An Industry Analyst’s Reaction to Manhattan Associates’ Quarterly Financial Call

I am an industry analyst that follows supply chain software solutions. Industry analysts are very different from financial analysts, who generally care about whether buying a company’s stock will be a good investment. As an industry analyst, I care about the technology. How functionally rich is it? How scalable? What new products are being introduced? I also need to make intelligent recommendations to our clients about whether they should implement a particular supplier’s solution.

Both financial and industry analysts listen to quarterly financial calls from public companies. Manhattan Associates had its call a few weeks ago. But often the things that make financial analysts happy actually disappoint industry analysts, and vice versa.

Financial analysts would, of course, have been pleased to hear about Manhattan’s record revenues and earnings per share, and its guidance that revenues and profits will continue to increase. An industry analyst cares about this too, but in a different manner. I want to know whether a company is financially healthy or in distress, and Manhattan Associates is clearly in the former category.

The company is exhibiting steadily growing revenue and profits, which makes it less likely to be acquired. In the software industry, there is a history of venture capitalists, or other software firms, buying underperforming companies at a low price, reducing or even virtually ceasing to invest in the technology they purchased, and “milking” the installed base for maintenance revenues. When Eddie Capel, the CEO of Manhattan Associates, refers to the company’s organic investments, and its decision not to play the consolidation game, he is saying that Manhattan Associates is not that kind of company.

But what I love is that Eddie defends the company’s investments in research & development (R&D). Some financial analysts clearly consider the R&D investments to be too high. In a company with 2,510 total employees, 650 work in R&D. Over ten percent of Manhattan’s revenues are devoted to R&D. And in fact, during the course of his career, Eddie has had senior product management positions. Based on my interactions with Eddie over the years, I continue to think of him as a “product” guy.

It is also clear from the financial calls that a significant portion of Manhattan’s R&D is being focused on building out solutions to support the omni-channel initiatives of the company’s retail customers. I consider omni-channel commerce the hottest trend impacting supply chain management, so this is something I continue to be glad to hear. Financial analysts are happy to hear that while omni-channel revenues are currently not a large portion of revenues, a “meaningful portion” of the warehouse management deals that are closing, which is Manhattan’s main product line, are being driven in part by omni-channel products and investments.

Industry analysts and prospective customers also care about the quality of the service a company provides. During the question and answer period a financial analyst asked about Manhattan’s willingness to develop a bigger system integrator ecosystem, particularly around its new omni-channel products. Eddie replied that very often consultants are involved in deals, particularly in the role of helping customers with change management issues, “but when it comes to [installing] our software, we think we are pretty good at it. No one can surpass our capabilities.” While financial analysts like the service revenues generated by Manhattan, some seem to be tacitly wondering whether Manhattan’s revenues would be higher if they had more consulting partners.

And as an industry analyst, I also pay attention to the ratio of total service revenues to software revenues. At Manhattan, service revenues are several times larger. This suggests, and customer interviews confirm, that when Manhattan’s WMS is put in, the costs associated with implementation are substantially larger than the software license fee. In past financial calls, and our calls to customers confirm this, Manhattan has said the ratio of implementation costs to software is closer to one-to-one for TMS implementations. I’d love to know what the ratio is for newer products like distributed order management (DOM), a key omni-channel product, but that has not come up in these calls and I’ve yet to interview a Manhattan DOM customer.

Eddie also talked about customer retention of 90 percent plus. Financial analysts hear this and think about a predictable stream of maintenance revenue. Industry analysts take it as a measure of customer satisfaction. In this case, this metric is about par for the course.

In conclusion, both industry and financial analysts listen to quarterly calls, but they are listening with different purposes, at times taking the same piece of information and interpreting it quite differently. Manhattan Associates is one of a relatively small number of companies that can have these quarterly calls and actually mostly please both sets of analysts.

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