Manhattan Associates Inc

NASDAQ:MANH

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon. My name is Sarah, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates Fourth Quarter 2017 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. As a reminder, ladies and gentlemen, this call is being recorded today, February 6, 2018.

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

[Dennis B. Story, Manhattan Associates, Inc.]

Thank you, Sarah, and good afternoon, everyone. Welcome to Manhattan Associates 2017 fourth quarter earnings call. I'll 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 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 2016 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'll find reconciliation schedules in the Form 8-K we submitted to the SEC earlier today and on our website at manh.com.

Since the highly successful release of our Manhattan Active Solutions last year and with cloud revenue now representing 12% of our full year 2017 software revenue, we've taken the opportunity to reformat our income statement in order to provide improved clarity. As a result, we will now break out cloud subscription revenue and on-premise license revenue in our reporting. And to enable you to better gauge the progress of our recurring revenue, we will also report maintenance revenue separately. In anticipation of the new ASC 606 accounting rules that require us to report hardware revenue net of expense starting in 2018, we will maintain a separate hardware-only revenue line.

Finally, going forward, our services revenue line will include consulting services revenue along with billed travel revenues that were previously combined with hardware revenue. With regard to cost of revenue, we will break out cost of license so that you can determine the gross margin of our on-premise license revenue. We will also combine our various service type cost into a single cost of cloud, maintenance and services line. Because that hardware revenue will be reported net of cost beginning in 2018, our hardware gross margin will, by definition, become 100%, starting next – starting in 2018 when we report Q1 results.

So you can refresh your models. We have included a supplemental schedule in our earnings release, which discloses eight quarters of history in the new format. Our comments in the remainder of this call will align with the new format.

And with that said and with that background, now I'll turn the call over to Eddie.

[Eddie Capel, Manhattan Associates, Inc.]

Thanks, Dennis, and good afternoon, everyone, and thank you for joining us to review Manhattan's 2017 fourth quarter. There's a lot to cover as we close out 2017 and transition into 2018, including significant strategic and operational initiatives that we're driving.

In fourth quarter 2017 and in line with guidance, we delivered total revenue of $144 million. That's down 2% year-over-year, and $0.45 of adjusted EPS also down 2% versus prior year. Now on a perpetual equivalent growth basis, total revenue was flat and adjusted EPS was up 3%. Two primary factors influenced our 2017 financial results, which were neutral for 2016. First was the sluggish pace of enterprise technology spending for many of our customers, particularly retailers as they grappled with shifts in their industry dynamics. And second was our significant business model change as we transition to subscription cloud-based solutions and its impact on revenue recognition.

The following operational metrics illustrate our continued leadership and performance stability. We continue to grow globally, opening offices in Chile, Germany and Italy, and 28% of our full year 2017 revenue came from outside of the U.S. Our new innovation excited both existing and new customers. Our cloud offerings represented 12% of our full year software revenue and 18% of our Q4 software revenue, with strong pipeline and interest in the Manhattan Active suite of solutions. New logos represented 30% of our Q4 deals closed with those new logos representing 40% of our full year 2017 closed deals. And we continue to perform well versus the competition with competitive win rates topping 70%. And WMS and non-WMS software revenue mix was about 65%.

Retail, consumer goods, food and beverage and third party logistics drove more than 50% of our revenues. And we continue to aggressively invest in research and development with $58 million invested in 2017 and accelerating investments exiting this past year. We're expanding our investment in marketing and sales coverage to drive greater market awareness accelerate revenue growth and we exit the year with about 2,800 employees globally with a strategic focus on hiring top talent. We finished the quarter with 60 people in sales and sales management with 54 quota carrying sales reps and that's down two from last quarter.

Now, turning to software, we experienced better than anticipated market demands for our Manhattan Active Omni solutions launched in mid-2017. And a strong acceleration of our cloud model, we saw 18% of our total Q4 software license revenue generated by cloud deals versus 13% in Q3 of 2017.

And just for perspective, on an annual basis, we exited 2016 with cloud subscription revenue representing 7% of software revenues. In 2017, it grew to 12%. And in 2018, our goal is to double our cloud subscription revenues to about 25% of total software revenue.

We reported $18 million in Q4 software revenue with an on-prem equivalent of $21.3 million. That's down 4% over the comparable Q4 of 2016. And we view the subscription revenue transition and stronger subscription mix as a positive near-term despite the pressure it puts on reported revenue and EPS.

And regarding perpetual license deal volume, the Americas and Europe both posted strong performances. However, a number of deals did push out into 2018, which was, of course, disappointing. And license revenue was $14.7 million for the quarter as $3.4 million of otherwise perpetual license deals converted to subscription revenue in the quarter. On a perpetual equivalent basis, license declined 13% compared to prior year.

And to continue on a geographic basis, the full year mirrored the fourth quarter results. We saw strong growth in Europe and APAC, each delivering record years for both revenue and operating profit. And whilst retail macro globally is a challenge, its impact has been a bit more acute in the Americas. Retailers seem to be pursuing more flexible purchase options and appear to be shifting their capital allocation strategy away from very large upfront payments to smaller incremental deals.

Additionally, sales cycles and evaluations are extending somewhat with a greater focus on capital prioritization, as retailers restructure and transform their omni-channel and digital commerce businesses to seamless customer engagement models.

Now, we have a strong and growing pipeline of customers interested in Manhattan Active Omni. And I'm also happy to report that we have a number of implementations already underway covering a variety of business model with several of them closing in imminently on go-lives.

And as I've mentioned last quarter, these include a multi-billion dollar direct business with an even larger bricks-and-mortar presence, a focused deployment of our store fulfillment application for a very well-known department store retailer, and a combined deployment of OMS and point of sale at a specialty apparel retailer. And several other companies in consumer goods and direct to consumer spaces.

Additionally, several large international brands with global implementations are in the operational planning stage for Manhattan Active Omni. And as we move into 2018, our overarching focus is investing in five key areas. First, customer success and driving long term sustainable growth for Manhattan Associates. Second, continued innovation to expand our products and our total addressable market. Third, ongoing development growth of our cloud operations and cloud subscription revenue. Fourth, expanding Manhattan Active Omni point-of-sale and customer engagement business. And fifth, expanding our global sales and marketing teams.

And with these goals in mind, a cornerstone of our long-term success has been and is product innovation. So, I'd like to provide an update on our industry-leading, first of a kind offering, Manhattan Active Omni solutions. And as a reminder, Manhattan Active Omni is a single application that combines our market-leading contact center, order management, point-of-sale, clienteling and store fulfillment applications into a single cloud-native version-less solution. And the market reception for Manhattan Active Omni has been exceptional. And since our mid-2017 launch, we've continued to innovate in this platform with three major functional releases and I'll take a minute to highlight some of these advancements.

First, we've focused our investment to continue to advance our point-of-sale application to better meet the needs of the omni-channel retailer and their associates. We believe strongly that stores will continue to evolve and meet the needs of the digital-first shopper, and the need for next-generation digital-first tools for store associates is an absolute must.

Since moving our point-of-sale to our Manhattan Active cloud platform in July, we've now enabled a single code base to run across all three major operating systems for the store, Windows, Android and iOS, and to run across all form factors from the mobile phone all the way up to the 24-inch touch screen at the cash wrap. And it's a massive advantage for our customers because they implement one solution, they personalize the code once, train their associates once, and the system comes to life anywhere and everywhere that they want to use it.

And to further build on our differentiation within point-of-sale, in early January, we launched a new enterprise promotions engine native to the cloud platform. This allows our customers to setup a managed promotions from a single location and to have them take effect any place the customer shops, on mobile, on the web or in the store. It's a meaningful advantage. It's another way that Manhattan Active Omni helps our customers break down channel silos to create a single cohesive experience for their customers, while also driving revenue. And we featured this expansion of our point-of-sale application at the National Retail Federation's BIG show in New York last month and customer interest was very strong. We believe our multi-year focus on point-of-sale is yielding a differentiated product that will drive increased value for our customers going forward.

And I'll conclude on the product front with the latest addition to the Manhattan Active Omni platform, an application that we call customer engagement. Customer engagement brings channel and siloed neutral operations to customer service to better enable customer loyalty, cost savings and proactive save the sale behaviors. Initially offered for contact center associates and fully interoperable with our order management application, customer engagement brings together order history with real-time social listening and customer service, as it provides native case management capability within the Manhattan Active Omni.

Customer value and personalization appear as soon as the phone call is connected to the service center. It offers native integration with Facebook, Facebook Messenger and Twitter, and support for email and chat-based customer service. Put simply, it facilitates great service across all inbound customer communication channels and helps our customers future-proof the ongoing evolution of how brands and customers communicate. And we believe that we put the industry's best set of customer centric service tools in the hands of associates across the enterprise and that customer engagement application is further evidence of our ongoing commitment to this cause.

Now, while my remarks today are centered on the continued advancement within omni-channel, please be rest assured that our commitment to our supply chain applications has never been stronger. We're investing heavily in the next-generation of those solutions too and we couldn't be more excited about what we have in store. And I'll share more information about our innovations in warehouse management and transportation management later in the year.

In 2018, we're the market leader in supply chain commerce solutions with a significant and expanded business opportunity in our core supply chain management market with a large WMS and transportation customer base. We have the industry's most comprehensive market validated technology platforms that enable our customers' core applications.

We believe that over the next several years, this market, like the retail market, will become ready for cloud transition. And while that change will not benefit our customers today, we're making early investments to enable us to meet those market needs at the appropriate pace of change.

And as always, we remain a company focused on our customers' success and in driving sustainable long-term growth for our shareholders. Today, we're a bolder, more innovative company than we've ever been before. We're creating new solutions that not only deliver competitive differentiation, but also critical and unmatched operational functionality for our customers.

And with broader and more technically advanced set of challenges we saw than ever before, we've introduced new branding, Push Possible. We've introduced Push Possible into the market to more boldly communicate the breadth of uniqueness of our solutions. We believe that this tagline encapsulates not only our commitment to innovation but also our relentless customer focus, our operational tenacity, and optimistic outlook that has driven the success for our company and for our clients.

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

[Dennis B. Story, Manhattan Associates, Inc.]

Okay. Thanks, Eddie, and let's strap it on. Please note unless otherwise specified, I'll be discussing non-GAAP results, which we term adjusted results. Total fourth quarter revenue of $144 million was in line with guidance, down over prior year $4 million or 2%. Year-over-year software revenue was down $4 million as a result of a higher mix of subscription bookings.

Recurring software revenue, which is cloud subscriptions plus maintenance, was 31% in the quarter, excluding hardware revenue. Quarterly maintenance revenue increased $2.5 million over the same period in 2016. Consulting services was down $4 million and hardware revenue was up $3 million over prior year. Geographically, Americas was down 7%, EMEA was up 24%, and APAC grew 7%.

On adjusted earnings per share for the quarter, we put up $0.45 per share in line with guidance and down over prior year $0.01 or 2%. Adjusting for the on-prem equivalent, our adjusted EPS would have been $0.48. Our GAAP earnings per share was $0.36 in the quarter compared to $0.42 in Q4 2016, as we recorded a one-time GAAP only charged of $2.8 million or $0.04 of EPS impact from the U.S. Tax Cuts and Jobs Act in Q4, primarily related to the repatriation tax on foreign earnings and the re-measurement of our deferred tax assets.

Q4 software revenue, which consists of license and subscription, was $18 million down $4.2 million over prior year, on the mix of subscription bookings and delayed decision making on a few deals in the Americas.

Our Q4 cloud subscription revenue recognized was $3.2 million, more than doubling versus $1.4 million in Q4 2016, with the 2016 comp representing subscription revenue from our TMS SaaS offerings. With the deferral of more license revenue into future quarters, our perpetual license equivalent for the quarter was $21.3 million, down 4% over comparable Q4, 2016. Sequentially, 18% of our total Q4 software revenue was subscription revenue versus 13% in Q3 2017.

Regional cloud recognized revenue splits were $3 million in the Americas and $0.2 million in EMEA. Just a reminder, with increasing subscription revenue, we view the natural deferral of revenue earnings and cash flows associated with the subscription transition as a positive.

Our Q4 2017 perpetual license revenue totaled $15 million, down $6 million over prior year. Nearly 60% of the decline was attributable to the uptake in subscription revenue versus perpetual license in the quarter, with balance associated with the deal timing in the Americas.

As Eddie mentioned earlier, on a perpetual equivalent basis, license declined 13% compared to the prior year for the same reasons. Regional perpetual license revenue splits were $8.3 million in the Americas, $5.8 million in EMEA and $0.6 million in APAC.

As we have disclosed historically, our perpetual license revenue performance continues to depend on the number and relative value of large deals we close in any quarter. That remains true, although for 2018 software, we expect the mix to continue to shift towards subscription models. While this is positive and the market is enthusiastic, deal sizes may be a bit smaller as revenue is recognized over time and product components are also easier to add over time in contrast to won and done enterprise deals. We also retained some caution around slow decision-making by some clients, particularly American retailers.

With those caveats, we are lowering our 2018 software, that's cloud plus perpetual, estimate from $84 million to a range of $78 million to $80 million. While the market response to our Manhattan Active Omni solutions has exceeded our expectations and pipeline activity is very positive, we are only two quarters into our launch, making it challenging to accurately forecast the pace of our transition and the resulting impact to near-term reported financial results. We are estimating license revenue to decline by 18% to 19% in 2018 with a corresponding license gross margin of between 90% and 90.5%.

That's some tight calibration there. For 2018, we're estimating cloud revenue recognized will double over 2017 to about $20 million with year-over-year growth slightly above 100%. Let me repeat that one more time. For 2018, we're estimating cloud revenue recognized will double over 2017 to about $20 million with year-over-year growth slightly above 100%.

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 will deliver greater value to customers enabling Manhattan to drive sustainable long-term growth and profitability.

At this point in time, we are not planning to provide guidance on 2018 for annual contract value and annualized recurring revenue in 2018. With only two quarters under our belt operationally and financially, we believe we need to achieve a full year – full year operationally to provide a beneficial comp base line for year-over-year comparisons and forward forecasting.

Shifting to maintenance, as I mentioned earlier, we will be reporting maintenance revenue on a separate line going forward. Maintenance revenue for the quarter totaled $37.3 million, increasing 7% over last year due to first half license revenue growth, cash collections, and retention rates of greater than 90%. As a reminder, we recognize maintenance renewal revenue on a cash basis, 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 1% to 3%, which will depend somewhat on the timing of perpetual license deals we closed during the quarter, the level and timing of any existing customer conversions to cloud, the resulting retention rates and timing of cash collection.

Moving to services revenue, services revenue for the quarter totaled $77.2 million down 5% compared to prior year and down 8% sequentially from Q3, 2017. As retail customers pause implementations to focus on the holiday season.

Americas was down 9% quarter-over-quarter and 7% sequentially from Q3, 2017. On the other hand, EMEA's quarter-over-quarter services revenue grew 16% and APACs grew 15%. Although, the rate of decline in the Americas has tapered a bit until we can see concrete signs of a rebound we will continue to be cautious in our near-term projections.

For 2018, we are estimating services revenue to decline between 4% and 2%. Consolidated subscription, maintenance and services margins, our new reporting line, for the quarter were 59.6% compared to 55.4% in Q4 2016, benefiting from cash collections driving maintenance revenue growth, strong productivity and lower performance-based compensation. Sequentially, our margin increased from 59.2% in Q3 due to greater productivity in light of decreasing services revenue.

For 2018, we expect full year services margins to be in the range of 52.9% to 53.1% and our Q1 range to be 49.8% to 50%. As discussed in our Q3 (sic) 2017 call, this reflects our investment in cloud operations, our performance-based compensation reset and our annual compensation increases.

Turning to operating income and margins, our Q4 operating income totaled $49 million, with an operating margin of 33.9%, best-in-class. 2017 full year operating income was $205 million with a 34.5% operating margin. So, that covers the operating results.

Moving on to our effective income tax rate, it was 36.5% for 2017. While the full benefit of the Tax Cuts and Jobs Act is yet to be fully vetted, we are projecting for 2018 a provisional effective income tax rate to be between 23% and 24%, which includes the estimated impact of state, local and international tax expense.

We are qualifying the rate provisional as our interpretation of the new U.S. tax law could change based on final tax code interpretations from the U.S. Internal Revenue Service. We work closely with our external tax advisors to arrive at our effective rate estimate. However, this should be a common theme for all companies.

Regarding our capital structure, we reduced our common shares outstanding in 2017, 3.5%, buying back 2.7 million shares totaling $125 million of investment. In Q4, we invested $50 million in our buyback program, repurchasing 1.2 million shares. Last week, our board approved replenishing our repurchase authority limit back to a total of $50 million. And I'll remind you that the management team is not compensated on the benefit of the share buyback program. For 2018 we're estimating $68.5 million diluted shares per quarter and full year, which assumes no buyback activity in 2018.

Turning to cash, we closed the quarter with cash and investments totaling $126 million and zero debt compared to $96 million in Q4 2016. For the quarter, cash flow from operations totaled $47 million, bringing our full year cash flow from operations to a record $164 million, increasing 18% over prior year. Capital expenditures totaled $6 million in 2017. For 2018, we estimate capital expenditures to be in the range of $10 million to $12 million.

That covers 2017. But before I turn to guidance, as Eddie mentioned, we are at the beginning of a pivotal transition to cloud. We are investing for growth and accelerating the company's transition to a predominantly subscription-based licensing model long-term. With our move to subscription, we will provide new disclosures in 2018 to enable you to better track the progress of our business.

Our new disclosures are important because traditional financial metrics like revenue, operating margin and EPS may not fully reflect the underlying performance of the business during the transition. The more short-term success we have with subscription adoption, the weaker our reported income statement results will be in the near-term, prior to the compounding year-over-year impact of subscription volume effectively masking the significant underlying value being created.

With the move to subscription, we will provide – sorry there, our guidance approach will continue to be annual with our traditional metrics of total revenue and EPS. For 2018 and beyond, we're adding operating margin to our formal guidance.

Turning to 2018 guidance, we remain cautious regarding the American retail environment, and between that and our cloud transition, we are providing what we believe to be conservative guidance heading into 2018.

As already alluded to, both on this call and from last quarter, there are a number of specific changes going forward, so let me point those out right up front. ASC 606 revenue recognition adoption January 1, 2018, the cloud transition, our performance-based compensation reset, our growth investments earmarked for R&D, cloud op sales and marketing and infrastructure and the U.S. Tax Cuts and Jobs Act. ASC 606 rev rec adoption, we will adopt ASC 606 on a modified retrospective basis, so we will not be restating years 2017 and prior.

There are two primary impacts for Manhattan. One, we will report hardware revenue net of the related expense on our income statement. And two, we will be amortizing commissions expense related to maintenance and other services that extend beyond 12 months. While the netting of cost against hardware revenue will not impact our gross profit, it will reduce our base year 2017 revenue by about $32 million. Therefore, directly impacting revenue growth comps 2017 versus 2018. The impact is earnings neutral on a comp basis. ASC 606 requires net reporting since we do not take title to any hardware sold. We're still evaluating the impact of the amortized commissions, but currently do not expect this to be material.

For revenue, we are providing total revenue guidance in the range of $546 million to $558 million, representing a decline of about 8% to 6% on a reported basis, respectively. Apples-to-apples, adjusting 2017 for ASC 606 hardware impact of about $32 million, we expect total revenue to decline by 3% to 1%.

Recurring revenue mix, which is cloud and maintenance, is targeted at 30% of total 2018 revenue. We also expect a first half second half split of about 49%, 51%, respectively. We expect Q1 2018 total revenue to decline 6% to 7% compared to Q1 2017, adjusted for the ASC 606 hardware impact for apples-to-apples comparison.

For earnings per share, our estimated range for 2018, adjusted EPS is from $1.48 to $1.52. For GAAP EPS, our estimated range for 2018 is $1.23 to $1.27, with an estimated first half, second half split of about 47% to 53%, respectively. Additionally, we estimate that our Q1 2018 EPS will decline between 24% and 27% compared to Q1 2017. The $0.25 difference between full year adjusted and GAAP EPS full year is primarily the after tax impact of equity compensation expense.

Operating margins; with the business transition to cloud continuing to ramp in 2018, including related incremental strategic investments and combined with previously mentioned performance-based compensation reset, we are targeting a full year adjusted operating margin range of 24% to 24.3% and a GAAP operating margin of 20% to 20.4%, still a margin profile that is top quartile relative to other peer comps. The difference between adjusted and a GAAP operating margin is primarily the pre-tax impact of equity compensation expense. Additionally, we estimate our Q1 2018 operating margin will come in between 21.1% and 21.4%.

So longer term aspirations, as we've previously discussed, we are in the early stages of a multi-year transition from on-premise solutions to cloud-based subscriptions naturally resulting in near-term impact to our key financial metrics. Our focus is on building the subscription base at a responsible rate that returns us to our expected and sustainable top line growth with the top quartile operating margin comp profile comparable to our software peers.

With that said, we're offering some near-term and long-term aspirations beyond 2018. We're targeting to return to revenue growth by late 2019, early 2020. From the midpoint of our 2018 total revenue guidance, we are targeting a 4% to 6% compounded annual growth rate through 2022. From the midpoint of our 2018 cloud subscription guidance, we are targeting a 72% to 82% compounded annual growth rate through 2022. From the midpoint of our 2018 recurring revenue, cloud plus maintenance, we are targeting to achieve a 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 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 based on timing of our growth investments in 2019 to 2020.

On our free cash flow to net income ratio for 2018 forward, we expect to trend in-line with our historical comps at about a 1.1 to 1.2 ratio to net income. Again, these are long-term aspirations, and these assumptions do not assume any share buybacks with our diluted shares pegged at 68.5 million shares through 2022. So that covers the financial update, I know that's a lot to consume. I'll turn the call back to Eddie for some closing comments.

[Eddie Capel, Manhattan Associates, Inc.]

All right. Thanks, Dennis. Well, clearly, as success continues to be driven by delivering innovation that anticipates the needs of the evolving market, focuses on customer success and leverages our deep domain expertise. And while some global and retail macroeconomic conditions give us reason to be cautious, we're bullish on the market opportunity ahead of us for sure. Supply chain complexity and retail evolution in the target markets, in fact, bring continued need for our solutions among our customers and will continue fueling multi-year investment cycles from us at Manhattan Associates.

The move to subscription and cloud-based models is positive and is clearly outpacing our expectations. Customer feedback on our exciting market-leading innovation demonstrates that we're delivering true differentiation, and we're investing significant energy and capital into advancing the world's leading suite of supply chain commerce solutions to extend our market leadership in 2018, and as Dennis articulated, well beyond.

Our competitive position is strong. We continue to invest in innovation to extend our addressable market, our market leadership and our differentiation. And with the world's most talented supply chain commerce employees, the best software solutions and the market dynamics that require customers to adapt and invest in supply chain innovation, we believe that we're very well-positioned for 2018 and beyond.

So with that, Sarah, we're ready to take any questions.

[Operator]

All right. Thank you. Your first question comes from Terry Tillman with SunTrust.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

Hey. Good afternoon, gentlemen. Can you hear me?

[Eddie Capel, Manhattan Associates, Inc.]

We can, Terry. Yes.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

Okay. So first, Dennis, thanks for all the color. It's a lot to chew, but it was all worthwhile. So appreciate that. I guess, Eddie, with these new office openings, maybe next quarter, as there's more to analyze, maybe we can do the next call in the Italian office or in Chile. Just keep that – just think about it, okay, and get back to us.

[Eddie Capel, Manhattan Associates, Inc.]

Sure. And if you'd like to join us there, Terry, in the general location, you'd be welcome.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

Okay. I guess. Thank you.

[Eddie Capel, Manhattan Associates, Inc.]

Yeah.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

So first question is just on the services business. I think, Dennis, unless I had it wrong, you're talking about a 4% to 2% contraction in 2018. And if that's wrong, you can correct me. But going with that assumption, I guess what I'm curious about is, A, what kind of visibility are you getting in terms of the stabilization and/or confidence in stabilization? And B, any early dynamics around some of these earlier cloud rollouts in terms of are they carrying meaningful services? So that's the first multi-part question.

[Dennis B. Story, Manhattan Associates, Inc.]

Yeah. So on visibility and stabilization, what we're looking at is backlog and in pipeline, new pipeline. And what we're seeing in terms of advancers versus decliners in the mix is we're narrowing the gap on the advancers versus decliners, but we haven't reached the breakeven point from that perspective.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

And hence, it's 4% to 2% down you said?

[Dennis B. Story, Manhattan Associates, Inc.]

Yeah.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

Yeah. And Dennis, in terms of the – so there's two things here. We have ACV, which you may not give us the quarter-to-quarter, blow-by-blow on the cloud business. But then recognize subscription revenue, if I recall originally, I think I had like the range was somewhere like $21 million to $25 million. You're talking about $20 million. Maybe you could give us some puts and takes on the $20 million number? Is there anything about timing of rev rec or is there more conservatism? Just maybe help us reconcile that.

[Dennis B. Story, Manhattan Associates, Inc.]

Yeah. There's no issue on timing of rev rec, other than we – with two quarters under our belt, timing can be a challenge in terms of forecasting the pace, Terry. So there's no rev rec particular issue. We're just adding an element we hope tap wood of conservatism to our forecast.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

Okay, got it. And then, my last question, just Eddie for you in terms of watching the story over the years and the evolution and the product expansion, market expansion, et cetera. Active Omni is interesting, but it's definitely a new market territory you're getting into. You're in the front of the store. You're helping them engage with customers and you talked about the customer engagement product. One of the things that we're looking for, I would assume, that would be important is sales hiring. I see a few open jobs on the website for account executives. And I'm just curious what is your strategy and how would you report on how well you're doing in hiring new folks. Because it seems to me Active Omni is going to take more feet on the street to get out there and tell retailers that you have these products.

[Eddie Capel, Manhattan Associates, Inc.]

Thank you. Yeah, certainly, we would agree with you – we would agree with you, Terry. Frankly, the front-end of that funnel really starts with additional spend in marketing to drive awareness and messaging frankly into the marketplace. I do agree with you that there is select domain expertise that we're looking to acquire in the white space areas for us. So that certainly is another focus and we still have some opportunity for increased account coverage as well. So certainly, we'd agree and that is the area of focus for hiring and investment in sales and marketing personnel.

[Terry Tillman, SunTrust Robinson Humphrey, Inc.]

Thank you.

[Operator]

Your next question comes from Brian Peterson with Raymond James.

[Brian Peterson, Raymond James & Associates, Inc.]

Hi. Thanks for taking the questions. So, just a clarification on the comments on the deal sizes. Dennis, I wanted to know if that's solely related to Active Omni where we might have some more modulized pricing and people are just picking different components of it, or are we seeing that on the WMS side as well?

[Dennis B. Story, Manhattan Associates, Inc.]

No, I'm referring to the transition from a perpetual license to a cloud subscription there, Brian.

[Brian Peterson, Raymond James & Associates, Inc.]

Yeah. Okay. So that's specifically just related to the license to (46:14) subscription dynamic, the like-for-like deal sizes aren't down. I just want to clarify that.

[Dennis B. Story, Manhattan Associates, Inc.]

That's correct. That's correct.

[Brian Peterson, Raymond James & Associates, Inc.]

Okay, got it. And just on the slippage, I was at NRF and I would say the environment was definitely better than it's been over the last couple of years. So I'm just curious, from your perspective, were you a little surprised that maybe some of the deals didn't get close in the fourth quarter? And if we think about what we've seen so far in the first quarter, have you seen some of those deals actually get done?

[Eddie Capel, Manhattan Associates, Inc.]

Yeah. So, I was at NRF as well, Brian, and I would agree with you. I would say that the mood was a little more up-tempo and buoyant than it's been really for the last three or four years even. So it certainly was – certainly was excited about that. In terms of the deal pushes, it was a small number and there's nothing particularly endemic about it, but just general timing issues, decision-making issues and so forth. Some of that I think, no doubt, tied to the reconstitution and the rebalancing of the digital and bricks and mortar businesses in retail, but we expect to see that bounce back in 2018. In terms of your specific question as to have 2017 deals sort of pushed into 2018 and get closed, the answer to that is no, not yet.

[Brian Peterson, Raymond James & Associates, Inc.]

Got it. Thanks, guys.

[Eddie Capel, Manhattan Associates, Inc.]

Sure. My pleasure, Brian. Thank you.

[Operator]

Your next question comes from Monika Garg with KeyBanc.

[Monika Garg, KeyBanc Capital Markets, Inc.]

Hi. Thanks for taking my question. First, on the service revenue, the 2022 guidance you have given us, how should we think about the services line trending from here? And second part is 2/3 of the services is really from expansions and upgrades. So as you move to the cloud, what happens to that?

[Dennis B. Story, Manhattan Associates, Inc.]

So, I'll take the front end of that, Monika, is with the parameters that we gave, when you lay those out in your model, you should be able to calibrate services. We're being conservative or we intend to be somewhat conservative on the services line within our growth projections.

[Eddie Capel, Manhattan Associates, Inc.]

And as far as the upgrade revenue, for those deals that end up being subscription-based, the upgrade is built into the subscription cost. So, the services are still there, they're smaller pieces of work, but they move from the services line to the subscription line.

[Dennis B. Story, Manhattan Associates, Inc.]

I mean, over time, we expect to shift our overall revenue mix to a higher recurring revenue mix and we would see services become less prevalent in terms of overall total percentage of our revenue, but still a growing part of the pie.

[Monika Garg, KeyBanc Capital Markets, Inc.]

Got it. Okay. Then, for 2018, I think you're reducing the revenue by $10 million. You gave us the color around $5 million for software. Given you saw a couple of millions of perpetual being shipped into 2018, could you help reconcile rest of the delta, which is about $6 million to $8 million?

[Dennis B. Story, Manhattan Associates, Inc.]

Yeah, the balance is coming from services.

[Monika Garg, KeyBanc Capital Markets, Inc.]

Got it. Thank you.

[Operator]

Your next question comes from Mark Schappel with Benchmark.

[Mark W. Schappel, The Benchmark Co. LLC]

Hi, good evening.

[Eddie Capel, Manhattan Associates, Inc.]

Hey, Mark.

[Mark W. Schappel, The Benchmark Co. LLC]

So, Eddie, the company reset the performance-based comp for the sales force at the beginning of the year, mainly due to the new cloud solutions and some of the changes here. I realize it's still early days, but I was wondering if you could maybe add a little bit of color on how that's being received at this point.

[Eddie Capel, Manhattan Associates, Inc.]

Well, the incentive-based comp reset is not specific to the sales organization. It's across the board. Given that we did not make our numbers certainly in the back half of 2017, we didn't pay across the board performance-based compensation. Therefore, we've got to reset that for 2017.

In terms of our sales force and sales organization, they are compensated essentially the same way and at the same levels for cloud-based deals as they are for perpetual deals. And the reasoning behind that is we want the decision that the customer makes between cloud and perpetual essentially or on-premise to be entirely their decision to be, frankly, driven for the right reasons and not because any of our sales guys, frankly, or any of us at all are incentivized one way or the other. We want it to be a very natural decision-making process.

[Mark W. Schappel, The Benchmark Co. LLC]

Okay. Thank you. That's helpful. And on the license deals that were pushed into 2018, I was wondering if you could give us a little bit more detail on that. Have any of those deals closed yet this quarter? And do you expect most of them to close in the Q1 period?

[Eddie Capel, Manhattan Associates, Inc.]

So the answer is no to have any of them closed yet in Q1. We expect some of them to close in Q1, but not all is really the short answer.

[Mark W. Schappel, The Benchmark Co. LLC]

Great, thank you. That's all from me.

[Eddie Capel, Manhattan Associates, Inc.]

Sure. My pleasure. My pleasure, Mark. Thank you.

[Operator]

Your next question comes from Matt Pfau with William Blair.

[Matthew Charles Pfau, William Blair & Co. LLC]

Hey, guys. Thanks for taking my questions. First, Dennis, I wanted to hit on the gross margin goal for 2022. If you look at the range you gave, it's fairly similar to what you posted in 2016 and 2017. So just wondering why as the cloud business ramps, it wouldn't have a bigger impact in terms of moving gross margins beyond that range that you have been in historically or at least in 2016 or 2017?

[Dennis B. Story, Manhattan Associates, Inc.]

Yeah. Well, at this stage, we're attempting to add a little conservatism to our projections, Matt. And we'll have a multi-wave transition. As you know, our supply chain management solutions for the most part, the WMS, is not in the cloud at this stage and a lot of this is predicated on WMS move to the cloud and the timing and our conversions.

[Matthew Charles Pfau, William Blair & Co. LLC]

Got it. Okay. And then also wanted to just hit on in terms of the macro expectations for 2018 and the retail environment. And I know in your comments for guidance you said you're still cautious about the retail environment, but does that mean you're sort of expecting, at least in the guidance, similar to 2017, or are you expecting some sort of improvement in 2018 versus 2017?

[Dennis B. Story, Manhattan Associates, Inc.]

I think it's going to be similar in 2018 to 2017. I think just retail restructuring is going to be a multi-year program that we work through, but that creates a meaningful opportunity for us as well we believe with the new innovation releasing into the market.

[Matthew Charles Pfau, William Blair & Co. LLC]

Got it. And then, in terms of the Active Omni products, I think one of the investment thesis on your part in terms of moving the grouping of omni-channel products there is to sort of encourage more cross-sell within your base. So what have you been seeing in terms of the deals that you've initially been engaged with customers, have customers perhaps been more open or to adopt more products than they would have previously or at least put those on the roadmaps.

And then, in terms of the point-of-sale product specifically, what have you seen in terms of interest with that, now that it's on the Active Omni platform? Has that sort of increased your ability to potentially sell that into your base of customers?

[Eddie Capel, Manhattan Associates, Inc.]

Yeah, great questions, Matt. And certainly, you articulated our intentions well. We have – to be specific, we have not seen any folks buy more modules than they need kind of early, number one.

Number two, we've seen great interest in point-of-sale. Obviously, it was launched whatever that was 30 days or so ago, so the reception has been exciting and has been – certainly, has been robust. But as of yet, we're too early into the cycle to see any cross-sell because we're still in the implementation of kind of the first modules of the solution that we've sold. But as we talk to our existing customers on Manhattan Active Omni about additional modules, there's certainly a lot of interest there and reason for optimism.

[Matthew Charles Pfau, William Blair & Co. LLC]

Got it. And just last one follow-up for me on the Active Omni is, last quarter, if I remember correctly, you said that most of the initial interest or at least deals signed were from new customers. Did that continue in this quarter and what is the interest or reception been like from some of your existing customers?

[Eddie Capel, Manhattan Associates, Inc.]

Yeah. It's so good. I don't have the specific metrics or I probably shouldn't use it, but I think it was about 50-50 in Q4 from existing customers and maybe a little more skewed toward new.

[Matthew Charles Pfau, William Blair & Co. LLC]

Got it. That's it for me, guys. Thanks.

[Eddie Capel, Manhattan Associates, Inc.]

Okay. Well, thank you, Matt.

[Operator]

And there are no further questions at this time. Do you have any closing remarks?

[Eddie Capel, Manhattan Associates, Inc.]

Terrific. Well, thank you, Sarah, and thank you, everybody, for joining us today. I know that, as Dennis mentioned, a lot to get a heads around in this particular call. We will continue to provide as much detail as we possibly can, and more detail as the quarters evolve.

So, thank you again. And I do have to say one note of congratulations to Dennis for making it through the call. He's been very sick for the last two or three days. So, congratulations, Dennis, on making it through the call, and we look forward to speaking to everybody in about 90 days or so. Thank you.

[Operator]

This does conclude today's conference call. You may now disconnect.