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Manhattan Associates' (MANH) CEO Eddie Capel on Q1 2016 Results - Earnings Call Transcript

Manhattan Associates, Inc. (NASDAQ:MANH)

Q1 2016 Earnings Conference Call

Executives

Dennis Story - Executive Vice President and Chief Financial Officer

Eddie Capel - President and Chief Executive Officer

Analysts

Terry Tillman - Raymond James

Mark Schappel - Benchmark

Yun Kim - Brean Capital

Matt Pfau - William Blair

Operator

Good afternoon. My name is Skinner, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates first quarter 2016 earnings conference call. [Operator Instructions] I would now like to introduce Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

Dennis Story

Thanks, Skinner, and good afternoon, everyone. Welcome to Manhattan Associates 2016 first 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, 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 fiscal 2015 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. And you can find a reconciliation schedule in 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.

Eddie Capel

Well, good afternoon, everybody. We're off to a great start in 2016, posting record results as our customers and prospects continue to invest in core supply chain and omni-channel commerce initiatives. Our competitive position in the marketplace continues to be strong and customer satisfaction is solid across the globe.

We delivered record total revenue in Q1 of $149.9 million, increasing 12%, and record adjusted earnings per share of $0.42, increasing 24% over Q1 2015. Software license revenue for the quarter was $20.6 million, up 7%. We closed three $1 million-plus license deals in the quarter, two with existing customers and one with a net new customer. Two of the large deals were in the U.S. and one in Latin America.

All three of the deals were led by omni-channel transformation initiatives. And in one of the three large deals, we were successful head-to-head against very strong competition. Clearly our sales teams are executing very well, and their competitive win rates in head-to-head sales cycles against their major competitors remain strong, at over 75% for the quarter.

Overall for the quarter, 50% of our license revenue was from net new customers, adding new large global brands to our customer portfolio. Our success is driven by the focus we apply to delivering innovation in an ever-changing commerce market, focusing on our customer success and leveraging at deep demand expertise.

While we remain cautious regarding the global economic growth risks with a strong start to 2016, we are raising both our revenue and earnings per share guidance for the year. Dennis will share the specifics with you in a moment.

Our pipeline is solid, services business demand is strong, customer satisfaction is good and we continue to be the leading innovator in the supply chain commerce market. And I'm going to look forward to providing more color in my business update, following Dennis' review of our financial results and our revised guidance details.

Dennis Story

Thanks, Eddie. I'll cover our Q1 2016 results, and then review our updated 2016 full year guidance. We posted Q1 total revenue of $149.9 million, representing organic growth of 12%. Excluding FX impact, total revenue grew 13%. For the quarter, Americas grew total revenue of 17%, EMEA was down 14% on weak license performance and APAC was up 2%.

Adjusted earnings per share for the quarter was $0.42, up 24% over prior year and our GAAP diluted earnings per share was $0.38, increasing 23%. For your reference, a detailed reconciliation of GAAP to non-GAAP adjustments is included in our earnings release today.

License revenue for the quarter totaled $20.6 million. From a regional perspective, Americas posted license revenue of $19 million, EMEA $0.7 million and APAC $0.8 million. Consistent with previous quarter's comments, our license performance depends heavily on the number and relative value of large deals we close in any quarter. Consistent with last quarter, we continue to target license growth goal of 6% to 8% for the remainder of 2016.

Shifting to services. Demand continues to be solid. Q1 services revenue totaled $116.3 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 $84.5 million, growing 16% over Q1 2015. With solid visibility into our global services demand, we hired 135 consulting associates in Q1 and continue to focus on hiring additional resources to meet our customer's needs.

Maintenance revenue for the quarter totaled $31.8 million, increasing 11% over last year. Strong cash collections, license revenue growth and retention rates of 90%-plus contributed to year-over-year growth. And as a reminder, we recognized maintenance renewal revenue on a cash basis. So timing of cash collections can cause in a period lumpiness from quarter-to-quarter, which Q1's growth was positively impacted by cash collections timing.

Consolidated services margins for the quarter were 56.5%, benefiting from solid productivity, while absorbing Q4 2015 and Q1 2016 new hires. We expect Q2 2016 services margins will likely be in the range of 57.6% to 57.8%, and our full year 2016 services margins to normalize into the 57.5% to 57.7% range.

Turning to operating income margins. Q1 adjusted operating income totaled a record $47.9 million, with operating margin of 32%, up from 30% in Q1 2015. Our operating leverage is driven by solid organic revenue growth, workforce productivity and a strong expense discipline.

With the solid Q1 results, we are expanding our goal for 2016 full year operating margin expansion over 2015 to a range of 75 basis points to 100 basis points, providing for an additional 25 basis point upside as we continue to incrementally invest in innovation, marketing awareness programs and infrastructure in 2016.

We are targeting a Q2 2016 operating margin range of 32.5% to 32.8%, representing an 80 basis points to a 110 basis point increase over Q2 2015. We expect second half 2016 operating margin to come in at 32.7% to 32.8% versus 32.5% in 2015. The second half quarterly splits should be adjusted for quarterly license seasonality and lower Q4 services revenue, due to the traditional retail holiday season.

So that covers the operating results. Regarding taxes, our adjusted effective income tax rate was 37% for Q1 compared to 37.5% in Q1 last year. We continue to project a full year effective tax rate of 37%.

Recall that Congress approved a permanent extension of the R&D tax credit in December of 2015. Prior to the permanent extension, Congress routinely extended the R&D tax credit in Q4, creating a full year catch-up in the fourth quarter versus recognizing the benefit quarterly throughout the year.

Diluted shares for the quarter totaled 73.0 million shares, down from Q4 2015 shares of 73.6 million. We repurchased about 890,000 of common stock in the quarter totaling $48.5 million. We estimate Q2 through Q4 2016 diluted shares to be 72.7 million and the full year weighted average diluted shares to be 72.950 million. This estimate does not assume additional common stock repurchases. 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. Turning to cash flow. Cash flow from operations was $40.4 million, up from Q1 2015's $15.2 million performance on strong global cash collections. DSOs improved to 51 days versus 63 days in Q4 2015. And capital expenditures were $1.9 million in the quarter, and we estimate full year 2016 CapEx to be about $11 million to $13 million.

Our balance sheet clearly continues to support stability and long-term investment flexibility with zero debt and cash investments totaling $115 million at March 31, 2016, compared to $129 million at the end of Q4 2015. The net decrease was driven primarily by our share buyback program. So that kind of covers the Q1 2016 results in a nutshell. The four pillars of financial strength, growth, profitability, cash flow and the balance sheet are rock solid for Manhattan Associates.

Now, I'll update you on our 2016 guidance, and then hand it back to Eddie for the business update. With a solid start to the year, we are raising our full year 2016 total revenue and EPS guidance with a measured pace, given potential risk associated with the current global growth outlook.

For revenue, we're raising our guidance for full year total revenue from our original range of $609 million to $615 million to a new range of $615 million to $620 million, representing 10.5% to 11.5% growth over 2015 versus our previous guidance of 9.5% to 10.5%. Our total revenue guidance factors in a 1 to 2 percentage point decline form FX headwind.

We expect our full year total revenue percentage split to be about 49% to 51% first half versus second half. With the Q4 holiday season as in prior years, we are modeling a sequential decline in services revenue of about 4% to 5% form Q3 2016 to Q4 2016.

For adjusted diluted earnings per share, we are raising our guidance range $0.04 to $1.73 to $1.76, representing 14% to 16% growth over 2015 adjusted EPS of $1.52. Our previous guidance was 11% to 13% growth at $1.69 to $1.72. We expect our full year EPS split to be the same as the total revenue with a 49% to 51% split first half to second half.

For GAAP diluted earnings per share, we expect to deliver $1.58 to $1.61, representing 13% to 15% growth over 2015 GAAP EPS of $1.40. The difference between GAAP and non-GAAP adjusted EPS represents the impact of stock-based compensation. So that covers the financial results and the 2016 guidance.

Now, I'll turn the call back to Eddie for the business update.

Eddie Capel

Thanks, Dennis. Well, as Dennis has mentioned, we're off to a very good start in 2016, despite a challenging global environment, particularly in Europe and in Asia. 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 activity, driven by digital commerce and technology modernization programs.

Our competitive position continues to be quite strong and we are aggressively investing in innovation and market awareness to take market share and to position Manhattan for the next wave of retail multi-channel selling, entering 2017. As I discussed at the beginning of the call, we recognized three large deals in the quarter, two in retail and one in food and beverage. All deals were driven by strategic supply chain modernization programs.

In Q1, our license fee mix was weighted at about 65%-35% between our warehouse...


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