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Edited Transcript of MANH earnings conference call or presentation 20-Jul-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Manhattan Associates Inc Earnings Call

ATLANTA Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Manhattan Associates Inc earnings conference call or presentation Thursday, July 20, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis B. Story

Manhattan Associates, Inc. - Executive VP, CFO & Treasurer

* Eddie Capel

Manhattan Associates, Inc. - President, CEO & Director

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Conference Call Participants

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* Brian Christopher Peterson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Mark William Schappel

The Benchmark Company, LLC, Research Division - Equity Research Analyst

* Matthew Charles Pfau

William Blair & Company L.L.C., Research Division - Analyst

* Monika Garg

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Terrell Frederick Tillman

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Jesse, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates Q2 2017 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, July 20, 2017.

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

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [2]

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Okay. Thank you, Jesse, and good afternoon, everyone. Welcome to Manhattan Associates 2017 Second Quarter Earnings Call. I will review our cautionary language and then turn the call over to Eddie.

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.

Now I'll turn the call over to Eddie.

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [3]

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Good afternoon, everyone. Q2 has been an important quarter for Manhattan Associates. We have accelerated our transition to the cloud and had the biggest and most innovative product release in the company's history, our Manhattan Active Solutions. While still early days, the reception has been strong and we're seeing positive encouraging impact.

In fact, we're already in several meaningful discussions with customers and prospects globally about these new solutions. While highly encouraging, we do continue to manage our business strategically with a rigorous operational and financial focus. And I'm pleased to say that our Q2 results were solid, improving sequentially, although year-over-year growth continues to be muted by macro retail challenges. And while we remain cautious, we're starting to see some stabilization in the services revenue as retailers invest in enterprise transformation. All of our other financial metrics remain solid and we delivered record first half license revenue, with promising pipeline activity for both license and services.

License revenue for the quarter was $22.4 million, up 9% over the prior year. EMEA operations had another terrific quarter, delivering $5.7 million in license revenue on the heels of a strong Q1. Nonetheless, our Q2 services revenue was down 3% from prior year. And in May, we made the difficult decision to eliminate about 100 positions from the Manhattan Associates Services business to align capacity with customer demand. Importantly, though, this action did not impair nor alter our strategic investment plans in innovation or in sales and marketing to increase market share and extend our competitive advantage.

In summary, we delivered Q2 total revenue of $154 million, flat year-over-year, and $0.50 of adjusted EPS, up 2% over the prior year. Our competitive win rates in head-to-head sales cycles against major competitors remained healthy at 75% plus for the quarter, and we're off to a very positive start in Q3 as well. We added several new large global brands to our customer portfolio closing 4 $1 million-plus license deals in the quarter, 2 with new customers and 2 with existing, 2 of the large deals were here in the U.S. and 2 were in EMEA. All 4 of the large deals were Distribution Management deals, and 2 of the 4 deals were successful head-to-head against very strong competition, 3 of the large deals were in retail and 1 in automotive.

In Q2, our license fee mix split roughly 65% to 35% between warehouse management and other solutions, respectively. The retail, consumer goods and third party logistic verticals were, again, our strongest license fee contributors, making up more than half of our Q2 license wins.

We're in advanced discussions with a number of customers and prospects about our new Manhattan Active Omni offering, which is extending sales cycles in a positive way, enabling and driving the full valuation of our new capabilities and technical architecture. And finally, as permitted by our customers, our earnings press release highlights some of our Q2 software license wins.

Turning to services. Consulting revenue was down 7% against the record prior year comp, but up sequentially by 7% from Q1 2017. All regions improved sequentially, with Americas up 5%; Europe, up 16%; and APAC, up 27%. And our consulting organization continues to execute well and remains focused on customer success globally. We completed 352 system go-lives over the past 12 months and continue to receive high marks from our customers.

For the quarter, we invested $14 million in research and development with nearly 700 associates dedicated to R&D, and our 2017 plans continue to call for increased R&D investment. As previously mentioned, we unveiled our Manhattan Active Solutions at our annual customer conference in May, marking the biggest launch of new capabilities in Manhattan's history. Our clients are under more pressure than ever to succeed in a digital-first landscape that demands both process velocity and technological investments in new methods of omni-channel and agile supply chain solutions, and our innovations focused directly on delivering against that acute need in a meaningful and competitively differentiated manner.

With Manhattan Active Omni, we have created the industry's first omni-channel operations platform that fully melds order management, point-of-sale, clienteling and store inventory and fulfillment into a single cloud-native micro services-based application, and the advantages of this new offering are certainly numerous. But let me highlight just a few that we believe will be game changing for our customers.

First, the overall solution is completely versionless, elastic and yet fully extensible. For our customers, this means that they'll always have access to our latest omni-channel applications with the freedom to fully extend the solution as they see fit, and it will scale to the business needs season-to-season. To that end, we're confident we're bringing to market a platform for optimizing operations and service that allows our customers to innovate on top of our advances. There are no upgrade processes consuming time or resources, so all of our customers focused investment can go into further advancing the platform.

Secondly, the solution is fully integrated with point-of-sale, order management and store inventory fulfillment, all delivered in a single application. The platform delivers an integrated view of the customer, inventory, pricing and demand so there's 0 data or process redundancy. This combination application approach, not only delivers a more holistic view of the customer and inventory to every customer-facing associate, it also enables customers to implement additional applications more quickly and cost-effectively, lowering our barriers to additional product sales.

And finally, we believe Manhattan Active Omni is an operational game changer for our customers with bricks-and-mortar. Our Manhattan Active store component of the suite creates a single, unified experience for the store associate: full access to selling, service, clienteling, fulfillment and inventory functions, and now that application runs across all form factors and all operating platforms that you'll likely to find in a store. Literally, the same code base could be applied on everything from an iPod Touch to a 26-inch touch screen at the cash [rep] station might be running Windows. And again, all fully customizable to flex with the needs of our customers.

Now turning to our supply chain applications. We unveiled a substantial new capability called Order Streaming within our flagship Warehouse Management for Open Systems application. Order Streaming is a major step forward for our warehouse operations customers because it takes in -- takes the so-called waveless concept to the next level. Some of our larger e-commerce shippers have been dabbling with outbound processes that stream orders directly to the floor throughout the day, as opposed to batching them 1 or 2 waves throughout the day. But Order Streaming takes that concept further to most efficiently drive more throughput in the distribution center to improve speed of distribution. Our early-adopting customers are seeing double digits improvements in the overall facility volume, and we believe there's much more that we can do in this area.

Finally, we've also made our inventory suite of applications available on a subscription basis. For some of our smaller customers, being able to subscribe to a fully managed and always up-to-date leading solution is proving an attractive option in the early months since launch.

Now turning to our global associates. We ended Q2 with about 2,900 employees around the globe, down about 120 compared with Q1 2017 and year-end 2016. We finished the quarter with 62 people in sales and sales management, with 56 quota-carrying sales reps, that's down 3 from last quarter, and we'll continue to be opportunistic and look to add talented sales professionals to the company over the balance of the year.

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

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [4]

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Okay. Thanks, Eddie. We posted Q2 total revenue of $154.1 million, about flat with Q2 of 2016. Consulting Services revenue was down 7%, muting solid license maintenance and hardware growth of 9% in each category. On a geographic basis, the Americas total revenue declined 6%, Europe grew 21% and Asia grew 49%. Sequentially from Q1, total revenue grew 7% with operating profit and EPS growing 19%, and our consulting revenue also showed modest improvement on a sequential basis.

Adjusted earnings per share for the quarter was $0.50, up 2% over prior year. Our GAAP diluted earnings per share was $0.45, decreasing 2% on a charge of approximately $3 million in the quarter associated with the improved alignment of U.S. services capacity with customer demand. For your reference, a detailed reconciliation of GAAP to non-GAAP adjustments is included in our earnings release today.

License revenue for the quarter totaled $22.4 million, growing 9% over prior year. From a regional perspective, Americas posted license revenue of $15.2 million; Europe, $5.7 million; and Asia, $1.5 million. As always, our license performance depends heavily on the number and relative value of large deals we close in any quarter. Given the pipeline activity associated with Manhattan Active Omni in the second half, we are adjusting our perpetual license growth goal of 4% to 6% -- or to 4% to 6% for the full year 2017. Our estimate change is based on our omni-cloud pipeline activity factoring in the potential transition impact from on-premise software to cloud-based subscription revenue. While the metrics are not material at this stage, customer interest is certainly increasing and expected to continue in this manner through the remainder of 2017. Also included in our forecast is 1% of year-over-year FX headwinds.

Shifting to services. Q2 services revenue totaled $116.8 million, down 3% over prior year and up 7% sequentially. Our Services revenue is comprised of 2 revenue streams, consulting and maintenance. Our 2017 estimate for total services revenue growth, including maintenance, reflects a decline of 3% to 5%. We are estimating Q3 Services revenue to be down about 2%. Our maintenance growth included in these estimates for quarterly and full year remains at about 6%.

In summary, despite our strong second half 2017 (sic) [2016] license growth and solid start to 2017, we expect services revenue growth to decline modestly in the second half.

Consulting revenue for the quarter totaled $80.9 million, down 7% compared to prior year and up 7% sequentially from Q1 2017, snapping 3 consecutive quarters of sequential decline. Americas was up sequentially 5%, but down 11% over prior year. Europe and APAC are trending positively, with Europe flat over prior year and up 16% sequentially. APAC was up 86% over prior year and up 27% sequentially.

Americas continues to be the most challenged geography with growth headwinds. We are seeing signs of stabilization with services sales efforts building pipeline, strong license performance with services attached and the momentum spread of customer engagements declining versus advancing over the past trailing 12 months is narrowing. All said, we are positive but remain cautious given the retail environment. Timing is also being impacted by our Manhattan Solutions launch regarding customer evaluations.

Maintenance revenue for the quarter totaled $36 million, increasing 9% over last year on strong collections. License revenue growth, cash collections and retention rates of 90-plus percent contributed to this year-over-year growth.

Consolidated services margins for the quarter were 59.6%, which exceeded our expectations, benefiting from solid productivity and capacity management. We expect Q3 2017 services margins will likely be in the range of 60.5% to 60.1%, and our full year 2017 services margins to normalize into the 58.4% to 59% range. We expect Q3 margins to increase as billability and utilization ramp then drop off again in Q4 due to regular holiday seasonality.

Turning to operating income and margins. Q2 adjusted operating income totaled $55.2 million with an operating margin of 35.8%, up sequentially from 32.3% in Q1 and down slightly from 36.1% in Q2 2016. Our operating leverage is being driven by strong license revenue performance, workforce productivity, expense discipline and lower incentive compensation accruals associated with revenue performance.

Our full year operating income estimate range is $201 million to $206 million, with an operating margin target of 34.1% to 34.3% versus the previous goal of 34.0% to 34.1%. This includes $5 million of the $9 million in incremental strategic investment largely tied to incremental R&D resources and investment in cloud operations. The lower investment is timing related and will straddle into 2018. We expect the Q3 operating margin range of 35% to 35.5%, with second half operating margin in the range of 34.2% to 34.6%. The second half quarterly split should be adjusted for quarterly license seasonality and lower Q4 services revenue due to the traditional retail holiday season. So that covers the operating results.

Regarding taxes, our adjusted effective income tax rate was 36.5% for Q2 and we continue to project a full year effective tax rate of 36.5% for adjusted earnings per share. For GAAP, new accounting rules related to taxes associated with vesting restricted stock will lower our 2017 GAAP effective tax rate to 35.5%.

Diluted shares for the quarter totaled 69.4 million shares, down from Q1 2017 of 70.2 million shares. We repurchased about 535,000 shares of common stock in the quarter, totaling $25 million. We estimate second half diluted shares to be about $69.3 million for Q3 and Q4 and the full year weighted average diluted shares to be about $69.5 million. The estimate does not assume additional common stock repurchases. And lastly on shares, our board approved last week, raising our share repurchase authority limit to a total of $50 million. That covers the P&L results.

Turning to cash flow. Cash flow from operations was $11.3 million in Q2 2017 compared to $19.1 million in Q2 2016, with the change driven by higher income tax payments in 2017. Year-to-date operating cash flow totaled $72.6 million, up 22% over prior year. DSOs were 57 days versus 53 days in Q1 2017. CapEx was $1.9 million in the quarter and we estimate full year 2017 CapEx to be about $7 million to $9 million. Our balance sheet also continues to support stability and long-term strategic flexibility with cash and investments totaling $87 million as of June 30 and 0 debt compared to $101 million reported for Q1 2017.

Now I'll update our 2017 guidance and then hand the call back to Eddie for closing remarks. While it will take time to build subscription revenue, we are factoring in potential second half impact on our revenue and earnings based on positive customer interest and pipeline activity. The top end of our guidance range for revenue and earnings assumes performance is weighted to our traditional on-prem business with license maintenance and services, and the low end assumes the positive impact of uptake on our cloud solutions with ratable revenue recognition and potential services revenue deferral until customer go-live, with recognition over the remaining term of the customer contract.

With that backdrop, we are lowering our full year total revenue guidance to a range of $590 million to $600 million from our previous range of $606 million to $620 million. The high end of the new range accounts for our services headwinds and Manhattan Active Omni subscription deals at the low end of the new range. We expect our full year total revenue percentage split to be about 50-50, first half versus second half. With the Q4 holiday season, as in prior years, we are modeling a sequential decline in services revenue of about 3% from Q3 2017 to Q4 2017.

For adjusted diluted earnings per share, we are lowering our guidance range from $1.89 to $1.93, to $1.85 to $1.89, representing a range of down 1% to up plus 1% over 2016 adjusted EPS of $1.87. We expect our full year percentage EPS split to be 49%-51% first half versus second half. For GAAP diluted earnings per share, we now expect to deliver $1.71 to $1.75, representing a range of down 1% to up 2% over 2016 GAAP EPS of $1.72.

Finally, with our move to the cloud, we expect to achieve long-term financial results exceeding what would have been possible under a standalone on-premise license model. Our transition will have a meaningful impact on the shape of our P&L and results in 2018 and beyond. So in our Q3 call, we will provide more details regarding our outlook.

Now I'll turn the call back to Eddie.

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [5]

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Thanks, Dennis. Well, I'll close our prepared remarks with a brief conclusion. Our success continue to be driven by the focus we apply to delivering innovation in a rapid and ever-changing market, focusing on our customers' success and leveraging our deep domain expertise. While the global and retail macroeconomic conditions certainly give us reason to be cautious, we are very bullish on the market opportunity ahead of us and investing significant energy and capital into innovation and advancing the world's leading suite of supply chain commerce solutions so as to extend our market leadership in 2017 and beyond.

Omni-channel retail commerce and supply chain complexity in our target markets continue to increase, driven by digitalization and e-commerce, which continue fueling multiyear investment cycles for customers and for Manhattan Associates. Our competitive position continues to be very strong, and we continue to invest in innovation to extend our addressable market, market leadership and differentiation. With the world's most talented supply chain employees, the best software solutions and market dynamics that require customers to adapt and invest in supply chain innovation, we believe we are well positioned for 2017 and beyond.

Jesse, we'd now be happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Terry Tillman with SunTrust.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [2]

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It's good to hear about Active Omni, seeing some strong new interest. I guess, Eddie, I have a question for you and then I have 2 follow-up for Dennis. First, Eddie, for you in terms of Active Omni, just maybe a little bit more narrative in terms of -- and I know it's still early, but do you sense that they will buy all the capabilities or would it be more bits and pieces? And I guess, related to that, what kind of deal sizes would you see versus your other traditional products? And just how do you see it playing out in terms of deal sizes and how they consume it?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [3]

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Let's see. So I think, first of all, it's a -- as I think you know, it's a modular suite of solutions with great potential for upsell in the out months, out quarters and out years. I think, that our prospects will buy -- will not buy, typically, the entire suite of solutions all at once. Certainly, it will happen from time to time, but don't expect that to happen all at once. In terms of deal size, I think the deal size will continue to be as it has been and not really change materially. We will, obviously, see some upside from the infrastructure costs that we'll be in control of in the new world, but I think the deal size will be consistent with what we've seen. The way that our customers and prospects consume, obviously, will be different. And expect that, as Dennis said, to largely be ratable over the term of the deal.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [4]

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Okay. And I guess -- well, actually, just as a follow-up to that, Eddie, do you see anything in terms of Active Omni changing kind of the mix of business of attracting net new customers versus what's been typically the balance we've seen of new versus existing?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [5]

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I don't think so, Terry. I mean, again, it's early. But given the response that we've see in the marketplace, both from existing customers and new, I think the mix will be consistent.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [6]

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Okay. And Dennis, maybe -- the question, it's actually on the combined services line. So first, in maintenance revenue, we get calls from clients wondering with the retail exposure if you'd see any kind of impact to both the maintenance renewal rates, collections, et cetera, but deferred was actually quite strong and the growth was solid in maintenance revenue. Are you forecasting anything in the back half of the year or any changing patterns in terms of retailers balking at maintenance or price increases, et cetera?

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [7]

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Not at all.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [8]

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Okay. That was clear. And then just the second part of the services line. In terms of confidence in services stabilizing, I mean, the rate of decline definitely improved from the first quarter, you mentioned something about advancers versus decliners. Can you maybe walk through what you mean and/or the visibility or confidence in further stabilization in the second half?

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [9]

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Yes. So advancer or decliners is really a momentum view that we take on the services and on a trailing 12-month basis. At any given time, you can have anywhere from 500 to 700 customer, unique customers in active engagements. So our view is that looking at from an advancer-decliner point of view and the spread between advancers and decliners on dollars, gives us a perspective of how is the business firming up or not. So -- and we've seen that spread narrowing, which is a positive sign. Looking forward, the services team has been working very diligently around selling services and expanding their services pie, and we're seeing some nice traction on the pipeline itself. It's growing. But unfortunately, since we're getting into the back half of the year, some of that we may realize in 2017 but most of it will manifest itself in 2018. Does that help, Terry?

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Operator [10]

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Your next question comes from Monika Garg with KeyBanc Capital Market.

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Monika Garg, KeyBanc Capital Markets Inc., Research Division - Research Analyst [11]

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One question, what I'm trying to understand. If I look at the license growth first half about 9-ish percent, whereas professional services is down 8% to 9%. So what I'm trying to understand, why this disconnect between the growth of license and the decline in service? And going forward, how do you think these 2 trend?

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [12]

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Yes. So Monika, this is Dennis. Typically, the services attached, okay, it all depends on when the customer drives the implementation cycle and generally you start out with the design element. So there's always a lag, typically, on the front-end from services attached. And when you look at the past trailing 12 months, license has been very strong and we're seeing better services attach with respect to the last 4 quarters, but we also have had bleed out of some larger engagements that we had signed in 2016, 2015 multiyear engagements. So basically that trailing 12-month advancer-decliner that I mentioned, what we're working hard to do diligently is fill the bucket back up and narrow that spread between engagements that are going live and generating positive ROI and the new business that we're bringing in the door.

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Monika Garg, KeyBanc Capital Markets Inc., Research Division - Research Analyst [13]

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Got it. Then as -- you talked about seeing interest in Active Omni Solution. So as that business, that line ramps, how do you think it could impact the service revenue for the next couple of years?

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [14]

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We'll talk more -- it's early days. We'll talk more about that in Q3 and how it's going to shape the P&L. Keep in mind, for the most part, we've been going to market with the product, I'm going to over-exaggerate here a little bit, but since June. And I think the feedback from prospects has been pretty exciting and I'm gauging that by the activity in the pipeline, and Eddie can talk about that. But what we know is, is for the Active Omni implementations, we will have to basically defer services revenue until go-live and then we can recognize that revenue over the balance of the remaining contract term with the customer. So we will have some impact initially as we transition to cloud on the services growth line in the P&L. And we'll talk more about that in Q3 and as we go along.

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Monika Garg, KeyBanc Capital Markets Inc., Research Division - Research Analyst [15]

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Got it. The last one for me. Do you think you will have to invest more in sales and marketing as you ramp Active Omni Solutions?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [16]

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I do think so, Monika. I mean we certainly allowed, as we've talked about before, some additional strategic investment and awareness in marketing as we bring our new solutions to the segments, but nothing above and beyond the investments we've already highlighted from a marketing perspective. From a sales and a quota-carrying sales rep perspective, we feel pretty comfortable about where we are. We will continue to look opportunistically to add heads to our organization, but nothing -- not an order of magnitude increase or anything like that.

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Operator [17]

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Your next question comes from Mark Schappel with Benchmark.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Equity Research Analyst [18]

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Eddie, starting with you and your prepared remarks. You noted that your transition to the cloud was accelerated in the quarter, and just wondering is it fair to assume that the transition took place mostly on the transportation side of your business?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [19]

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So historically, yes, Mark. But -- so that's really what I meant by the acceleration. So as you know, we've had a cloud, a transportation cloud business for a number of years now, but pretty much all of our other solutions, order management, point-of-sale, WM and so on down the line, we have been delivering exclusively as a perpetual license model. As we launch our Active suite of solutions, we certainly expect to see and are seeing more of our products over and above TMS being consumed on a subscription basis.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Equity Research Analyst [20]

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So the 2 new solutions, your Active Solutions and Active Omni, are they being offered only a subscription basis? Or is it more of a hybrid model?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [21]

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Both. Both. So to be clear, our Active Omni solution is a true, native, pure play, whatever adjective you want to use, cloud solution. The interesting thing I think about our offering is we will deliver it as a perpetual license model as well, sort of an active at customer-type model, if that makes sense. So either subscription or perpetual.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Equity Research Analyst [22]

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Great. And then, Dennis, cash flow from operations was down meaningfully this quarter year-over-year. Were there any onetime items that won't appear -- or won't reappear that drove that number? Or -- and do you expect cash flow from ops to bounce back next quarter?

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [23]

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Yes. So Mark, we've always looked at cash flow on a year-to-date basis, throughout the year. The only meaningful impact in the quarter was we paid $36 million in income taxes, which was up significantly over last year. Last year was about $24 million of income tax payments. That's the primary difference. But if you look at year-over-year or year-to-date cash flow, we've generated roughly $73 million, up 22% year-to-date. So yes, I would expect that we'll have a nice cash flow profile in the back half of the year as well.

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Operator [24]

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Your next question comes from Matt Pfau with William Blair.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [25]

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First, I wanted to dig in a little bit more into the guidance change for revenue. I guess what changed in terms of your expectations versus when you reported your last quarter, were there deals or engagements that were delayed and that you were expecting to come back and now they're going to be pushed out further? Or is it something in the pipeline in terms of anticipated deals that hasn't been building as expected?

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Dennis B. Story, Manhattan Associates, Inc. - Executive VP, CFO & Treasurer [26]

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Yes. I'll take that, Matt. First off, in our guidance last quarter, we didn't factor in anything for Active Omni. So number one, we weren't baking any assumptions into our guidance from the beginning of the year through the last quarter relative to Active Omni. Secondly, the services revenue line, while it's improving sequentially in the back half, it's better than the first half, it didn't improve. It's not accelerating or improving as fast as we would like. So the good news is we aren't seeing a meaningful work stoppage on services engagements. We're seeing more of a timing on restarts, some restarts.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [27]

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Got it. And then, I guess, in terms of -- Eddie, some comments on the press release about how you expect some of the retail headwinds going on right now to eventually produce some nice growth opportunities for Manhattan. I guess, what does it take to sort of flip that switch where we stop seeing some of these delayed services engagements and it starts potential, actually, maybe driving a bit of an investment cycle in Manhattan's products.

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [28]

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Yes. Well, I think, what we've -- we've still got this -- essentially, the pause in the retail industry going on whilst the landscape -- their portfolio and their landscape gets reconstituted and rebalanced between digital and bricks-and-mortar, and retailers still are, frankly, redesigning, to some extent, their networks, their bricks-and-mortar portfolios, and again the balance between digital and B&M. And when we see that, those strategic decisions being completed, I think the reinvestment and reinvigoration in either or in both, in supply chain transformation and in the technology enablement of the stores, is what will drive some nice upside for us there.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [29]

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Got it. And then on the Active Omni Solution and the interest you're seeing, I think, correct me if I'm wrong, but there's kind of 4 different ways that you could -- combinations of how you could purchase and deploy the solution between subscription license and then on-premise or cloud. So what areas have you sort of been seeing the most interest in there? And then, I guess, is there a certain type of customer that fits in better with the certain type of combination?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [30]

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Yes. So a pretty good mix inside of all of those permutations. Almost all of them have a flavor of cloud, whether public or private. If you pushed me, I'd probably tell you that the larger Tier 1 customers are running in either public or private clouds but would like to consume the license as perpetual, and the slightly smaller customers, bearing in mind we deal in Tier 1 and Tier 2, so still pretty sizable customers, but are more interested in consuming the solution on a subscription basis.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [31]

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Got it. And then last one for me. Just in terms of traction with the point-of-sale solution, what are you seeing there? And then does the Active Omni Solution help potentially accelerate the adoption of that product?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [32]

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Yes, so good progress there. It just went live actually with one of our early-adopter customers just days ago, frankly. So we're pleased about that. It seems to be going well in the early days. Our pipeline is pretty solid. A good bit of activity in that space for sure. I think that our -- the Active platform and the native cloud platform certainly has garnered a lot more interest. And I want to be cautious using the word accelerate, I don't think it's going to create a hockey stick acceleration, but I do think it is going to make the solution more and more attractive to the marketplace because, frankly, it is the first and only of its kind.

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Operator [33]

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Your next question comes from Brian Peterson with Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [34]

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So maybe a high level question. If we look at your Active Solution portfolio, Dennis, how should we think about the dollar opportunity of services versus some of your current products? And the reduction in service capacity is that solely related to the retail spending environment? Or is that any reflection of what services could look like with the new product portfolio?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [35]

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I shall take that, Brian. So the services engagement, whether it be from the older, if you want to call it that, on-prem solution or Active cloud-based solutions really look very, very similar. Clearly, there are some very idiosyncratic differences between the technology deployment and so forth, but the services engagement looked very, very similar. Now if the client, our client is signed up for a cloud-based solution, as Dennis pointed at them, the revenue recognition rules say that we cannot begin to recognize services revenue until that customer goes live. In the old world, we would recognize services revenue from Day 1 on a time and materials basis. So there will be a lag in terms of picking up that revenue and then the balance of the services revenue is recognized over the time of the contracts, so that is definitely different for sure.

And then with regard to the part B of the question which was, was the reduction in services capacity related to retail headwinds? And the answer to that is, yes, almost exclusively and not representative, as I pointed out in part A, of a transition to the cloud.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [36]

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Got it, makes sense. And maybe one more for you, Eddie, just on the pipeline. There's a lot of news on what's going on in retail. I'm just curious, is there any way to bifurcate what the sales pipeline looks like if we looked at retail and non-retail?

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [37]

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Well, there is. We don't disclose that. But obviously, we've got a view of that. I would tell you though that -- and we talked about retail being pretty strong for us and so forth, retail pipeline looks good. It's really the big transformational services projects that have been ongoing for 12, 18, 24 months where we've seen a bit of a slowdown and created the headwinds in services. The retail pipeline is really quite active, both here in the United States and internationally.

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Operator [38]

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There are no further questions at this time. I'll turn the call back to the presenters.

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Eddie Capel, Manhattan Associates, Inc. - President, CEO & Director [39]

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Very good. Thank you, Jesse, and thank you, everybody, for taking the time to join us this afternoon and your continued support of Manhattan Associates. We look forward to updating you on, particularly, our Active suite of solutions, but of course, of the business in general in about 90 days. Thank you, and good evening.

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Operator [40]

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This concludes today's conference call. You may now disconnect.