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Edited Transcript of MANH earnings conference call or presentation 31-Jan-17 9:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Manhattan Associates Inc Earnings Call

ATLANTA Feb 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Manhattan Associates Inc earnings conference call or presentation Tuesday, January 31, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis Story

Manhattan Associates, Inc. - CFO

* Eddie Capel

Manhattan Associates, Inc. - President and CEO

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Conference Call Participants

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* Terry Tillman

Raymond James & Associates, Inc. - Analyst

* Matt Pfau

William Blair & Company - Analyst

* Mark Schappel

The Benchmark Company - Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Angel, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates fourth quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this call is being recorded today, January 31, 2017. I would now like to introduce Dennis Story, CFO of Manhattan Associates. Dennis, you may begin your conference.

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Dennis Story, Manhattan Associates, Inc. - CFO [2]

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Thank you, Angel, and good afternoon, everyone. Welcome to Manhattan Associates' 2016 fourth quarter earnings call. I will review our cautionary language, and then turn the call over to Eddie Capel, our CEO.

During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance, and that actual results may differ materially from 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 FY15, 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 the reconciliation schedules in our 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 and CEO [3]

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Good afternoon, everyone. Well, 2016 was a very successful year for Manhattan Associates. Despite some persistent global macro sluggishness and the recent services revenue head winds, we strengthened our Company significantly in 2016, and we improved our market leadership position.

We posted solid fourth-quarter and full-year financial results, marking a fifth consecutive year of record revenue, operating profit, earnings per share, and operating cash flow performance. Importantly, we exited 2016 with strong second-half license momentum, as well as solid demand for omni-channel, store, and distribution management solutions. Our associates also continue to execute very well, and maintain a strong commitment to providing our customers with a very high level of expert service.

Q4 total revenue increase 4% over the same period last year to $148 million, and adjusted earnings per share increased 18% to $0.46. Full-year 2016 total revenue was $605 million, increasing 9%, and adjusted earnings per share were $1.87, increasing 23%. The combination of continued revenue growth in the face of stressed retail markets and F/X head winds, but along with prudent expense discipline, led to our record performance.

Our Q4 software license revenue was $22.1 million, up 8% over 2015, and we closed seven $1 million-plus license deals in the quarter, two of which were with new customers. Six of the deals were US-based, and one was in Europe. Our large deal activity continues to be driven by a healthy mix of platform-based warehouse management, transportation, and omni-channel initiatives, both in the US and our international markets.

Our deal activity also spanned some diverse industries, including industrial, wholesale, distribution, wine and spirits, specialty retail, department stores, and third-party logistics. For the year, we closed 18 $1 million-plus deals. Five of these deals were with new customers and 13 with existing. In 11 of the 18 deals, we competed head to head against very strong competition.

We are very pleased with our second-half license performance. We exited 2016 with solid momentum, and we're off to an early solid start in 2017, giving us cause for cautious optimism in these fairly turbulent times.

Fundamentally, we are winning with compelling differentiation through organic product innovation, domain expertise, and customer focus. We saw wins across retail, manufacturing, and wholesale in a variety of product categories and geographies. We not only expanded our solution set with our tier one and tier two customer base, but we also continue to add net new customer -- add to our net new customer base with a number of leading global brands.

Our sales teams executed very well, and our competitive win rates remain strong. Win rates for the quarter and full year were about 75% when in head-to-head sales cycles against our major competitors. For the quarter, 30% of our license revenue came from new customers, representing approximately 35% of total licensed revenue on a full-year basis.

As we discussed in our Q3 call, we did continue to see significant revenue pressure on our US and European services businesses, as some customers delayed or slowed major project implementations and upgrades. We posted Q4 consulting revenue growth of 4% year over year, with America's growth at 6%, and EMEA down 18%.

Our current market outlook assumes that market pressures similar to those we experienced in Q3 and Q4 will continue into the first half of 2017, with some recovery in the latter half of the year. The silver lining to this cloud is that our license pipeline entering 2017 looks solid, and our competitive win rates remain strong. Given this solid license performance, we expect services revenue growth will follow over time. Dennis will provide more details on this in his financial update.

As we already stated, our license pipeline is solid entering the year. Customer satisfaction is good. Our competitive position remains strong, and we continue to be the leading innovator in core supply chain, retail store operations, and point-of-sale commerce solutions.

2017 is a pivotal investment year for Manhattan. Our 2017 plans include approximately $9 million in incremental strategic investment to deliver new, next-generation multi-channel retail selling solutions into our core markets. As a result, 2017's earnings per share will be reflective of these strategic investments, which represent about $0.08 of EPS.

We're bullish on the market opportunity ahead of us, and continue to place significant energy and investment into developing and advancing the world's leading suite of supply chain commerce solutions, to extend our market leadership in 2017 and beyond. I will provide a little more color in my business update following Dennis' review of our financial results.

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Dennis Story, Manhattan Associates, Inc. - CFO [4]

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Thanks, Eddie. I will review our Q4 financial performance, and finish with our 2017 guidance. As Eddie noted, we delivered Q4 total revenue of $147.6 million, increasing 4% over 2015. Adjusting for currency head winds, total revenue grew 5.4%, and that's organic growth. By region, Americas grew 5%, APAC increased 3%, and Europe declined 2% compared to Q4 of last year.

Full-year total revenue was $604.6 million, increasing 9% over 2015. Full year by region, Americas grew 11%, APAC increased by 13%, and Europe declined 5%. Q4 adjusted earnings per share was $0.46, up 18% over 2015, and our GAAP diluted earnings per share was a record $0.42, increasing 17%. Full-year adjusted GAAP and adjusted EPS both grew 23% year over year, with $1.72 in GAAP EPS, and $1.87 in adjusted EPS. A detailed reconciliation of GAAP to non-GAAP adjustments is included in our earnings release today. The remainder of my P&L discussion represent our adjusted results.

License revenue for the quarter totaled $22.1 million, up 8% over prior year. Full-year license revenue was $85 million, increasing 8% over 2015. We continue to experience solid activity in our target markets, and the demand environment remains quite positive. We finished the year out strong, closing 12 of our 18 $1 million-plus deals in the second half, leading to total license growth of 11% versus 2015.

For 2017, our goal is to achieve a 5% to 6% license growth rate versus 2016. Our growth forecast includes a 2% haircut for negative F/X impact, and a 3% reduction for a moderate transition from traditional on-premise software revenue recognition to cloud-based subscription revenue. While the recurring revenue metrics are not material at this stage, customer demand certainly is increasing, and we expect transaction growth in 2017.

Finally, as we have always disclosed, our license performance continues to depend heavily on the number of relative value of large deals we close in any quarter. Q4 services revenue grew 5%, totaling $111.9 million over 2015.

For the year, services revenue growth was 9%, totaling $467.3 million. The combination of some consulting services revenue pressure and negative F/X impact continued in Q4, resulting in lower-than-expected services growth. As a reminder, total services revenue includes both consulting and maintenance. Q4 consulting revenue grew 4% to $77.1 million, and full-year revenue grew 9%, totaling $333.4 million.

2016 was the tale of two halves, with 15% revenue growth in the first half and 4% growth in the second half. Our growth head winds were in the Americas and Europe, largely attributed to three factors. One, select customers extending implementations and upgrades; two, the tail-off of large, multi-year implementations going live in the second half, driven by strong services efficiency; and three, the strong F/X head winds I mentioned earlier.

In the Americas theater, first-half growth was 18% and second half with 7%. In Europe, first-half growth was 3% and second half growth was down 16%.

For the year, we increased our global services head count by another 5% or about 90 heads. With a challenging demand outlook entering 2017, our Q1 2017 hiring plan is to add about 80 more new associates globally, as we balance demand with capacity. We're off to a good start, with 38 new hires in January.

Turning to Q4 2016 maintenance revenue, we posted $34.8 million, growing 7% over Q4 2015. Full-year maintenance revenue grew 8% to $133.8 million. Solid license performance, cash collections, and retention rates of 90%-plus contributed to year-over-year growth. We recognize maintenance renewal revenue on a cash basis, so timing of cash collections can cause inter-period revenue lumpiness from quarter to quarter.

On the services margin side, consolidated margins for the quarter were 58.1%, compared to 59.2% in Q3 2016, and 57.1% in Q4 2015 -- world-class. Consistent with prior years, Q4 margins were down sequentially from Q3 2016, due to the retail busy season and the addition of about 60 new billable professional services associates in Q3 and Q4. 2016 full-year services margins were 58.6%, versus 57.5% in 2015.

For 2017, we expect services head winds to straddle into the first half of 2017. Thus, we are estimating full-year total services revenue growth in the 2% to 4% range. We expect 2017 to be the inverse of 2016, with first-half revenue down 1% to 3% against tough 2016 comps, and second half up 7% to 9% against weaker 2016 comps.

We are forecasting Q1 2017 growth to be down 3% to 4%, and Q2 down 2% to up 1%. Maintenance growth is included in these growth rates, which we estimate quarterly and annual growth at 6%. In summary, with our strong second half 2016 license growth and solid pipeline entering 2017, we expect services revenue growth to improve in the second half.

On the 2017 services margin outlook, we are estimating margins to be in the 58.3% to 58.5% range for the full year. For Q1 2017, we expect services margins to be in the 53.3% to 53.8% range. We expect Q2 and Q3 services margins to increase as billability and utilization ramp on first-half hires, and then drop off again in Q4 due to the usual holiday seasonality.

That covers services. Turning to operating income, we delivered record Q4 operating income of $49.7 million, growing 15% over 2015, with operating margin of 33.7%. Our full-year operating income was also a record at $210.7 million, increasing 19%, with operating margin of 34.8%, up 310 basis points versus 2015. Our operating leverage was driven by ongoing revenue growth and disciplined expense management, with very strong quality of earnings.

Entering 2017, we are targeting operating income to grow approximately 1%, landing in the range of $210 million to $214 million, with an operating margin profile ranging in the 33.7% to 33.9% range. Our margin profile includes $9 million in incremental strategic investment that Eddie mentioned, representing about 150 basis points of margin, and $0.08 of earnings per share.

Excluding the strategic investment, our underlying core business is margin accretive, with an operating margin of 35.3% versus 2016. From a quarterly perspective, we expect Q1 operating margin to be about 28.6%, driven by our outlook in Q1 services revenue and our traditional beginning of the year salary and head count increases from Q4 and Q1 hires. For the balance of the year, Q2 and Q3 margins will be about in the same range of 35.5% to 36%, while Q4 will be in the 34.5% range with traditional seasonality.

That covers the operating results. Regarding income taxes, our adjusted effective income tax rate for 2016 was 36.6%, consistent with 2015's effective rate of 36.5%. For the 2017 adjusted effective tax rate, our best estimate at this stage is 36.5%, subject to the mix of US to foreign taxable income, and US federal, state, and foreign tax legislation changes. New accounting rules related to taxes associated with vesting restricted stock will lower our 2017 estimated GAAP effective tax rate to 35.6%.

Turning to cash, for the quarter, cash flow from operations totaled $37.8 million, bringing our full-year cash flow from operations to a record $139.3 million, representing our seventh consecutive year of record operating cash flow, and a 16% increase over 2015's $120.2 million. Our Q4 DSOs were 63 days, versus 60 days in Q3 2016, and 63 days in Q4 2015.

Capital expenditures totaled $6.8 million in 2016. For 2017, we are estimating CapEx in the range of $9 million to $10 million.

Our balance sheet liquidity continues to be excellent closing the year with $96 million in cash and investments, compared to $111 million in Q3 2016, and $129 million in Q4 2015. In Q4, we increased our share buy-back to $50 million. We continue to carry zero debt, while self-funding our investments in innovation and growth, and share buy-backs from operating cash flows.

Regarding capital structure, we reduced our common shares outstanding 3% in 2016, buying back 2.8 million shares totaling $158 million. With our Q4 repurchase activity, last week our Board approved raising the repurchase authority limit to a total of $50 million.

Our 2017 diluted share forecast is 71.1 million shares for the quarters and full year. Consistent with prior years, our diluted share estimate and EPS guidance does not assume any common stock repurchases in 2017.

That closes the chapter on a strong 2016 year. Turning to 2017 guidance, thematically, I would like to summarize our 2017 guidance as follows: One, we expect the competitive landscape to be about the same. We remain cautious regarding global macro and retail market challenges. Our target markets and new addressable market opportunities continue to represent significant long-term growth opportunity for Manhattan.

Despite services head winds, our business fundamentals support -- or supporting growth remain strong. 2017 is an incremental strategic investment year to build the franchise, with moderate transition into the cloud subscription revenue model. Finally, we continue to subscribe to under-promise and over-deliver.

For 2017 total revenue, current guidance is to grow 3% to 5%, delivering $622 million to $632 million in total revenue. This factors in near-term services head winds, and about $10 million, or approximately 2% in negative currency head wind, given recent global volatility.

Overall, we expect our full-year total revenues split to be about 48% first half, 52% second half. For license revenue, we're modeling a 49%, 51% split first to second half, with a seasonal pattern of Q1 and Q3 license revenue lower than Q2 and Q4. As I mentioned earlier, we are expecting a moderate transition from traditional on-prem license revenue to cloud-based subscription revenue. For services, as usual, Q4 revenue will be down sequentially from Q3, due to the retail holiday busy season. From a revenue mix perspective, we believe 2017 hardware and billed travel will grow about 7.5% over 2016, and will represent about 9% of total revenue.

For 2017 adjusted diluted earnings per share, our guidance range is $1.89 to $1.93, representing 1% to 3% growth. Over 2016, adjusted EPS of $1.87. This guidance includes $0.02 of negative F/X impact. In addition, this includes $0.08 of planned strategic investments, most of which will occur in the second half of 2017.

As mentioned in the operating discussion, with our Q1 services revenue outlook combined with traditional beginning of the year global salary increases and first-quarter head count additions, we expect Q1 2017 EPS to decline sequentially by about $0.08 to $0.09 versus Q4 2016, with a year-over-year decline of 9% to 12% versus Q1 2016, given a strong comp.

We expect EPS to have a first-half, second-half spread of about 46% to 54%. For 2017 GAAP diluted earnings per share, we expect to deliver $1.74 to $1.78, representing 1% to 3% growth over 2016 GAAP EPS of $1.72. The $0.15 full-year EPS difference between GAAP and non-GAAP diluted EPS is the net impact of equity-based compensation. That covers my financial update and guidance, and I will turn the call back to Eddie.

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

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Thanks, Dennis. Before I get into the quarter details, 2016 was a very successful year for Manhattan Associates on many fronts. We delivered record financial results, revenue, operating profit, EPS, and cash flow. We continue to take market share and expand our adjustable market. Our competitive position grew stronger.

We remain the leading technology innovator in supply-chain commerce. We focused on our customers, and continue to improve customer satisfaction. Our domain expertise is growing, as we continue to attract and retain the most talented supply chain professionals. Despite macro and secular head winds, we are exiting 2016 stronger than we entered, and we're excited about our prospects for 2017 and beyond.

We were quite active in 2016, investing and growing our business, delivering new innovations such as the development and market launch of our fully integrated omni-channel point of sale and clienteling solution, driving market awareness of our retail and point-of-sale capabilities, and working hard to earn greater mind share. As we enter 2017, we are aggressively investing in innovation and market awareness to position Manhattan for the next wave of retail multi-channel selling solutions.

As I discussed at the beginning of the call, we recognized seven large deals in the quarter, three in retail, two in wholesale, one in third-party logistics, and one in industrial. Two of the seven deals were with new customers to Manhattan, and were driven by strategic technology and modernization programs.

In Q4, our license fee mix was weighted at about 55%, 45% split between our warehouse management and our other solutions, with a meaningful portion of both WMS and non-WMS license and services revenue related to omni-channel programs.

We also closed our largest store inventory and fulfillment deal to date, which was encouraging. The retail, consumer goods, food and beverage, and third-party logistics verticals were our strongest licensee contributors, making up more than half of our Q4 license revenue.

Q4 software license wins with new customers that have permitted us to share their names included AutoZone, Blocker, China Logistics, Kirk Geiger, Milan Supply Chain Solutions, SUNAI, and The Warehouse Limited. Q4 expanding relationships with existing customers included, [Aledde], [Aloga], Aramark Uniform, CDiscount, Cotton On, Dick's Sporting Goods, Federal Mogul, Genco, Hastings Deering, Hibbett Sports, Hot Topic, Northern Safety, Olympus, Papa John's, Ryder Integrated Logistics, Shore Industries, The Honest Company, Tommy Bahama, Uniform Advantage, United National Foods, UPS Supply Chain, US Foods, and The Vitamin Shoppe.

Now despite significant head winds, our professional services businesses around the world performed very well, posting record revenue results, with Q4 revenue up 4%, and 2016 full-year growing 9% over 2015. Our global services team continue to receive high marks for our customer satisfaction, and they were busy, with 79 system go-lives in Q4. We had a total of about 330 go-lives in 2016 full year. We expect to add about 140 more associates in 2017, balancing capacity with demand, of course.

We continue to be the leading innovator in supply-chain technology. For the year, we increased our R&D spend to nearly $55 million, and closed out the year with 680 dedicated R&D Associates. The core of our success is our strategy to be serial investors in forward-thinking innovation. We continue to invest at a rapid pace, expand our addressable market, and deliver market-leading differentiating capabilities to our customers, with our supply-chain commerce platform-based suite of solutions.

As I mentioned in my opening comments, our 2017 plans call for increased strategic investment, mainly in R&D, beyond our core supply chain solutions, developing the industry's leading multi-channel retail store platform with POS and clienteling capabilities focused on the consumer.

2016 was another great year of progress across our product portfolio. I'd like to spend just a little bit of time today providing some insight, though, into one or two things that we're working on that we're going to be excited to unveil in the first half of 2017.

Now as a reminder, we organize our product development teams into three collections of applications, omni-channel, supply chain, and inventory optimization. By organizing the teams this way, we're able to design end-to-end process flow support spanning multiple Manhattan applications.

Now on the technology front, we've made great progress, too, in the last couple of years, helping our customers transition our applications either into public cloud environments like AWS and Azure, or into their own private clouds. You've heard us talk for a while now about how the majority of our TMS deals are now cloud-based. But on a more frequent basis, we're also hearing our customers ask us to run OMS, EM, and our WMS applications off premise, as well.

We anticipate we'll see this trend accelerate. Cloud computing is particularly well-suited to help our customers manage the spikiness endemic to omni-channel commerce. The computing power required to successfully process orders and shipments during peak holiday times can often flex beyond 10 times the average daily computing power needed. Cloud deployments also allow our customers to stay current with the fast-pace of innovation at Manhattan Associates.

Now in almost all cases, our applications have been ready and able to run in cloud environments for many years. Our ongoing R&D investments over the years have ensured a technologically modern application infrastructure, and one that can fairly easily be deployed in environments like AWS, the Oracle cloud, and Azure. That said, our R&D teams have been working hard to enhance the portability and scalability of our applications to the most popular public cloud infrastructures.

Turning from technical to functional innovation, I'd like to give you a brief glance into just a couple of innovation tracks that we've been actively working on for release a little bit later this year. First, I'll return to a topic that I mentioned a few times in the past. It's the new normal of distributed order fulfillment. As retail peak season numbers start to roll in, I think it's safe to say that the upward trend in digital selling and the downward trend in traditional bricks and mortar continues to abound. Our retail customers endeavor to adapt their businesses to these shifting customer behaviors.

Now, I'll return to the topic of how we're planning to help our customers re-cast their bricks and mortar businesses later, but for now I'll focus on the business lift in digital or the omni-channel sectors. Simply put, there are three very distinct market forces that are significantly increasing the complexity of operating an omni-channel business today: One, channel proliferation; two, fulfillment location proliferation; and three, fulfillment mode proliferation.

We help our customers manage this complexity today in our market-leading OMS. As a means to shift from enablement to full optimization, we have designed a next-generation capability that we're calling adaptive network fulfillment. This generation of algorithm helps our customers seamlessly blend logistics costs, merchandise profitability, operational considerations, and all kinds of other factors to generate order-level fulfillment plans that consider the wholistic needs of the business.

This capability is built right into the heart of our OMS. Our customers can start simple and increase the sophistication of the output over time. Now, in short, we believe that capability like adaptive network fulfillment will become really table stakes for any omni-channel commerce business in this increasingly competitive space.

Finally on the product front, a quick glimpse into what's ahead within our warehouse management solution. Similarly to my commentary on omni-channel, we're seeing substantial changes in the way that large, direct-to-consumer fulfillment distribution centers are being designed. While automation is on the rise, these large-scale warehouses also use hundreds of workers per shift to process merchandise through their facility.

In order to maximize the effectiveness of the capital and labor assets in the building, we're building a fully waveless processing capability within the core of our WMS. We call this new capability order streaming. Order streaming is designed to maximize the effectiveness of our customer's multi-million-dollar investments in robotics and automation, along with their human resources. As we've said before, the core of our success is our strategy to be a serial investor in innovation, to expand our adjustable market, and deliver market-leading differentiating capabilities to our customers.

Turning to our global associates, we ended Q4 with about 3,025 employees around the globe. That's up 3% over prior year, and 95% of our head count growth was in our professional services group to support top-line growth and customer satisfaction. We finished the quarter with 64 people in sales and sales management, and with 58 quota-carrying sales reps. That's down 60 from last quarter. Our intention is to continue to be opportunistic, and add about a half a dozen additional talented sales professionals to the Company in 2017.

Let me close our prepared remarks with a brief summary. We are very pleased with our 2016 performance, and we remain focused on our customers. We remain focused on getting them commerce ready. As we turn our sights to 2017, and while the global macroeconomic conditions certainly give us reason to be somewhat cautious, we are very optimistic about our future, and remain focused on our customers.

Omni-channel retail commerce and supply chain complexity in our target markets continues to increase. It's all driven by digitalization and e-commerce, which is fueling multi-year investment cycles for customers and Manhattan Associates.

Ultimately, our relative competitive position continues to be strong. We continue to invest in innovation to extend our addressable market. The world's most talented supply chain employees, the best software solutions, and great market momentum give us belief that we are very well positioned for 2017 and beyond. With that, Angel, we would now be happy to take any questions.

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Questions and Answers

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Operator [1]

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Certainly.

(Operator Instructions)

Terry Tillman, Raymond James.

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Terry Tillman, Raymond James & Associates, Inc. - Analyst [2]

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Hi, gentleman. Thanks for taking my questions. Hi, Eddie. Hi, Dennis.

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

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Hi, Terry.

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Terry Tillman, Raymond James & Associates, Inc. - Analyst [4]

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Eddie, the first question is, you talked about -- well, it was good to see the license strength in the fourth quarter continued from what we saw in 3Q, but you made a comment in passing talking about some early positive signs in the first quarter. Is there anything you can say about what you're seeing on the license business as we are in January and headed through the first quarter? Is that related to large deals that have closed, or things that slipped out of 4Q that have closed? Give us a little bit more color on when you used I think the word optimism?

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

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Yes. Not too many details at this very early point in the quarter, Terry. But as you know -- actually, we had a terrific year in all of 2016, but particularly Q3 and Q4 were encouraging. The pipeline in the early part of 2017 feels as strong as it was in Q3 and Q4. We're certainly encouraged about where we are. A little too early in the quarter to be talking about any specifics, but certainly positive momentum, and we're encouraged.

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Terry Tillman, Raymond James & Associates, Inc. - Analyst [6]

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Got it. I guess 2017 is a year where there's evolution here and the new product, an important new product, the retail selling platform. Could you maybe reconcile as you guys come to market with that? Then the lines around brick-and-mortar challenges, is there any issues in terms of as you're launching that product, will the market be receptive? As these brick-and-mortar entities maybe are looking at downsizing their brick-and-mortar footprint, how do you sell into that kind of environment where perception-wise it looks tough?

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [7]

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Yes. Well, it's a terrific question. There certainly is some down-sizing of brick-and-mortar assets, for sure. We're seeing that in the news on a pretty frequent basis here

But, as well as some of that down-sizing going on, there's clearly a reinvention of the retail footprint. What used to be purely a cash and carry selling environment is now transitioned to, or is transitioning to, those retail stores being everything from a boutique to a gallery to a distribution center, to a customer service center. The solutions that have traditionally been at the center of retail stores no longer provide the necessary tools that store associates need.

We certainly think there is a place for the next generation of retail store solutions. In fact, we think that the current solutions really are all right for replacement -- not on a quarter-by-quarter basis, but over the next several years.

Now we just came off of the National Retail Federation conference in New York, where certainly we were spending a lot of time with our customers, with prospects, sharing with them our vision for the next generation of retail store solutions, and got terrific feedback. We are quite encouraged by the market momentum.

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Terry Tillman, Raymond James & Associates, Inc. - Analyst [8]

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Got it. Dennis, you gave a lot of color, so appreciate all the color as it relates to the quarter itself, and then the outlook commentary. One thing I'm curious about, it looks like you're looking at 5% to 6% license growth. There's 2 points F/X head winds. It looks like the license growth would be a moderate acceleration from what you all guided to in 2016 originally.

Now, the other thing that seems like a newer dynamic is the potential of impact or head winds around subscription revenue, or the shift to subscription. Is that related to some of your existing or pre-existing SKUs, or is that related to the potential selling of this new set of products you launched later this year? Thank you.

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Dennis Story, Manhattan Associates, Inc. - CFO [9]

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Yes, great question, Terry. It relates to our existing SKUs, so namely, the big one would be transportation and the shift there. We're definitely seeing traction there, but as Eddie mentioned and I believe I mentioned, customers are starting to look for the recurring revenue model in other products, as well.

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Terry Tillman, Raymond James & Associates, Inc. - Analyst [10]

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All right, thank you.

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [11]

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Thanks, Terry.

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Operator [12]

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Matt Pfau, William Blair.

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Matt Pfau, William Blair & Company - Analyst [13]

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Hi, guys. Thanks for taking my questions. First, just wanted to know if we could get a little bit more clarity on the expectations in terms of what's changed between when you gave your initial outlook into 2017 last quarter, and then versus now in relation to the delayed deals? Is there further delays or cancellations, maybe just some insight as to what changed between the two quarters?

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [14]

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Yes, Matt, sure. Eddie here. Just to be clear, these are not really deals, per se. They're certainly not deals that have been canceled. These are focused around services implementations that have any combination of being paused, delayed somewhat, slowed down. Just largely, I think is not exclusively, but largely as the retailers and retailer environment retrench, and formulate their strategies going into the balance of 2017. These are services programs, not deal cancellations and things that have been lost to competitors.

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Dennis Story, Manhattan Associates, Inc. - CFO [15]

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Sure. When we look at the services pipeline, year-over-year gross without putting a handicap on it, it's certainly solid compared to last year, Matt. The challenge is just predicting the timing of when some of these retailers are going to re-launch on some of their programs.

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Matt Pfau, William Blair & Company - Analyst [16]

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Sure. I guess to that point, Dennis, is there anything that you guys learned from this experience that can be applied down the road to maybe make that a bit more predictable as you think about how retailers are going to consume, especially some of the newer maybe more complex solutions that you're selling them?

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Dennis Story, Manhattan Associates, Inc. - CFO [17]

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I would say we're very much into visibility and pipeline and capacity management. It's a great question. We're doubling back down and trying to look at metrics. It's early to predict any long-term trends. That's why we were pretty aggressive with our guidance, from a conservatism point of view.

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Matt Pfau, William Blair & Company - Analyst [18]

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Got it. Just wanted to touch on the cloud or the move to subscription a bit. In terms of -- it sounds like right now the primary demands with TMS but potentially some other components down the road, number one, is this something you think can eventually be applied to all of your business, or is there certain parts of your business that you don't foresee moving to the subscription model? Also in that sense, as customers move to subscription products, what does -- besides the obvious transition head wind there from the revenue perspective, is there anything else as we think of the lifetime value of that customer or profitability that changes as they move to the subscription model for you?

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Dennis Story, Manhattan Associates, Inc. - CFO [19]

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Let's see. First of all, Matt, in terms of the products that are best suited to a subscription-based model, and there are certainly some that are more attuned than others, I think over time -- to some extent, depending on the tier of customer -- they all have the opportunity to move to a subscription-based model.

If I were putting a sequence of likely priority, certainly TMS would be top of the list. We've seen that. We've talked about that. I would put our extended enterprise management probably number two, probably order management number three, and then we start to tail off to warehouse management and inventory optimization. That would be the sequence that I would see.

Then from what we would -- or how we would categorize tier of customer, you tend to see the smaller, closer-to-SMB-type customers adopting a cloud and subscription model first, with particularly the tier one and tier two guys wanting to run our solutions in the cloud, but not on a subscription model, okay?

Then with regard to the second question, I think that the opportunity for lifetime value of a customer in a subscription-based world versus a traditional on-prem license world goes up. Many of the things, frankly, are equal; but as we are rolling into that subscription cost all of the infrastructure costs and so forth, then it increases the potential lifetime value of the customer.

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Matt Pfau, William Blair & Company - Analyst [20]

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Got it, that's helpful. Thanks for taking my questions, guys. That's it for me.

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

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Sure thing, Matt. Thank you.

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Operator [22]

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Mark Schappel, Benchmark.

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Mark Schappel, The Benchmark Company - Analyst [23]

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Good evening. Thank you for taking my question.

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [24]

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Sure thing, Mark.

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Mark Schappel, The Benchmark Company - Analyst [25]

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Eddie, starting with you, with your services business stalling as a result of these delayed projects, why hire up at this stage?

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [26]

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Well, just to be clear, I'm not sure I would categorize it as a stalling, Mark. We still are -- we still grew in Q4. We still are projecting growth for 2017. It's not exactly a stalling of the business, but it is a temporary deceleration of growth, not a stalling of the business.

We still have solid customer demand, number one. Number two, as you've seen, we have had strong license performance throughout 2016, but particularly in the second half of the year. That will pull through strong services revenue with it.

Customers don't buy license revenue, licensed products not to implement them. We've still got pretty strong demand, just not quite as strong as it was in the last couple three years. That has driven us to a position where we still need to hire to fulfill customer demand and drive revenue and so forth, so not quite a stalled situation.

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Dennis Story, Manhattan Associates, Inc. - CFO [27]

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Yes. Mark, as I mentioned, the pipeline is up, and we've got a long track record of being able to manage our capacity very well, and a good track record. I think that bores out in the margin profile that I laid out for 2017, with a range of 58.3% to 58.5%. That's really just about in line with the 58.6% that we did in 2016, and it's still world-class. If we weren't managing our capacity appropriately, you would see much more drag on the margin profile of the Company in and of itself.

We think the bottom -- we hope, tap on wood -- the bottom is Q1, and then the trajectory starts to move back up. Unfortunately, from a timing point of view, we're just straddling the back half of 2016 and the first half of 2017 in our current outlook. The challenge is more just timing of when the re-acceleration starts, because the one uncontrollable for us is when the customer is going to pull the trigger.

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Mark Schappel, The Benchmark Company - Analyst [28]

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Okay, great, thank you. Finally, Eddie, with respect to the new cloud product, I believe it was called adaptive network fulfilment, when do you expect to have something in GA there?

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [29]

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That's a -- certainly in the first half, Mark. Won't be in the next couple three or four weeks, but for sure in the first half of 2017. At the absolute latest, if you're able to join us at our customer conference in early May, you'll certainly get the opportunity to hear about it in detail there.

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Mark Schappel, The Benchmark Company - Analyst [30]

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Okay, great. Thank you.

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [31]

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It's my pleasure, Mark. Thank you.

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Operator [32]

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

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Eddie Capel, Manhattan Associates, Inc. - President and CEO [33]

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Terrific. Well, thank you, Angel, and thank you, everybody, for taking the time to join us in our Q4 earnings call this afternoon. As we have said, we are very pleased with 2016 results, cautiously optimistic about 2017, and we'll look forward to reporting out on Q1 in about 90 days from now. Thank you.

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Operator [34]

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