-channel fulfillment strategy world.

Likewise, the initial deployments of the 2015 release of distribution management mobile, our tablet-based mobile solutions designed to enable warehouse managers and supervisors to ditch their desk and engage out with their employees on the floor, where the real operational work occurs, the demand there has been an overwhelming success. Initial feedback to our newly expanded capabilities included real-time management of tasks and exceptions right out on the floor has been extremely positive, and driving many customers to consider software upgrades to both their labor management system and their warehouse management systems.

Now, turning to the transportation side of our Business, our focus on growing our cloud revenue streams, as well as expanding our international logistics management capabilities, continues to be successful. Q2 saw several key go-lives leveraging our multi-tenant transportation solution in the cloud. One in particular involved optimizing freight spend and transportation planning across a global distribution network. This customer now relies on our transportation solution to optimize international export shipment planning and execution all the way through freight payment across truckload, less-than-truckload, ocean, and rail-shipping modes. This was obviously a pretty complicated business problem that our transportation solution was very well suited for. The demand for our cloud-based supply chain solutions continues to build, and it will continue to be an important part of our solution strategy.

Clearly, at the core of our success continues to be our investment in innovation. Year to date, we've invested about $27 million in research and development, and that's up 13% over H1 2014. And we have about 650 people plus dedicated to research and development, and we are looking to increase our innovation investment capacity with several strategic hires. Our supply chain process platform-based suite of solution, including our omni-channel and point-of-sale solutions, certainly distinguishes us from all of our other competitors.

As I mentioned in our last call, in May we held our annual customer conference, Momentum 2015, in Desert Springs, Arizona. We had record attendance, with over 1,100 people of the -- and the best and brightest in the supply chain industry coming together to exchange ideas and concepts; and we had the privilege to share with them Manhattan's go-forward strategy and our progress. The conference theme was Building the Commerce-ready Enterprise.

And at Momentum, we highlighted two primary elements. First, our latest innovations, including mobility for distribution management and advanced transportation modeling. And secondly, we introduced for the first time, and demonstrated for the first time, our mobile point-of-sale, clienteling and tablet retailing solutions. Our conference emphasized how much the demands of omni-channel has blurred the lines between supply chain solutions, especially WMS, and store solutions, including point-of-sale, and how omni-channel is changing the role of the retail store associate.

In an omni-channel world, the retail store associate is becoming a mashup of really three roles. Firstly, they still have to be the consummate sales professional. But secondly, they also have to be a great omni-channel customer service agent. And thirdly, they now have to be an order fulfillment expert. Overall, the educational break-out sessions, the customer presentations, and the keynote speeches made at Momentum made for a terrific event that was very well received by our global attendees.

Turning to our global associates, we ended Q2 with about 2,845 employees, up 6% over the prior-year Q2. 95% of our headcount growth is in our professional services group, on strong demand to support top-line growth and customer satisfaction. We finished the quarter with 66 people in sales and sales management, with 60 quota-carrying reps -- that's down one from last quarter -- but we intend to continue to be optimistic and opportunistic, and look to add about a half a dozen talented sales professionals to the Company.

So, let me close my prepared remarks with a brief summary. We are very pleased with our continued momentum and performance for the 2015 midpoint. While the global macroeconomic conditions continue to give us reason to be cautious, we are very optimistic about the future, and remain very focused on our customers and getting them commerce-ready.

Retail, commerce and supply chain complexity in our target markets continue to increase, driven by digitalization and eCommerce, which are clearly fueling multi-year investment cycles for our customers, and for us at Manhattan Associates, as well. Our relative competitive position continues to be strong and improving, and we continue to invest in innovation to extend our addressable market, our leadership and our differentiation. And with the world's most talented supply chain employees, the best software solutions, and good market momentum, we believe we are very well positioned for the balance of 2015 and beyond.

And, Kyle, with that, we'd be happy to take any questions from the group.

(Operator Instructions)

Mark Schappel, Benchmark.

Hello. Good evening and nice job on the quarter. And Eddie, have a couple of big picture-type questions here this afternoon. I was wondering if you could just address maybe in a little bit more detail how your solutions address the challenges associated with omni-channel retailing. What specifically are your solutions providing in that part of the picture?

Yes, good question, Mark.

Probably, it's a pretty detailed question, and the answer, I think is -- would be a long one. But at the end of the day, we're trying to make sure that we can bring to the retail community the ability for them to be able to blend selling channels, all selling channels, into one for their consumer community, so that you and I as consumers have a very consistent experience across all of the channels that we want to buy from, and as you look at the retail side of the house, making sure that retailers can execute on fulfilling our needs in a very consistent and seamless way.

At a high level, in order to be able to do that, we believe that retailers need a single view of their entire inventory pool across every node of their supply chain, whether it be inventory that's in transit to them, at their distribution center, at their retail stores, at franchisees, or anywhere else in the supply chain. And also a single view of the customer, again, across all the channels at which they shop, and ultimately, being able to match the demands of the customer to that single inventory pool in an effective and efficient way.

Okay. Great. And along those lines, available to promise is a big part of this, as well, and the firm has coined the term available to commerce. I was wondering if you maybe could just go into -- maybe we're getting a little bit too deep in the weeds -- but just try to go into a little bit more detail on how available to commerce just differs from the classical available to promise, if you will.

Yes. So I'll try to do it in a nutshell. In a nutshell, available to promise anticipates inventory coming into the supply chain. So if you are a retailer, you've ordered 1,000 units from your manufacturer, you may begin to start promising those items to your consumers before they arrive, which, sometimes you have to do, but has some risk, frankly, associated to it.

Available to commerce gives retailers the ability to be able to make that absolute commitment to the consumer. We can promise to get that product to you, because we know in real time exactly what the inventory position is across the network. So as a very simple example, when you go on to a retailer's website and you say, hey, I'd like to buy this product, but I want to pick it up in one of your stores. It wouldn't be uncommon for that retailer, via their website, to promise you, commit to you, that within 30 minutes, that product will be ready to be collected.

Well, they certainly don't want and can't disappoint you. You can't go to that retail store having got that commitment and find that the inventory is not there. So available to commerce is focused on ensuring that this is a real-time view of inventory across the network, number one, but maybe most importantly, gives the retailers the ability to be able to segment inventory by selling channel, so they can commit units to bricks and mortar, catalog, online orders and franchisees.

Okay. Great. Thank you. I know that's tough to do in a short time frame here.

Something a little bit easier here. Dennis, moving to you, on the cash flow side, cash flow from operations looked very healthy this quarter, especially compared to a year ago quarter. Could you just remind us if there was something a year ago that caused cash flow to be so low, if there was like a one-time hit that you took?

Yes. We paid incrementally in the first half $18 million more in taxes in 2014 than in 2013.

Great. Thank you.

Very good. Thanks, Mark.

By the way, this quarter's operating cash flow is the second best quarter in the history of Manhattan Associates.

Terry Tillman, Raymond James.

Good afternoon, gentlemen. Can you all hear me okay?

We can, Terry. Yes.

This is becoming old hat. Nice job on the quarter.

Thank you.

First question just relates to -- we have -- and I'm not trying to jinx you -- but is the number of quarters in a row now where the license revenue has been at least modestly above our estimates, and I guess it's just two estimates, but the point is consistently above our assumptions, I'm wondering, is it something around just the activity level, the level of pipeline, late stage pipeline has just gotten stronger because of either omni-channel or maybe US healthiness? Or is there something about close rates that have improved? Because it's notable of this consistent track record on license now.

Yes. I think it's a little bit of both, Terry. There's no -- as you know, there's no silver bullet here to bringing license revenue in for the quarter. We still are subject to a little bit of lumpiness. We are still subject to big deal timing. But I do think our close rates are solid. We are seeing good momentum, particularly in retail and omni-channel initiatives. And frankly, hats off to our sales team who are executing very well across the globe.

Okay. Dennis, you had talked about strategically investing in R&D. I think that was in your prepared remarks versus Eddie's. So hopefully I got that right. And if that's the case, what I'm curious about, what does that mean, though? I felt like that was a different language. And could that entail potentially M&A as a route to get the strategic investment in R&D?

We never discount that, but the lean would be really more towards investing in growing our intellectual capital headcount, Terry.

Okay. The last question, on the retail store side, which is definitely newer stuff for you guys, if I'm not mistaken, Lillian Vernon, you all talked about at the user conference. Eddie, were you talking about another signature win or is that still too early to be talking about other wins, and how should we think about that business evolving versus the omni-channel/order management business? Could it evolve more rapidly, about the same, or maybe a little bit more lagging?

Let's see. A couple three questions in there, Terry, and all good ones. By the way it was Lilly Pulitzer that presented at Momentum.

Sorry.

No problem. Just wanted to make sure that we were clear there. And I wasn't talking about another particular signature win during the prepared remarks. But with regard to the momentum and the focus around retail store solutions and so forth, we're certainly seeing a lot of interest.

Your question was, should we expect to see that business developing faster than our order lifecycle management business? It looks a little bit like order lifecycle management of a few years ago. There's a great deal of interest out in the marketplace. The buying cycles are still very long, at the moment. You're seeing early adopters get on board. And I think it'll be 18, 24 months, in my view, before we start seeing consistent buying cycles in that space, much like the ones we are now seeing in the order lifecycle management space.

Okay. All right. Thanks.

Yes, sure. Thank you, Terry. Appreciate it.

There are no further questions at this time.

Okay, Kyle. Well, thank you very much, everybody, for joining us this afternoon. I appreciate your time. And we will certainly look forward to updating you on our Q3 results in about 90 days or so. Good afternoon.

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