Manhattan Associates Inc

NASDAQ:MANH

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon. My name is Imani and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates’ Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period [Operator Instruction]. As a reminder, ladies and gentlemen, this call is being recorded today, July, 24th.

I would now like to introduce Eddie Capel, CEO; and Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

[Dennis Story, Chief Financial Officer]

Thank you, Imani, and good afternoon, everyone. Welcome to The Manhattan Associates 2018 second quarter earnings call. I will review our cautionary language and then turn the call over to Eddie Capel, our CEO.

During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance, and that actual results may differ materially from the projections contained in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-K for fiscal 2017 and the risk factor discussion in that report. We are under no obligation to update these statements.

In addition, our comments include certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You will find reconciliation schedules in the Form 8-K we submitted to the SEC earlier today, and on our Web site at manh.com. Finally, with the adoption of ASC 606 revenue accounting rules and our new P&L line item format, we have included in the supplemental schedules of earnings release, year-over-year comparisons for apples-to-apples comps. Our year-over-year revenue percentage growth comments and our results are based on apples-to-apples comparison, normalizing 2017 revenue for hardware revenue impact.

Now, I will turn the call over to Eddie.

[Eddie Capel, Chief Executive Officer]

Good afternoon, everyone. And thank you for joining us to review the Manhattan Associates 2018 second quarter results. We delivered Q2 total revenue of $142 million and $0.47 of adjusted EPS. Now while it sustained 3% and 6% respectively versus prior year, these metrics were in line with our objectives and exceeded our Q2 targets across all revenue lines with the exception of perpetual license revenue. And based upon our outlook for the remainder of the year, we’re raising at 2018 full-year total revenue, operating margin and earnings per share guidance.

We continue to be very encouraged by our transition to the cloud and our positive business momentum, highlighted specifically by the following four areas. Number one, our market leading product innovation. At Manhattan Associates, we create industry leading transformative supply chain innovation. Our development cycles are faster than ever and our product and technology releases are bringing important, differentiated new solutions to the market, resulting in encouraging pipeline growth. Year-to-date, our research and development investment is up 22% over prior year and we’re on pace to invest about $70 million in research and development this year.

Number two, strengthening pipeline. Our global pipelines are solid and we're seeing upward trends across cloud, license and services and we’re especially encouraged by our new customer signings and the concentration of potential net new customers in the pipeline with more than half of the deal opportunities representing net new logos. Number three, our improving consulting services. Our forecasted demand for the balance of 2018 is stabilizing and strengthening based upon new product sales and system upgrade activity. Our services teams across the globe are operating at capacity and forward demand continues to build. Global consulting services revenue grew 4.5% sequentially over Q1 2018 and we have the potential to post incremental second half growth over 2017.

Since our last call, we’ve on-boarded approximately 25 consultants and actively recruiting another 175 services consultants across all geographies. And lastly, number four, investments in sales and marketing. Our competitive win rates continue to be strong at 75% against head-to-head competition with about 45% of license and Clydesdales coming from brand new customers. Verticals, driving more than 50% of our licensing cloud revenues in the quarter were retail, consumer goods and food and beverage, with retail being the strongest vertical.

Sales and marketing investments are up 15% year-to-date as we continue to focus on driving market awareness and the expansion of our sales and account management coverage, predominantly in the Americas and Europe. We finished the quarter with 63 people in sales and sales management and 57 quota-carrying sales reps, and we’re currently recruiting for about 20 new positions across sales and marketing globally. All these positive markers point to growth.

And our recognizable cloud revenue continues to track ahead of our 2018 goal of $20 million, more than 125% increase versus prior year. We continue to be very busy with new cloud implementations for Manhattan Active Omni, and TMS is growing as well. Q2 was a strong quarter across all relevant cloud metrics, including deal volume, annual contract value and bookings. We recognize $5.4 million in cloud revenue, more than doubling over Q2 2017 and up 2.5 times over the first half of 2017 or about 154%. Manhattan Active Omni drove 95% of the bookings in the quarter with the Americas delivering about 75% of that deal activity.

We’re also experiencing some early interest in subscription models for our other traditional supply chain management solutions, as we closed our first Manhattan Active Scale warehouse management deal in the cloud. And while the near term early adaptors will impact our license results, overall, we view this as a positive for our long-term subscription revenue growth.

Perpetual license revenue for the quarter totaled $13 million, which included two $1 million plus transactions. Both were competitive retail deals in the Americas previously delayed in prior quarters. And whilst deal activity is healthy, license performance is being impacted by timing, primarily related to the retail reconstitution and customers and prospects sometimes weigh more flexible purchase options for WMS and other supply chain management solutions.

I’ll now comment on a number of significant enhancements that we delivered within our product portfolio this quarter. At our Momentum Users’ Conference in May, we announced the most significant step forward for our WMS applications in the last decade or so. Over a year in the making, WMOS 2018 continues at multi-year theme of reimagining distribution technology for the digital age. In our release, we included significant new innovations in automation enablement a unique machine learning based approach for maximizing outbound velocity and modern mobility for our customers’ associates and their supervisors.

On the automation enablement front, we’ve now embedded what’s known in the industry as a warehouse execution system within our WMS. This provides our customers with real-time connectivity to warehouse automation of any type, ranging from legacy technology to the most innovative new robotics. The warehouse execution system within our WMS allows our customers to flex the balance of man and machine with demand. And because we power the experience within the broader WMS, we’re able to provide a holistic visibility across the entire facility or even the distribution center network.

And this is an important offering, because very few customers can or will pursue a single vendor automation approach for the distribution centers, which makes that differentiated WMS software more vital than ever for rolling out new automation and robotics into facilities across distribution networks over the coming decade or even beyond. So we didn’t’ stop there. Having access to real-time data from all the automation within a facility unlocks a whole new set of opportunities for WMS. We’re now armed with much more granular information about what's happening in the facility at any given time.

We know what work is occurring and what's left to be done. And crucially, we also now know how deeply utilized each piece of automation is. And we can use this holistic view to create the most efficient stream of work possible, making sure all assets are utilized to peak efficiency. And we call this technology order streaming, it brings machine learning and the IoT data that we’re receiving from the automation equipment and combines it with our expertise built for more than 25 years of operational optimization efforts. And early pilots of this new technology are showing double-digit improvements in distribution center throughput all from our new software alone.

And finally, WMOS 2018 includes a brand-new mobile app experience to warehouse associates. Associates throughout the DC are now able to receive, put away, pick, and pack, and ship using a consumer grade mobile application. And our internal testing shows end-to-end pass times are significantly faster with this new app. It also makes on-boarding new full time and temporary associates much faster and much less expensive, which is tremendously important in today's labor markets.

Positive customer response to the latest 2018 WMOS release has been immediate, and we‘re already seeing interest with both new clients and in upgrade projects with existing clients. And that commitment to WMS has just simply never been stronger. We’re investing more in WMS technical and functional innovation than we ever have, and that services organization is extremely well positioned to help our customers unlock the value by implementing these competitive differentiated advancements right away.

In omni-channel, we continue to advance our Manhattan Active Omni operating platform on a quarterly basis, with all customers on the platform gaining immediate advantage by receiving these updates. We have continued our multiyear commitment to helping our customers improve their customer service experiences. And in this case, we've even empowered consumers themselves with new out of the box integration to Amazon’s Alexa virtual assistant. From the kitchen or living rooms using their Alexa device, consumers can now check on an order status or arrange for a call center associate to call them.

It’s fast and easy for the consumer and it helps our customers continue their efforts to deliver best-in-class post purchase customer experience. In Q2 there were a number of successful go-lives for Manhattan Active Omni, and we currently have many additional implementations in flight and look forward to bringing those customers live in the back half of this year.

So that covers the business update. So Dennis, why don’t you provide the financial update and our 2018 guidance? And then I'll close with some prepared remarks and a brief summary.

[Dennis Story, Chief Financial Officer]

Okay, thank you very much, Eddie. So as mentioned, we reported Q2 total revenue of $142 million and $0.47 on adjusted earnings per share. Overall with our business and early-stage cloud transition, we are tracking slightly ahead of our 2018 targeted total revenue and earnings objectives. Our GAAP earnings per share was $0.42 in the quarter compared to $0.45 in Q2 2017 with the difference between adjusted earnings per share and GAAP EPS being the impact of stock-based compensation.

License revenue was $13 million against the $15 million target objective for the quarter. Given the interplay between license and cloud on supply chain management deals, extended deal timing and customer purchasing preferences, we are targeting $13 million in license revenue for Q3 and $15 million for Q4 with a full year license revenue estimate of $49 million, and a corresponding license gross margin of about 89%.

Cloud revenue was $5.4 million, up 126% over Q2 2017. Year-to-date, we’ve recognized $9.8 million in cloud revenue, up 154% over first half 2017. For Q3, we estimate our recognizable cloud revenue will be about $6.2 million, up about 150% over prior year. As Eddie mentioned, we are on pace to more than double our full year 2018 cloud revenue over 2017. We are increasing our beginning of year estimate of $20 million to $23 million with year-over-year growth at 140%. As a reminder, this line includes all subscription, hosting and Infrastructure-as-a-Service revenue from our existing and new software-as-a-service and hosted customers.

We believe our Manhattan Active Solutions deliver differentiated value to customers, enabling Manhattan to drive sustainable long-term growth and profitability. As mentioned on previous calls, we're not providing annual contract value and annualized recurring revenue metrics. Our objective is first to complete at least a full calendar year of our Manhattan Active cloud operations that can serve as a base line for year-over-year comps.

Regarding license and cloud, our performance continues to depend on the number and relative value of large deals we close in any quarter. While large license deals remain important, we expect the mix to continue to shift towards subscription models in 2018 and beyond. While this is positive, deal sizes may be a bit smaller as subscription revenue is recognized over time and product components are also easier to add over time in contrast to the one and done enterprise deals. We also retained some caution around slow decision-making by some clients, particularly retailers and potential global macro and geopolitical events that could impact business investment cycles.

Shifting to maintenance. Maintenance revenue for the quarter totaled $37 million, increasing 3% on new license revenue and strong retention rates greater than 90% plus. As a reminder, our maintenance renewal contracts become effective once we’ve collected cash from the customer, so timing of cash collections can cause inter-period lumpiness from quarter-to-quarter. For 2018, we are estimating growth in maintenance revenue of about 2% to 3% with the midpoint estimate of $146.5 million. We estimate Q3 maintenance growth to be flat to 1% with the midpoint of $36.5 million. Q3 and full year results will depend somewhat on the timing of perpetual license deals closing during the quarter, as well as the level and timing of any existing customer conversions to cloud, and the resulting retention rates and timing of cash collection.

Services revenue for the quarter totaled $82.3 million, exceeding our target and up 4.5% sequentially from Q1 2018 on improvements in Americas and solid growth in Europe. With services demand and pipeline increasing, we are now estimating full year consulting services revenue to be about $323 million, flat to down 2% compared to prior year versus our previous estimate of $318 million, down 3% to 2%. For Q3, we are estimating flat to 1% decline compared to Q3 2017 with midpoint of $83.5 million.

Consolidated subscription, maintenance and services margins for the quarter were 55.5%, driven by cloud and maintenance revenue growth, strong consulting services productivity and capacity management. For 2018, we expect full-year services margins to be about 53% and our Q3 range to be 52% to 52.7%. As discussed in our Q4 2017 call, our services gross margin reflects our investment in cloud operations, our performance-based compensation reset and our annual compensation increases.

Turning to operating income and margins. Our Q2 operating income totaled $41 million with an operating margin of 28.7%. We estimate our Q3 operating margins to be in the range of 24.5% to 25%, representing the hiring in growth investments we're making across our business globally. That covers the operating results. Our adjusted effective income tax rate was 24.5% for Q2 and we are maintaining our 2018 provisional effective income tax rate of 24.5%, which includes the estimated impact of state, local and international tax expense.

Regarding capital structure, we reduced our common shares outstanding by 2% in Q2 2018, buying back 1.1 million shares, totaling $48 million of investment. Year-to-date, we've invested $98 million repurchasing 2.2 million shares and reducing common shares outstanding 3%. Last week, our Board approved replenishing our repurchase authority limit to a total of $50 million. And for the remainder of 2018, we are estimating about 66 million diluted shares for quarters three and four and 66.5 million for full year, which assumes no additional buyback activity for the remainder of 2018.

Turning to cash. We closed the quarter with cash investments totaling $83 million and zero debt. Our deferred revenue balance totaled $90 million, up 20% over December 31, 2017, driven by maintenance and cloud buildings. Year-to-date, cash flow from operations totaled $68 million compared to $73 million in 2017, down due to positive cloud revenue results and lower license revenue. For the quarter, cash flow operations totaled $17 million, up 48% which included $26 million in cash taxes paid for closing out 2017 and first half estimates for 2018. Capital expenditures totaled $2 million in the quarter. And for 2018, we estimate capital expenditures to be in the range of $10 million to $12 million.

I'll wrap up with our guidance. As Eddie mentioned, yes, we are raising our 2018 annual guidance for total revenue, adjusted earnings per share and adjusted operating margin. As you know, the more short-term success we have with subscription adoption, the weaker our near-term reported income statement results will be, effectively masking the significant underlying value we are creating. Prudently, we remain cautious regarding the retail environment and the global macro, as I mentioned earlier.

For revenue, we’re raising total revenue guidance from the previous range of $546 million to $558 million to $548 million to $560 million, with a midpoint estimate of $554 million. Apples-to-apples adjusting 2017 for the 606 hardware impact of about $32 million, we expect total revenue guidance to be in the range of slightly down 3% to potentially flat year-over-year. Recurring revenue mix, which is cloud plus maintenance, is targeted at 31% of total 2018 revenue. We expect Q3 2018 total revenue growth to range from down 1% to up 1% with the midpoint estimate of the $141.5 million adjusted for the 606 hardware impact.

For EPS, we are raising our 2018 adjusted earnings per share range from $1.48 to $1.52 to a $1.57 to $1.61 with a midpoint estimate of the $1.59. Our GAAP EPS guidance will increase also from $1.23 to $1.27 to $1.32 to $1.36. So we're moving GAAP EPS from $1.23 to $1.27 range to $1.32 to $1.36. Additionally, we estimate our Q3 2018 EPS to be about $0.40.

Operating margins with the business transition to cloud continuing to ramp in 2018, including related incremental growth investments combined with the previously mentioned performance-based compensation reset. We are targeting a full-year adjusted operating margin range of 24.8% to 25% and a GAAP operating margin range of 21.1% to 21.4%. We estimate our Q3 operating margin will come in between 24.5% to 25%, as I said earlier.

Finally, we remain committed to our long-term aspirations we discussed in our Q4 and Q1 call. Our focus is on building the subscription base at a responsible rate that returns us to our expected and sustainable top line growth with an operating margin profile in the top quartile compared to our peers. With that said, our long term aspirations remain unchanged from our previous call. And I'll repeat as follows. We are targeting a return to revenue growth by late 2019, early 2020. From the midpoint of our 2018 total revenue guidance, we are targeting 4% to 6% compounded annual growth rate through 2022. From the midpoint of our 2018 cloud revenue guidance, we are targeting 72% to 82% compounded annual growth rate through 2022. From the midpoint of our 2018 recurring revenue, that's cloud plus maintenance, we are targeting to achieve 42% to 47% recurring revenue mix as a percent of total revenue by 2022.

By 2022, we project our all-in gross margin to be in the range of 58% to 60%. We expect our annual gross margins to trough in the 57% to 57.5% range based on the timing of our growth investments in 2019 to 2020. By 2022, we are projecting our operating margin to be in the range of 25% to 26%. We expect our margins to trough in the 20% to 22% range, again, based on the timing of our growth investments in 2019 to 2020. And on our free cash flow to net income ratio for 2018 forward, we expect to trend in line with our historical comps of about 1.1 to 1.2. That covers the financial update, back to Eddie for some closing comments.

[Eddie Capel, Chief Executive Officer]

Thanks, Dennis. So in summary, our underlying business fundamentals of building momentum, and we remain focused on extending and market leading position and supply chain and omni-channel commerce solutions. We’re excited about the significant and expanded business opportunity in our core supply chain management market. Our success continues to be driven by delivering innovation and anticipates the needs of an evolving market, focusing on that customers’ success and leveraging our deep domain expertise.

While some global and retail macroeconomic conditions give us reasons to be cautious, we’re bullish on the market opportunity ahead of us. Supply-chain complexity and retail evolution in our target market in fact brings continued need for our solutions among our customers, and we’ll continue fueling multiyear investment cycles for Manhattan Associates. The move to subscription and client based models is positive and is outpacing our expectations. Customer feedback and win rates continue to validate our investment strategy. Our competitive position is strong and we continue to invest in innovation to extend our addressable market, market leadership and differentiation. As always, we remain focused on our customer success and on driving sustainable long-term growth for our shareholders.

With the world's most talented supply chain commerce employee, the best software solutions and market dynamics that require customers to adapt and invest in supply-chain innovation, we believe that we are very well positioned for the balance of 2018 and well beyond. So with that, Imani, we’ll be happy to take any questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Terry Tillman with SunTrust.

[Terry Tillman, SunTrust Robinson Humphrey]

Eddie, just the first question is just as you get one more quarter into selling the SaaS solutions, just would love to learn -- and this is a high level question, just more about the learnings you’re seeing in terms of -- is it tending to be Tier 2 retailers, Tier 1 retailers, are you starting to see consistent cadence around the sales cycle, pricing that you’re able to get? So that’s just the first question. Maybe just what are you seeing versus what were your expectations were in terms of the flow of the business?

[Eddie Capel, Chief Executive Officer]

It’s about where we expected to see, Terry, and I wouldn’t say there’re no real surprises frankly. The one thing that we're seeing that maybe we didn’t anticipate quite as early in the cycle is our ability to be able to address the needs of smaller retailers and so forth. That’s been a positive and slight -- I wouldn’t say surprised, but certainly some upside there. In terms of the sales cycle, the buying cycle, the gestation, the due diligence of our customers and prospects and so forth, I’d love to give you some revelation there. But frankly, it’s been pretty much aligned with our expectations, and equally as deep and conscientious as previous years.

[Terry Tillman, SunTrust Robinson Humphrey]

And as it relates to…

[Dennis Story, Chief Financial Officer]

Terry, if I can just piggy back on that. I think from my perspective, one of the things that excites me about what we’re experiencing is when we look at our pipeline, over 50% as Eddie mentioned, over the 50% of those are net new logos and they span Tier 1, Tier 2 logo, so very attractive. I think it’s a great validation in terms of interest around the new technology.

[Terry Tillman, SunTrust Robinson Humphrey]

And just the second part of that SaaS question and Active Omni relates to the idea that you have both multiple modules here. But are you primarily seeing a starting point and the early traction with the OMS?

[Eddie Capel, Chief Executive Officer]

Yes, that would be an accurate statement, Terry, so still very nice cross sell up-sell opportunity there available to us as well. Yes.

[Terry Tillman, SunTrust Robinson Humphrey]

And then, Dennis, not to leave you out of this, I wanted to ask you a question about how do we think about professional services? It seems like the green shoots are there and things are improving. But if we’re into potentially upgrade cycle that had been somewhat impaired because of the retail challenges over the last couple of years. In terms of upgrade to the newer version like the 2018 version, is this something that is a multiyear upgrade that would positively affect services? How do those upgrade cycles work? Just trying to understand the longevity of this. Thank you.

[Dennis Story, Chief Financial Officer]

Yes, it depends on the size of the customer, Terry. But suffice to say that number of the upgrades we are seeing are multiyear upgrade cycles for sure, with global distribution networks, very important.

[Operator]

Your next question comes from the line of Mark Schappel with Benchmark. Your line is open.

[Mark Schappel, Benchmark Securities]

Eddie, starting with you. In your prepared remarks, you noted the new machine learning capabilities in your upgraded warehouse management solution. And I was wondering if you could just give an example or two of how customers might be using these capabilities in the new product?

[Eddie Capel, Chief Executive Officer]

I’m not sure I can do that justice in 30 or 60 seconds, Mark. But the bottom line is that when you have voluminous amounts of data and lots of repetitive tasks, those things are very well suited to applying machine learning techniques to generate a better answer. So if you think about what's going on in a warehouse, we've now got a lot more sophisticated automation that’s giving us a lot more real-time feedback. We've got repetitive tasks. We’ve got voluminous amounts of data.

So we’re able to, again, apply these machine learning techniques to give better answers; whether it’d be from how the stream orders through the building; how to effectively replenish product before picking locations; how to deploy human capital most effectively in the distribution center; all focused around the optimization and velocity of product through the building.

[Mark Schappel, Benchmark Securities]

And then also in your prepared remarks, it was noted that the first warehouse management cloud deal was closed in the quarter was signed in the quarter. And I was wondering if you could provide some additional details around that deal, particularly what was the driving factor that caused this particular customer to really step up and purchase a delivery model that has not traditionally been a delivery model for warehouse management sector?

[Eddie Capel, Chief Executive Officer]

So the deal actually was in APAC just for reference. And with a very nice but a Tier 2 organization that I think was the economic profile of the deal certainly liked. It had a very small IT organization so was attracted to the fact that we would manage everything and that's about the solution and all they would have to do is use it for their benefit.

[Mark Schappel, Benchmark Securities]

And then I'll close with this one, with respect to the cloud solutions. If I recall correctly, the implementation services for these products was going to be less than traditional products, granted these new services offering for you. Just wondering if you could just give us an idea about maybe how much less you're seeing? Now that you’ve had the cloud products out in the marketplace for close to a year. How much less you're actually seeing with respect to the services around those, is it 10% less, 20% less?

[Eddie Capel, Chief Executive Officer]

So in fact, we’ve got a couple of the revenue lines when we moved to the cloud that we've not have the access to before. One is the infrastructure cost that now passes through Manhattan associates. But also the managed services associated with the well-being and upkeep of the solution, those tasks that were traditionally handled by the customers’ IT organization. So those two things are boost to the revenue line. And as you can see, tell one of them whilst included in the subscription cost, no question, is actually it services line item those managed services.

And what we said is that the services are largely similar in a cloud world; so the initial implementation is really largely the same, maybe a little faster, maybe a few nuances, but you still got to design it; you still got to configure it; you still got to test it; you still got to train the customers and so forth; so largely it’s same on the initial implementation. When you're rolling the solution out whether it’d be across warehouses, across brands, across geographies, the services is largely the same. The thing that changes a little bit is in the old on-prem world, every hypothetically five years, you’re getting to get a pretty big slug of services when a customer does that big old once every five year upgrade.

Now what you see is we’re effectively micro updates and upgrades every 30 to 90 days. So instead of seeing that big piece of services revenue come in it’s a constant flow, number one. Number two, that piece of the services business is built into the subscription cost, the updates that are coming through the version of software very automatically. So at this particular juncture in the journey, we’re seeing no impact on the service line, because implementation is the same, they’re all same and frankly, we’re not five years in so we’re not missing out on a big upgrade every five years.

[Dennis Story, Chief Financial Officer]

Plus we have the opportunity to generate new services, Mark, from new innovation that we have on the platform in terms of cross sell and up sell with our customers going forward.

[Operator]

Your next question comes from the line of Brian Peterson with Raymond James.

[Brian Peterson, Raymond James]

So first off, I wanted to hear on the comment about new customers being over 50% of the pipeline, and I’m assuming a lot of that is Active Omni. But if you think about those opportunities, what would you be displacing? Is that anything that’s different with what you would versus your prior customer base? And any help on understanding what the competitive differentiation points would be?

[Eddie Capel, Chief Executive Officer]

So the pipeline is spread across all of the portfolio, frankly, I mean we’re obviously excited about everything we’re doing. And we are excited about Manhattan Active Omni, but the pipeline is spread across all of the portfolio. In terms of what we’re displacing, there is a little bit of and across the board answer to that. At the end of the day, there generally are systems in place today but it's a combination of legacy systems. It has developed old crumbling around the edges, number one. Number two, solution from frankly companies like Manhattan Associates that were ran 15 years ago that aren’t anymore that need replacing, or solutions from software providers who have not invested in innovation. And yesterday's EMS, yesterday’s transportation system, yesterday's labor management system and so on down in the line, doesn't get it done in today's world. So our trajectory and our journey as has been to consistently invest in differentiated innovation. And so replacing those old systems for operation in the new digital world makes a lot of sense. And in a lot of cases is a must have to remain competitive in our customer base.

[Brian Peterson, Raymond James]

And maybe one for you Dennis, just on the cloud line as we think about modeling that going forward. It was like you have implied growth sequentially and clearly off of low base. But as we model that, going forward, should we think about implementation activity being a little bit lighter in the fourth quarter just with the lot of retail customers having their head down. How should we think about that? Thanks guys.

[Dennis Story, Chief Financial Officer]

Typically, we factored into our full year guidance Brian, the retail holiday season impact, because most customers are going to idle their implementation in the busy season. So you'll see a sequential decline from Q3 to Q4.

[Operator]

Next we have Matt Pfau with William Blair.

[Matt Pfau, William Blair]

I wanted to start out on the point of sales system, and you made some significant improvements in that over the past several quarters. Maybe you can talk about what interest you’re seeing from clients and how traction with that product has been?

[Eddie Capel, Chief Executive Officer]

So building slowly, as we’ve always said, Matt, this is not something we expect to take off overnight from a product perspective. But I would say that I continue to be very encouraged by the reception of our solution in the marketplace, the pipeline and the general enthusiasm. We’ve got, as I think you know we’ve got a couple of implementations underway, one live, couple of implementations underway. And the pipeline, I think safe to say that the pipeline is stronger today than it’s ever been with very nice customers in that prospect, in that pipeline pool. And looking -- we’re looking forward to that critical mass being built, frankly.

[Matt Pfau, William Blair]

And then one to ask on the 2022 goals and the 2018 guidance from an operating expense perspective, and you gave us some indication about how we should think about the ramp for R&D expenses, at least for the remainder of 2018. But in terms sales and marketing, I think you said you have 20 open positions out there in that area that you’re trying to fill. But how should we think about those expenses ramping? And I guess, if I look at the results for the second quarter. Where are you at it in terms of hiring for sales and marketing versus where you expected to be at, at this point in time?

[Eddie Capel, Chief Executive Officer]

Yes, so we’re making some good progress, hiring both in search and development and sales and marketing. Dennis can talk to a little bit more of the specifics as is appropriate, but you definitely will see the expense continue to grow in Q3 and Q4. And again, we’ve made some good progress, you just haven’t seen the full quarter impact of that in Q2 and we’ll start to see that, again full quarter impact in Q3 and Q4 and the continued ramping.

[Dennis Story, Chief Financial Officer]

So as I said, Matt, in the model, we’re not giving any color on the operating expense mix. But the trough on the operating margin profile will be 20% and it will be late 2019 early 2020 as we're ramping investment across R&D, sales and marketing, cloud ops, et cetera. So getting into the 2021-22, we expect that we will drive leverage off of that trough through our revenue growth, monetizing those investments.

[Matt Pfau, William Blair]

And last one from me, just a follow up on the license revenue expectation for the year. So the decline in that versus the previous expectation, is that related to how the mix of deals are coming in with cloud versus license? Or is there something else that’s driving that updated expectation?

[Dennis Story, Chief Financial Officer]

Mix of deals cloud versus license and timing of deals.

[Operator]

[Operator Instructions] Next we have Monika Garg with KeyBanc.

[Monika Garg, KeyBanc Capital Markets]

Eddie, license gain came below your guidance, I mean third quarter in a row. Could you talk about what is leading to license revenue below expectations?

[Eddie Capel, Chief Executive Officer]

Yes, just the delayed sales cycles, extended sales cycles, mostly related to -- we've talked about this is reconstitution of the retail network and the retail sector, which I think that all of us, certainly, we are seeing that beginning to stabilize. If we think back that 2016 timeframe where we start to see -- to hear about slowdowns in retail and so forth, and we talked about the need for retailers to be able to rebalance between digital and bricks-and-mortar reconstitute their network. Our sense is that most of that planning process is complete now, and retailers are beginning to, with caution, execute on those plans that they put in place, number one.

Number two is the buying patterns are a little different I think. The bigger enterprise deals that we saw, maybe two, three, four, five years ago, the one by the software that covers everything that you could possibly need. I’m talking about the perpetual license here. It seems to be trending away a little bit toward -- I will take a smaller bite now and another bite where I need it next year or the year after, which is a halo effect I think in that buying community.

[Dennis Story, Chief Financial Officer]

We got a nice pipeline, and 45% of license and cloud sales came from new customers in the quarter. So the opportunities are there, it’s principally on the license side, what Eddie commented on, retail reconstitution, all kinds of dynamics that can happen in that from a retail perspective that impacts our timing and sales cycles.

[Monika Garg, KeyBanc Capital Markets]

Then Eddie on the WMS side, you talked about one customers came from the cloud WMS. Could you comment on are you seeing more demand from more customers buying on the cloud for WMS, are still basically buying more on prem?

[Eddie Capel, Chief Executive Officer]

Certainly, more on prem, we just did the one deal in the quarter. And I would say the trend is -- well, there isn’t yet a trend, it’s slow, it’s early adopter and tending in that Tier 2 or Tier 3 space. But it’s started, those early adopters are starting to take a look at that model and we’re certainly there for them. That was always our intention to innovative it just slightly ahead of the market and just slightly ahead of the curve. And that’s what we’ve done and that’s the demand pattern that we’re starting to see. So it is encouraging.

[Monika Garg, KeyBanc Capital Markets]

Then just a housekeeping question on the maintenance line, I think you did $37 million in the quarter. I think you’ve guided $36.5 million if I noted the number correctly for Q3 and similar in Q4. Why would maintenance revenues -- because given renewal rates of maintenance is high and we are still seeing more licenses being sold, that line be slightly down?

[Dennis Story, Chief Financial Officer]

Some of that variability is driven by the timing of cash collections, Monika, because we essentially don't begin for maintenance, cash collections. We don't begin the revenue recognition until the customer pays their annual maintenance. So that creates a bit of inter-period lumpiness from quarter-to-quarter.

[Monika Garg, KeyBanc Capital Markets]

And then the last one is, maybe you could talk about what is the correlation between license revenue and services. Could lower license revenue what we are seeing this one, two quarters impact service revenue down the line? Thank you

[Dennis Story, Chief Financial Officer]

Well, it could if you got into a long extended cycle, but the flipside of that is the pump fake is cloud. So we've got a got a sizable amount of cloud implementations going on that are stepping in and taking the place of that license, that traditional license momentum.

[Eddie Capel, Chief Executive Officer]

And I think we’ve seen and talked about for the last, frankly, let’s call it about eight quarters, a slowing in appetite for upgrades inside of our existing customers. Just again most networks were being reconstituted and so forth. We on the other hand have continued to innovate during that slightly it wasn’t huge, for that slightly down period. And as retailers and others start to execute on their plans for network efficiency and so forth, we're well positioned with the innovation that we’ve delivered to be able to offer them great ROI. And so we’re starting to see those upgrade cycles begin to freshen up again as well. And those -- as one of the previous questions that came up indicated, those are multiyear upgrade cycles in a lot of cases, so pretty encouraged by that.

[Dennis Story, Chief Financial Officer]

The WMS innovation that we released is definitely manifesting itself in the pipeline, as well as upgrade activity.

[Operator]

Okay, and there are no further questions at this time.

[Eddie Capel, Chief Executive Officer]

Very good, Imani. Well, thank you very much everyone for joining us on this Q2 call. We, as always, appreciate your interest and support in Manhattan Associates. And onward and upward, we’ll look forward to speaking to you again in about 90 days or so. Thank you.

[Operator]

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.