Good afternoon. My name is Jessie and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Manhattan Associates Q3 2017 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, October 24. I’d now like to introduce Eddie Capel, CEO; and Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

Thank you, Jessie, and good afternoon, everyone. Welcome to Manhattan Associates 2017 third quarter earnings call. It's truly a global call, I am here in Atlanta, and Eddie is down under in Sydney, Australia. So 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 will find reconciliation schedules in the Form 8-K we submitted to the SEC earlier today and on our website at manh.com. Now, I will turn the call over to Eddie.

Good afternoon, everybody. Q3 was a very solid quarter for Manhattan. Our financial results demonstrate our continued market leadership and the increased adoption of our cloud solutions particularly in the retail omni-channel sector. We continue to drive strong innovation in the quarter delivering substantial differentiated capabilities to the market and our services teams performed at a very high level delivering efficient plan implementation. So Q3 represents the first full quarter post launch of our Manhattan Active Solutions suite. And I'm very pleased to report that customer and prospect response has exceeded our expectations. While it's early with only one quarter under our, belt but there appears to be two principal factors in play. Firstly based upon client feedback for our Manhattan Active Omni solution, cloud is the preferred deployment and buying model. And secondly, the Manhattan Active Omni product itself is superior and differentiated over competitive alternatives in the market. Already we’re seeing 13% of our total Q3 software revenue generated by cloud deals. And based on discussions with customers and prospects globally, we expect continued acceleration to our Manhattan Active cloud business as customers look to a cloud first approach. We continue to manage our business strategically with strong operational and financial execution. More year-over-year comps reflect macro retail challenges to services revenue, our Q3 results were solid across all other financial metrics reflecting the anticipated move by clients towards subscription-based cloud models. While we remain cautious in managing through a tough retail business cycle, we will clearly exit 2017 stronger than we entered the year. License revenues for the quarter was $18.8 million down 13% over prior year, a $3.5 million of otherwise perpetual license deals converted to subscription revenue in the quarter. On a perpetual equivalent basis, license revenue grew 3% over prior year, EMEA operations delivered…

Okay, thanks Eddie. As Eddie mentioned, our year-over-year reported comps in my opinion were positively influenced by our Manhattan Active Omni cloud transition. Approximately 3.5 million of what we would have reported as traditional perpetual license deals with $0.03 of EPS in fact converted to cloud this quarter based on customer demand with future routable revenue cash flow and EPS impact. Q3 total revenue was 153 million flat versus a year ago, Americas was down 4%, Europe grew 22%, and Asia-Pacific was up 36%. Adjusted earnings per share for the quarter was $0.51 up slightly compared to Q3 2016 EPS of $0.50 on flat revenue and expense management. Our GAAP earnings per share was $0.47 flat compared to prior year. For your reference a detailed reconciliation of GAAP to non-GAAP EPS is included in our earnings release today. So license revenue for the quarter, reported license revenue totaled $18.8 million declining 13% versus Q3 2016 driven by Manhattan's transition to the cloud. The 3.5 million in on-prem equivalent license revenue that converted to cloud will begin generating recognize subscription revenue in Q4 of this year. Just to be clear, the $3.5 million only represents the license portion of subscription for the total subscription value. Our reported 18.8 million in license for the quarter includes 2.5 million of cloud revenue predominantly from our TMS product. Regional license splits were Americas $14.7 million, Europe $2.2 million, and Asia Pacific $1.9 million. Global pipeline activity is robust for our Manhattan Active Omni solutions so we expect Q4 cloud sales will have a similar impact on Q4 license revenue as we close out the year. Shifting to services, Q3 services revenue totaled $115.6 million down 3% over prior year and down 1% sequentially. Our services revenue is comprised of two revenue streams as you…

Thanks Dennis. I’ll close my prepared remarks with a brief conclusion. As success continues to be driven by delivering innovation, the anticipated needs of a rapidly evolving market focusing on our customer success and leveraging our deep domain expertise. For the global and retail macroeconomic condition certainly give us reason to be cautious, we’re very bullish on the market opportunity ahead of us. Supply chain complexity in retail evolution in our target markets will continue fueling multiyear investment cycles for customers and Manhattan Associates. The move to subscription and cloud-based model is positive and is outpacing out expectations. Customer feedback on our exciting market leading innovation demonstrate that we’re delivering true differentiation, and that we’re investing significant energy and capital into advancing the world's leading suite of supply-chain commerce solutions to extend that market leadership in the 2017 and certainly in the out years. Our competitive position is strong. We continue to invest in innovation to extend our adjustable market, market leadership and differentiation and with the world's most talented supply-chain commerce employees, the best software solutions and market dynamics that require customers to adapt and invest in supply-chain innovation, we believe that we're very well-positioned for 2017 and beyond. And with that, Jesse, we’d now be happy to take any questions.

[Operator Instructions] Your first question comes from Terry Tillman with SunTrust Robinson. Your line is open.

So, first, it’s a lot of color you provided on 2018, so I really appreciate you being proactive on that front, Dennis in giving us all that clarity for the '18 model, I know it’s just an initial view, but it is really helpful. Also good to see the Active Omni products seeing a strong start out of the gate. I have a series of questions, first, if I look at some of the numbers, Dennis is there any way you can look at, you said about 84 million of software sales next year. Could you look at a like for like, if we break out any of the pre-existing cloud business and then obviously the incremental cloud business, so let’s look at just traditional on-prem license products, what’s the underlying growth rate or is there any growth looking at '18, 34 [ph] million?

You're asking for on-prem equivalent right, Terry?

Yes, but that will also take into account some of existing sub revenue from WMS and couple of your preexisting products in '17. I really want to strip out anything and everything that has to do with subscription, pre-existing or new stuff. And if you can't do it, that fine, I'm just trying to get at how the WMS business and some of the traditional, you know what are going to remain licensed products, what kind of growth forecast you're assuming there?

Yes, we just don’t have that level of detail yet, Terry. We’ll be better prepared once we close out Q4.

I guess one thing though as it relates to -- we're going to get a question as it relates to the ongoing evolution of this cloud transition, and it will never play-out exactly like you are forecasting. There’s going to always be puts and takes, but what about the WMS business? And this is for either of you guys in terms of are your customers and prospects asking for WMS in the cloud or is that potentially something that’s longer down the road?

So, I think it’s a little further down the road. As we look at the Active Omni Solutions, certainly cloud seems to be the preferred, both deployment and economic buying model. The need for consistent and frequent innovation is much more important in that particular arena. In the WMS space, while deploying WMS [indiscernible] from a technology perspective certainly has its benefits. The need for such frequent innovation update is lesser with WMS, because frankly they are a bit more disruptive in the WMS world number one and the economic delivery model of WMS by subscription does not seem to be a focus at this particular juncture from the market.

And then just my last question. Eddie, this is directly for you. You know in the past, when I'm talking to investors and even I'm just thinking about it, it seems like everybody should be doing omni-channel today or yesterday. I know there's inertia, there's disruption even to Active Omni, or the omni-channel investments, but do you see with delivery now of a quicker to deploy maybe more of a writable revenue recognition type story around Active Omni, that could actually accelerate adoption of your order management capabilities and maybe just further accelerate overall adoption of omni-channel in general given that you can now provide it in the cloud? Thank you.

Yes, I think it’s right Terry. Certainly the speed to deploy is very helpful, very valuable to our customers number one and the ability to be able to ramp and scale more incrementally based up on both the technical deployment in the cloud and the economic model that we’re offering, I think certainly offers us a great deal of a promise in that area.

The next question comes from Brian Peterson with Raymond James. Your line is open.

Thanks for taking the question. So maybe a tactical one for you Eddie, just as we're thinking about Active Omni is that something that's going to continue to focus on kind of the high-end of the market which your traditional customer base has or do you think maybe that's more TAM expanding and potentially moving down markets?

Yes, certainly as we deliver the solution again both from a deployment perspective and an economic model in a cloud way, I think our ability to be able to go down market to smaller revenue customers and so forth certainly gives us the opportunity to expand. Now, I would just clarify that the innovation and the capability that we’re delivering is very focused on that Tier 1 and that Tier 2 customer delivering that very sophisticated, very seamless experience to the consumer, but as we know, the need for those capabilities being driven down into smaller retailers has certainly become more and more evident on a day over day basis. So, we’re certainly encouraged about our ability to go deeper into that pyramid for sure.

And as a follow-up just on, you guys are pretty explicit on the license key to cloud transition and the impact of that so I appreciate that. Is there any way that you could size the total customer impact as we think about the lifetime value of services and other aspects, do you guys have any math that you can provide on that.

Way too early as I mentioned Brian, we’ll talk about more detailed metrics once we get another quarter behind us and we level set the guidance in February.

Your next question comes from Monika Garg with KeyBanc. Your line is open.

Thanks for taking my question. First is on the operating margin guidance, if I look at the impact of ASI 606 both in 2017 and 2018 your revenue guidance is kind of flattish year-over-year but your operating margins, you were guiding almost down 12 points, right. So could you help me reconcile the 12 points gap between 2017 and 2018?

Yes so Monica I kind of stepped through that. You know it's the three big factors. Number one is the transition to cloud, number two is resetting our performance based comp and then number three is we’ve earmarked based on demand generation and growth potential $15 million of strategic investment.

So $15 million strategic investment, $15 million for comp and then about $30 million impact is transition to cloud then, rest?

Sure, I mean it's when you take the transition from - when you take a traditional perpetual as you know on-prem license deal and you begin spreading it over a three to five-year period it's going to have significant impact in at least the year one, year two transition to cloud.

Looking at the revenue 2018 guidance, total revenue kind of flattish in ASC 606 impact. You just said softer revenue you are expecting to be flat so are you expecting services to be flat too that means?

I would say the goal is right now what factoring into that where the goal is on the high end of the range to be flat on the low end of the range we forecast to be down about 3% to 4%.

I guess broader picture perspective could you help us understand when you move to cloud generally people need lower services, so how should we think about impact to service revenue as you model shift to cloud?

I think we'll talk - that's part of the key metrics and longer term impact. We'll give guidance or will talk about that in the Q4 call itself.

Just a last one, free cash flow guidance for 2018?

We don't give guidance of free cash flow right now, never have.

Your next question comes from Matt Pfau with William Blair. Your line is open.

The first wanted to start on the cloud gross margins and I know you said that you expected them to be about 44% for next year. How should we think about that longer-term, what's the margin potential in that business as you are start to gain some scale there.

As I said in the call we're going to talk about all of those metrics when we get to the Q4 call. We're a quarter and we've had fantastic results, we're extremely busy, we love the activity in our pipeline, our associates are working their tails off in the organization and it would just be premature for us to really start throwing those kind of metrics around for the investors, our employees, our shareholders et cetera. We won't get another quarter of activity under our belt. I mean we're modeling the heck out of this but as you know this is - any business that goes through this it's a big transition.

And then maybe you'll talk about that later too but figure I'll ask it anyways. When we think about the revenue recognition of the subscription deals relative to license obviously there is the ratable recognition there but in terms of when you actually start that recognition is it more delayed versus the license dealer how should we think about that?

It is not more delayed.

And then just want to dig into the incremental investments for 2018. I know you had talked about for 2017 were you're making some as well over around the Active Omni solutions so how does the ones for 2018 compared to the ones that you've made are in the process of making in 2017.

We put a $9 million bogie out there and essentially we did not consume it, we self-funded it internally. So in the fourth quarter we got some seed investment going into the marketing side of the house to drive market awareness around our cloud solutions. So the $15 million is not incremental on top of the 9 that we established in the initial guidance in 2016. Incremental wise we'll probably be about $14 million relative to 2017, strategic investment.

And then just last one from me, Omni Active, Omni deals that you've been selling I think one goal of the product was to I guess encourager or health cross-selling amongst the products that are grouped into that Active Omni solutions by removing some of the implementation or double implementations between various products. So have you been seeing customers in either deals in the pipeline or deal that you've sold be interested in it may be more products than they would have when all those were kind of separate applications that you were selling?

Yes, that's definitely the case Matt. There is customers and prospects and particularly now customers buy into the Active Omni of products suite, they are clearly buying into the vision of the roadmap and the incremental implementation of the solutions built into that suite. So certainly very encouraged by that for sure.

[Operator Instructions] Your next question comes from Mark Schappel with Benchmark. Your line is open.

Eddie first question for you down under. Anyways the supply chain space has been one of the slower software categories to embrace the cloud, excuse me, however in your prepared remarks you are noting that the clouds is really becoming the preferred buying models. I was wondering if you can just walk us through what some of the changes that you're seeing in the buyers' mind with respect to the supply chain execution space.

Yes, well there is a little bit of a bifurcation Mark, in as much as the, kind of, that traditional logistics side of supply chain is still tending to be kind of an on-prem perpetual model but in the area of supply-chain commerce particularly you know the omni-channel solutions and so forth, A, the need to be able to drive innovation much more quickly to be able to capture the hearts, minds and loyalties of the consumer, I think is, it's really what is front and center of the retailers, wholesalers and manufacturers' minds. Obviously we're seeing the way I phrase it, we're seeing a lot more retailers today than we've ever seen before, and what I mean by that is we're seeing of course manufacturers go direct to consumer, we're seeing wholesalers going direct to consumer and the need for them to be able to respond quickly to the expectations that are being driven into the marketplace by the pure play online guys drive that need for consistent and speedy innovation. And then secondly, it would be remiss of me not to mention that the ability to be able to ramp the economic spend is also very attractive in that particular space. When you're building a distribution center, the WMS is going in - you're building the distribution center, you're building the distribution center with a very specific set of volume requirements, so it's pretty clear the type, the nature and the volume of the WMS you need. When you are entering the direct to consumer or omni-channel market, the ability to be able to ramp the economics over time is surely very attractive as well.

Mark, I like to piggyback on that a little bit too. Eddie it's a subtlety that probably flew over everyone's head on the call but Eddie mentioned in the script that we signed the - Manhattan Active Omni deals were all with new customers in the quarter. So if you remember when we launched WMS on the platform in January 2010 our win rates went from roughly 60%, 65% north of 70%. We had, when we launched on that platform we had a number of existing customers that had already implemented. In this scenario we released brand-new net new technology born in the cloud and scored some nice new logos without any installs to compare to.

And then one follow-up question. Eddie with respect to re-architected Active Solutions, do you expect the implementations for these products to require less so imitation services.

Well the simple answer is yes, Mark, and there is two factors there. One is the speed of technical implementation is greater with this architecture, so it improves the time-to-market, the total cost of ownership speed to market and so forth. And then secondly we set ourselves some aggressive internal goals to continue to improve our efficiency that deliver that value back to our customer. So the simple answer is, yes, on a couple of fronts.

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

Okay, very good Jesse. Well thank you and thank you everybody for joining us this afternoon. We certainly appreciate your attention and your support of Manhattan Associates and we'll look forward to updating you in about 90 days on the continued transition to the cloud and giving you more specifics around our 2018 target. So thank you again and good afternoon.

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