What happened
Shares of supply-chain and inventory software company Manhattan Associates (MANH +3.78%) appreciated 88.2% in 2019, according to data from S&P Global Market Intelligence. The software company saw a rebound from the tech sell-off of late 2018, and demand for its software solutions continued to exceed expectations.
In addition, Manhattan Associates is transitioning from a perpetual license model to a cloud-delivered model, which caused revenue declines in 2017 and 2018 but reversed to headline revenue growth in 2019.
Image source: Getty Images.
So what
Despite fears of a global slowdown, retailers and businesses worldwide are increasingly leaning on the supply-chain optimization tools that Manhattan Associates offers in order to modernize their businesses. Manhattan Associates' software helps businesses optimize their supply chains and manage omnichannel solutions across physical stores and e-commerce, making retailers and other businesses more efficient and keeping them competitive.
The strong product fit for today's omnichannel world enabled Manhattan Associates to exceed analyst expectations for both revenue and earnings in each of the first three quarters of 2019, sending shares higher. In addition, Manhattan Associates returned to revenue growth after two years of declines.
The declines in revenue and earnings per share (EPS) didn't necessarily indicate a declining business, though. Starting in 2017, Manhattan Associates began transitioning customers off of a perpetual license model, which entails a large upfront payment, to a lower but recurring monthly subscription model for Manhattan Associates' cloud solutions.
When a company does this, it substitutes large multiyear upfront payments for a lower and recurring subscription that's recognized each month. As customers transition, this has the effect of temporarily lowering revenue. However, once enough time has passed and a critical mass of customers has made the transition, revenue and EPS then begin to grow again.
That return to growth happened in 2019, which may have convinced skeptical investors about headline revenue and earnings figures.
Now what
Since Manhattan Associates has successfully handed off many customers to its cloud solution, the company should display continued growth going forward. It will need to, as the company trades at nearly 40 times cash flow after its big run.
Still, Manhattan Associates generates very high returns on capital and is primed to benefit from the continued complexity of modern supply chains and omnichannel commerce. As such, it should perform along with the rest of the software-as-a-service sector, which has done extremely well but, on the whole, looks a tad expensive today.
