Manhattan Associates

Sticky supply chains

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History

In the 1980s, the U.S. textile industry faced intense global competition. To compete effectively, Manhattan Associates developed "Quick Response," using technology to improve the supply chain. Their software, PkMS, revolutionized warehouse management and drove the company's rapid growth in the 1990s. By the late 1990s, Manhattan Associates established itself as a leader in the warehouse management system sector of supply-chain execution. They attracted a diverse customer base, including prominent companies like Calvin Klein and Patagonia. In 1998, they went public, and their PkMS software became widely recognized for its effectiveness. Throughout the decade, Manhattan experienced significant growth, expanded internationally, and acquired other companies to broaden its services. In the early 2000s, the company faced increased competition but responded by acquiring Logistics.com, expanding their capabilities beyond warehouse management.

Today

Manhattan Associates (named after Manhattan Beach, CA, not New York) is adapting yet again. In 2017, the company started its transition to the cloud through its Manhattan Active Solutions. The company’s cloud-based product is growing 40%+ while its on-premise product is declining. 

The fact that professional services still make up about half of the business is why gross margins are in the low-to-mid 50%’s. This is lower than the standard 70%-80% pure SaaS business but it’s because these aren’t small implementations. It’s quite difficult to tie together a bunch of distribution centers, trucks, and retail stores. But once everything works together nicely, there’s a very small chance the customer will ever rip the system out. These software solutions aren’t quite as sticky as something like an ERP which ties the entire business together but supply chain management software has notoriously low churn rates because stitching together all of the assets is very time consuming upfront and directly affects revenue and profits.

The company’s revenue centers around three main buckets – supply chain, omnichannel commerce, and inventory management. At the core, the software fulfills the job of enabling companies to get products where they need to be efficiently to maximize revenue and profits. Manhattan boasts some high-profile customers like Walmart, L’Oreal, Nike, and Home Depot. The company is particularly strong in apparel based businesses as Under Armour, Lululemon, Adidas, and Crocs all use Manhattan products in some capacity.

Competition

In fact, Manhattan has been recognized as a leader in the Warehouse Management System Gartner Magic Quadrant for the last 15 years. That is quite some brand strength in the space! 

In warehouse management, there are really four main competitors, two big and two smaller. The big ones are the ERP powerhouses, SAP and Oracle. A lot of companies simply use SAP and Oracle’s supply chain tools rather than needing to buy a separate system and integrate it. And then there are two private companies, Blue Yonder, which was actually bought by Panasonic in 2021 for $7 billion and Korber, which is minority owned by KKR. Manhattan’s leading product is the warehouse management system (makes up about half of the business and then the other segments split the other half) so it’s not a surprise this is where its strongest lead is. However, it also puts up a good fight in transportation management systems as you can see below. 

Business Model

The company’s leadership position contributes to its strong margins. Free cash flow margins are consistently in the 25% range, even higher than EBIT margins, mainly due to strong working capital dynamics and deferred revenue. And to add to the solid margins, revenue has been slightly accelerating as the cloud business becomes a large portion of overall revenue. The company is six years into its cloud transition yet it accounts for only about a quarter of the business. But the underlying cloud growth isn’t slowing down a whole lot and as companies move to a more omnichannel model of having stores and an efficient e-commerce operation, the need grows for Manhattan products. The business of retail has gotten much more complex over the past decade. Nike can’t just ship products to Footlocker and get their money anymore. They have to do DTC, have their own fulfillment centers, contract with logistics providers, and do returns. The operations have become much more complex which is a tailwind for Manhattan.

You can see the cloud growth below. The bolded numbers are management’s guidance for Q2 - Q4 ‘23. So I suspect that YoY growth will be at least 40% for the year as management will likely raise guidance throughout the year. 

And here is the cloud’s contribution to overall sales:

What’s interesting is that Manhattan didn’t have to go through the same cash flow trough that Adobe did since they get half of their revenue from services. The company was able to slowly shift customers from on-premise deployments to the cloud. That’s why it has taken a while – here we are six years later and 26% of revenue is from the cloud. COVID did accelerate the adoption of the cloud products too because in-person maintenance upgrades became far more of a hassle. 

Wrapping Up

The products that Manhattan offers are extremely mission critical so transitions have to be very smooth. In fact, the company was planning the transition and the development of the cloud products for four years prior to actually launching in 2017. So it was a very thoughtful process. As supply chains just continue to get more complex, the company’s blue chip customers need to optimize revenue and profits and Manhattan helps them do that. Supply chain management isn’t quite as sticky as a full-blown ERP but it’s incredibly mission critical. Management is a thoughtful bunch as we’ve seen with the cloud transition and the company has bought back 40% of its shares over the last 15 years. The company has now been on the NASDAQ for 25 years which in tech-years (can be like dog-years) is mighty impressive. 

Manhattan is an under-discussed compounder with high returns on capital, a strong management team and a very sticky product.

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