Manhattan Associates, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 5/5

Manhattan Associates, Inc. is a technology company that provides supply chain software and solutions for retailers, wholesalers, and other large enterprises, helping them manage their complex supply chains.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Manhattan Associates (MANH) operates in the Supply Chain Management (SCM) and related software sector. They provide a suite of cloud and on-premises software solutions designed to optimize inventory, logistics, and transportation operations for their clients. The company’s business is structured around four main types of revenue: Cloud Subscriptions, Software Licenses, Maintenance, and Services. This revenue model is particularly important because a large portion of their revenue (Cloud Subscriptions and Maintenance) is recurring, as opposed to the other two categories.

  • Cloud Subscriptions: Customers pay for access to Manhattan’s software on a subscription basis, generally long-term contracts.
  • Software Licenses: Customers acquire a perpetual license to use Manhattan’s software on-premises.

  • Maintenance: Support and updates for both software license and subscription customers.

  • Services: Services include system implementation, training, customer support, consulting, etc.

Industry Trends and Competitive Landscape The industry is characterized by several trends:

  • Cloud Adoption: There is an ongoing shift from on-premise software to cloud-based solutions, due to lower upfront costs and better scalability. This works well for MANH who has a large cloud-based revenue stream, meaning that the company is well-positioned for the present.
  • Supply Chain Complexity: Modern supply chains are increasingly complex, so solutions need to be able to manage complex interdependencies between different entities in the chain (for example, a manufacturer, a shipper, a retail store, and so on). MANH addresses the issue head on, giving it a sustainable advantage in this area.
  • Globalization: As businesses expand internationally, SCM software needs to support international operations, which includes diverse regulations, currencies, and languages.

Competitive Landscape: The SCM sector is not dominated by one company, as there is a diverse set of solutions that companies use, such as those from SAP, Oracle, and smaller pure plays. As the industry further consolidates, the bigger companies are likely to increase their power. Thus, MANH needs to be wary of its ability to continue to win customers long-term.

What Makes MANH Different

  • Focus on SCM: While some competitors offer solutions as part of their broader software portfolio (e.g., Oracle and SAP), MANH focuses almost exclusively on supply chain and related operations which leads to superior understanding and focus in the field.
  • End-to-End Solutions: MANH offers full supply chain solutions, from warehouse management to inventory optimization.
  • Proprietary platform: Manhattan’s software is built entirely upon its proprietary platform and offers a vast amount of solutions, unlike competitors.

Financial Analysis

  • Revenue Distribution: Cloud subscriptions are the highest revenue generators, followed by maintenance, services, and licenses. The recurring revenue components (Cloud and Maintenance) are large and stable, while the others vary year to year depending on sales.
  • Profitability: MANH has a generally high gross margin (around 60%) and stable operating margins (ranging between 20-30%), indicating a strong ability to turn revenue into profit. Even when the company is not selling any software licenses, the business is still profitable. This can be attributed to its strong recurring revenues which help to sustain operations and improve margins. Operating margins have been trending up in 2023.
  • Growth: Growth in the last two years has been very strong, though it will likely taper off in the future. A lot of the growth is due to the increase in cloud subscription revenue. Given the transition to the cloud is already underway, it is unlikely that growth will be as high as in past years. Growth in international markets is also being targeted as the US market is becoming saturated, with strong growth prospects in EMEA and APAC.
  • Cash Flows: The company has a history of generating consistent positive free cash flows due to its SaaS business model, meaning it is capable of returning cash to investors.

Latest Updates

  • Q3 2024 Earnings Results:

    • Strong revenue growth in both cloud and software revenue was reported in the latest quarterly report, showing the company’s continuing ability to perform well in both core businesses.

    • Operating income margins have improved year-over-year for both the three- and nine-month periods ended September 30th.

  • Acquisition Activity: It was recently acquired by Axtria, which can help MANH expand into the pharma business.

  • Economic Outlook: Management expects to perform within historical parameters despite the uncertain macroeconomic outlook and the transition towards the cloud.
  • 2024 Forecast: There is a strong performance expected for the rest of 2024.

Moat Assessment: 3 / 5 MANH possesses a narrow moat primarily because of switching costs. Businesses that tightly integrate their operations with Manhattan’s software often find it costly to switch to a competing program, which creates customer lock-in. Further, due to the deep understanding of supply chains that the company has and its extensive client list, it is unlikely that any new entrant will quickly be able to displace it as a market leader. However, the competitive landscape is quite fragmented, and other established companies are well positioned to compete with MANH. Furthermore, the constant updates and improvements that SCM software needs also implies that the “moat” is not absolute but rather a consistent improvement of products. This is reflected in the “narrow” rather than “wide” moat.

  • Intangible Assets: While MANH has some reputational advantages, its most important strength is not brands or patents but rather its high quality, niche-focused business.

  • Switching Costs: As explained above, the costs of switching to a competing program are quite large.

  • Network Effect: It doesn’t have a powerful network effect.
  • Cost Advantage: It is difficult for MANH to generate cost advantages, particularly as it is not a commodity seller.
  • Size Advantage: It is not the market leader, but it has a sizable presence in its markets.
  • Regulatory Approvals: It has some limited regulatory approvals (such as for some global companies).

Risks to the Moat

  • Competition: The competitive environment is relatively fierce and fragmented, leaving the company prone to competitor actions.
  • Technological Obsolescence: The supply chain software sector moves very fast, so failure to adapt new technologies can hurt the company’s advantage.
  • Global Economic Fluctuations: The company, while global, still has the majority of its business in the USA, and is susceptible to changes in the U.S. economy.
  • Integration Complexities: Many software firms struggle when integrating new acquisitions, and MANH could struggle with that if they decide to acquire more businesses in the future.

Balance Sheet Health: 5/5 MANH has an extremely healthy balance sheet. The company has very strong liquidity and low long-term debt, making it a very low risk company. The amount of cash and equivalents is extremely high compared to its liabilities, showing that the business has enough resources available for internal investments, as well as for any short-term obligations.

  • Liquidity: Their current ratio is extremely strong, consistently over 1.5. Their quick ratio is also good, which implies their short term assets can pay off their short term debt obligations.
  • Leverage: Total debt is negligible compared to its total assets.
  • Asset Quality: The majority of their assets are in marketable securities and cash equivalents, making it a liquid and easily accessible.
  • Shareholder Equity: The company has a strong shareholder equity, giving the company a strong safety net.

Understandability: 2/5 The business model of MANH is not particularly difficult, however, there are some areas that will confuse beginner investors. Due to the technical aspects of its products, and its various services, it has an understandability score of 2 out of 5.

  • Simple Product Suite: While complex, the core product suite is not difficult to understand in general
  • Clear Business Model: The recurring revenue model of MANH makes it quite easy to see how their cash flows are generated, however, the exact technical aspect of their solutions are complex and hard to understand for the casual investor.

In conclusion, MANH is a successful and well-run business with a narrow moat. It operates in a fairly competitive environment and faces risks related to technology and the economy, but has a strong business that is profitable and stable, with a superior balance sheet.