MANH - Manhattan Associates Guides To Moderated Growth As Slowdown Looms

2023-05-10 17:49:43 ET

Summary

• Manhattan Associates recently reported its Q1 2023 financial results.
• The firm provides supply chain management software and related services.
• MANH has been an excellent performer, with solid growth, profits and free cash flow.
• However, a macroeconomic slowdown looks to be underway and management's guidance appears cautious.
• I'm cautious, too, so my near-term outlook on MANH is Hold.

A Quick Take On Manhattan Associates

Manhattan Associates ( MANH ) reported its Q1 2023 financial results on April 25, 2023, beating expected revenue and EPS estimates.

The company provides supply chain and inventory management software and related services to businesses worldwide.

I previously wrote about Manhattan Associates with a Buy rating here .

MANH has been an excellent stock but its valuation isn't cheap and management's cautious guidance going into an economic slowdown means that I'm more cautious, too.

My outlook on MANH is Hold.

Manhattan Associates Overview

Atlanta, Georgia-based Manhattan Associates was founded in 1990 to assist companies in optimizing their product supply chains, inventory management capabilities and omnichannel order and fulfillment operations.

The firm is headed by president and Chief Executive Officer Eddie Capel, who previously held senior executive positions at Real Time Solutions.

The company's primary offerings include:

• Transportation Management

• Warehouse Management

• Point of Sale

• Order Management

• Customer Engagement

• Store Inventory & Fulfillment

The firm acquires customers through its in-house direct sales and marketing efforts, and through partner referrals.

Manhattan Associates' Market & Competition

According to a 2021 market research report by Allied Market Research, the market for supply chain management software and services was an estimated $18.7 billion in 2020 and is forecast to reach $52.6 billion by 2030.

This represents a forecast CAGR of 10.7% from 2021 to 2030.

The main drivers for this expected growth are demand for increased supply chain visibility, especially after the disruptions caused by the COVID-19 pandemic.

Additionally, there are several other growth opportunities within the supply chain technology sector, including enterprise supply chain management technologies, e-commerce integration, warehouse automation, omnichannel capabilities and last-mile delivery.

Major competitive or other industry participants include:

• Epicor Software
• HighJump
• Info
• IBM (IBM)
• JDA Software Group
• Kinaxis (KXSCF)
• e2open
• SPS Commerce (SPSC)
• Oracle (ORCL)
• SAP (SAP)
• Descartes Systems Group (DSGX)
• Others

MANH's Recent Financial Trends

• Total revenue by quarter has risen per the following chart:

• Gross profit margin by quarter has trended slightly lower in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended lower more recently:

• Operating income by quarter has grown materially, as shown in the chart below:

• Earnings per share (Diluted) have risen impressively recently:

(All data in the above charts is GAAP)

In the past 12 months, MANH's stock price has risen 39.83% vs. that of SPS Commerce's growth of 48.32%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $181.6 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash flow was an impressive $200.5 million, of which capital expenditures accounted for only $6.1 million. The company paid an eleven-quarter high $61.9 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For MANH

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be SPS Commerce; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

MANH's most recent Rule of 40 calculation was 39.3% as of Q1 2023's results, so the firm has performed well in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Manhattan Associates

In its last earnings call (Source - Seeking Alpha), covering Q1 2023's results, management highlighted revenue and earnings exceeding its previous expectations.

RPO (Revenue Performance Obligation) rose by 42% year-over-year and is a leading indicator of demand growth for the company's services and software.

The company is still focused on retail, manufacturing and wholesale customers, with those segments accounting for over 80% of its bookings in Q1.

Management also mentioned 'advanced work' on how best to integrate AI technologies such as ChatGPT and Google Bard into its offerings.

Total revenue for Q1 2023 rose 23.5% year-over-year and gross profit margin fell 0.2 percentage points.

Management did not disclose any company or customer retention rate information, nor did it characterize retention or churn qualitatively.

SG&A as a percentage of revenue increased 0.9 percentage points year-over-year but operating income rose a whopping 38.5%.

Looking ahead, for full-year 2023 revenue guidance, management expects 12% revenue growth.

Adjusted earnings per share is expected to be $2.88, an increase of 7% from its prior expectation.

Also, the Board of Directors approved replenishing its $75 million share repurchase authority after purchasing $74 million in Q1.

The company's financial position is very strong, with ample liquidity, no debt and impressive free cash flow.

Regarding valuation, compared to SPS Commerce, MANH is being valued by the market at slightly higher valuations despite essentially the same revenue growth rate although MANH has a higher net income margin over the trailing twelve-month period.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so management cited 'Challeng[es][ing]' two times and 'Macro' four times in various contexts.

The negative terms referred to the uncertain macro environment the firm is operating in, which is giving management some pause, although the firm has diversified away from retail customers to some extent more recently, so has less exposure to some of those concerning aspects.

In the past twelve months, the firm's EV/EBITDA valuation multiple has jumped 25%, from 48x to around 60x, as the chart from Seeking Alpha shows below:

A potential downside catalyst to the stock could include a macroeconomic slowdown or recession, especially as the banking sector reduces lending activity in the wake of recent high-profile bank failures.

Management's word choices and guidance are somewhat cautious and so I'll be cautious, too.

My near-term outlook for MANH is a Hold.

For further details see: