Good afternoon. My name is Howard and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instruction] As a reminder, ladies and gentlemen, this call is being recorded today, February 5. I would now like to introduce Eddie Capel, CEO, and Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

Thank you, Howard, and good afternoon, everyone. Welcome to Manhattan Associates 2018 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 the future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance, and that actual results may differ materially from the projections contained in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-K for fiscal 2017 and the risk factor discussion in that report. We are under no obligation to update these statements. And as an FYI, we do plan to file our 2018 10-K within the next week. 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’ll turn the call over to Eddie.

Well, good afternoon, everybody. And thank you for joining us to review Manhattan Associates 2018 fourth-quarter results. We delivered record Q4 total revenue of $144 million – that's applying ASC 606 retrospectively – and $0.46 of adjusted EPS. In Q4 2018, our total revenue grew 6% and EPS was up 2% versus prior year. We saw solid revenue results across all revenue lines, exceeding our Q4 revenue targets on improving services demand. Our operating margin was higher than expected due to the timing of certain business investments as we continue our business transition to the cloud, but we certainly exited 2018 stronger than we entered the year. And we’re slightly ahead of our timetable for returning to sustainable long-term growth. While we do remain prudently cautious given global macro volatility, we’re very bullish on our outlook for 2019. And we're raising our 2019 full-year total revenue, operating margin and earnings per share guidance. And as discussed in our Q3 2018 call, we’re still early in our transition to cloud, with aggressive transformative goals and investments earmarked for driving our customer success and, in turn, our long-term future growth and earnings. We continue to be very encouraged by our transition to cloud and our positive business momentum, highlighted specifically by the following four areas. Firstly, market-leading product innovation. In 2018, our R&D investment was up over 24% against prior year. And with that, we invested $68 million in research and development and we’re delivering industry-leading transformative supply chain, inventory and omni-channel commerce innovation. Our development cycles are faster than ever and our product and technology releases are bringing important differentiated new solutions to the market, resulting in very encouraging pipeline growth. Which brings me to the second pillar, strengthening pipelines. Our global pipelines is solid and we’re seeing upward trends across…

Great. Thanks, Eddie. As Eddie mentioned, we reported Q4 total revenue of $144 million and $0.46 in adjusted earnings per share. Our Q4 EPS performance includes $0.02 of incremental impact on our year-end true-up of estimated taxes in response to tax reform. Overall, with our business and early-stage cloud transition, we exceeded our 2018 targeted total revenue and were above our earnings objectives based on the timing of investments. Our GAAP earnings per share was $0.40 in the quarter compared to $0.36 in Q4 2017, with the difference between the adjusted earnings per share and GAAP EPS being the impact of stock-based compensation. So, license revenue was $13.3 million, achieving the upper end of the $11.5 million to $13.5 million target range we discussed in our Q3 call. For Q1 2019, we are targeting $9 million in license revenue recognized. In full-year 2019, we are estimating $36 million to $40 million in license revenue. We expect full-year license gross margin to be about 89%. Q4 cloud revenue was $6.8 million, up 113% over Q4 2017. Full year, we recognized $23.1 million in cloud revenue, up 141% over 2017. For Q1 2019, we estimate our recognizable cloud revenue will be about $7.5 million, up about 68% over prior year. And for 2019, we are targeting the opposite of license with a revenue-recognized range of $40 million to $36 million and cloud revenue representing 73% to 56% growth over 2018. Our 2019 full-year estimate for total combined license and cloud revenue recognized is $76 million, up 11% over 2018, reflecting the current interplay of the supply chain market preference for, and transition to, the cloud. For a directional indicator on bookings, I want to point you to our remaining performance obligation disclosure, which I’ll refer to as RPO found in our significant…

All right. Thanks, Dennis. Well, in summary, clearly, our underlying business fundamentals continue to gain momentum and we remain focused on extending our market-leading position in supply chain and omni-channel commerce. Entering 2019, we’re confident in the significant and expanded business opportunity in our core supply chain management market. Our success clearly continues to be driven by delivering innovation that anticipates the needs of an evolving market, focusing on our customer successes and leveraging our deep domain expertise. While some global and retail macroeconomic conditions give us reason to be cautious, we’re very bullish on the market opportunity ahead of us. Supply chain complexity and retail evolution in our target market, in fact, brings continued need for our solutions among our customers and is going to continue to fuel multiyear investment cycles for us at Manhattan Associates. The move to subscription and cloud-based models is positive and is outpacing our current expectations. Our customer feedback and win rates continue to validate our investment strategy. Our competitive position is strong. We continue to invest in innovation to extend our addressable market, market leadership and differentiation. and as always, we remain focused on our customer success in driving sustainable long-term growth for our shareholders. 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 that we are very well positioned for both 2019 and well beyond. So, with that, Howard, we would be happy to take any questions.

[Operator Instructions]. Our first question or comment comes from the line of Eric Lemus from SunTrust Robinson. Your line is open.

Guys, nice job on the quarter. I have a question on Active Omni in particular, can you guys talk a little bit about where you are in terms of the referenceability of the product? And how adept is the sales force at selling the product at this point? And then lastly, any sort of differences with Active Omni in 2019 versus 2018 and how you go-to-market?

Yeah. Let's see. So, couple of questions embedded in there. Eric, I would say that the referenceability for Manhattan Active Omni is very good. As I pointed out, it came through retail peak season, frankly, really its first retail peak season, with flying colors. So, we feel very good about that and the associated referenceability. In terms of our sales force's ability to be able to sell Manhattan Active Omni, we've got pretty good win rates frankly – 70% against our major competitors. Overall, we've got about a decade under our belt of selling these solutions. And remember, about 40% of our wins this quarter came from new logos as well. So that, along with really the same metric for the full year, gives us a great deal of confidence in our ability to be able to position the solution and, frankly, sell its value into the marketplace. So, I guess, for some reason, we feel pretty good about the referenceability and very good about our position.

Okay, great. And then, a question for you, Dennis. Good to hear the positive trends for guidance for 2019. But, specifically, when we’re looking at maintenance, you said down 1% for the year. Is that fairly linear throughout the year? And then, when we think about if there is some upside with the cloud transition better than expected, what's the relationship there and how maintenance would be declining if it's increasing in the cloud revenues?

It's fairly linear throughout the year, Eric. And I'm not quite sure I understand the second part of that question.

Yeah. I'm just looking at – with the transition from license to cloud more based in the cloud and how that – the relationship between maintenance and the cloud transition, should we continue to see that maintenance revenue go down year-over-year or not at all?

Yeah. But it's not going to accelerate. We don't expect it to accelerate, but as we start to begin to convert existing customers on to cloud, you'll see it begin to trend down over time.

Got it. And then just one clarifying question for you again, Dennis. When you talk about the long-term aspirations, are you basing those growth rates in the revenue mix based on what you delivered in 2018 or based on the midpoints for 2019?

The midpoint for 2018, we’ll recalibrate after we get through this year – this year's results, using the 2019 actual results once we close out the year.

Sorry. So, you mean the 2018 reported results?

Yeah. Yes, we'll basically leverage – we'll eliminate the 2018. And once we complete 2019, we’ll begin to project out with actual 2019 results.

Got it. Great. Appreciate it. Nice job, guys.

Okay. Thanks, Eric. See you.

Thank you. Our next question or comment comes from the line of Monika Garg from KeyBanc. Your line is open.

Hi. Thanks for taking my question. The first question is, I think the last quarter you guided for cloud revenue for 2019. You had guided somewhere about $40 million. But looks like you're guiding $36 million to $40 million. Given the strong momentum you talked about in the cloud, I guess, I'm just a little – any color like why would the guidance be slightly lower?

We're being conservative just because customers are evaluating, Monika, the interplay dynamics between license and cloud. So, as I talked about in the commentary, is from a cloud perspective, we would – we are targeting $40 million to $36 million, right? And on the license side, $36 million to $40 million. And we're just kind of balancing the interplay there in terms of customer choice and if they decide to go cloud versus license.

Got it. And then, generally, you give us the warehouse license revenue on the yearly basis. So, what was the WMS license revenue for 2018?

Well, if you look at license revenue for 2018, it's predominantly WMS. It's probably ballpark 85% of the license revenue recognized in 2018 would be WMS.

Because you’ll remember, Monika, in mid-2017, we released Manhattan Active Omni, which is a cloud-only solution. So, as a consequence of that, there is no on-prem order management solutions anymore.

Makes sense. And then, did you – for the WMS, did you have any revenue for WMS in the cloud for 2018 and how are you thinking about WMS cloud on 2019 in your guidance?

We did for our WMS scale solution, which is more of a tier two, tier three solution as we wader into the supply chain execution space, but not material overall.

Okay. And the color on 2019?

We're not giving any color on by product on 2019.

Okay. Last one on the cash flow. Could you maybe add a color, like, if you look at cash flow from operations for 2018, it is down almost $30 million year-over-year. Maybe just could you add some color on that. And also, could you provide the free cash flow guidance for 2019? Thank you.

Yeah. We don't give free cash flow guidance. As I said, we target a ratio of about 1.1 to 1.2 of our net income. And then, the cash flow is down over – for 2018 is down, really driven by two objectives. One is the transition to cloud, Monika, and that shift; the impact of lower license revenue; and then substantial growth investments in the business.

Got it. Thank you so much.

Okay. Thank you. Monica

Thank you. Our next question or comment comes from the line of Brian Peterson from Raymond James. Your line is open.

Hi, guys. Congrats on the quarter and thanks for taking the question. So, really just want to understand what drove the upside in services this quarter. That was much better than what I was expecting. We typically don't see it up sequentially. So, are there any one or two factors that you could call out that drove the acceleration this quarter and how sustainable are those factors as we head into 2019?

No one or two particular things, Brian. We saw strength in the Americas, a good deal of strength in Europe, and APAC wasn't slouching around either. But, really, the demand is sort of across the board. I would say, we've seen a little bit of a kind of an uptick in system upgrades, system rollouts and so forth. Some of the things that we saw have a bit of a slower pace in 2017, maybe even early 2018. But that and some pretty good success with Manhattan Active Omni on the sales side, driving new services revenue, all go into the mix there to provide some solid growth. And it feels pretty solid, going into 2019 too. The momentum is pretty good. We came off of NRF and so forth where the tone at the retail conference was just a little more buoyant than it had been for the last couple of three or four years. That was certainly our perspective as well. And as a result of that, we're certainly in hiring mode for our consulting practice.

Got it. And if I wanted to dive into a narrative on this call and on the last call as well, it's been on the pipeline being 50% from net new logos. Is there any way to segment how much of that is maybe new end markets outside of your traditional customers or how much of that is different tiers or different types of customers within more of your traditional end markets?

Yeah. Really, it's across the board, Brian. It’s new verticals, frankly, particularly as you see manufactured and branded folks sort of get into the direct-to-consumer business. We've seen, frankly, some interesting new geographic regions kind of open up for us as well. But at the end of the day, it really is the tier one global brands that got us kind of excited about the pipeline.

Got it. And maybe one for you, Dennis. And I appreciate all the color on 2019. But I think you mentioned previously that you expect margins to trough in late 2019 or early 2020. Just curious if that's still the case? Thanks, guys.

Yes, that's still the case, Brian.

Yeah. Around about the end of the year.

Yeah. The objective here is we're aggressively investing to really get back to driving long-term sustainable topline growth.

Thanks, Brian.

Thank you, guys.

Thank you. Our next question or comment comes from the line of Matt Pfau from William Blair. Your line is open.

Matt?

Hi, guys. Thanks for taking my question. Question, Dennis, on the remaining performance obligations metric that you've given out. So, it doesn't include contracts that are one year or less. But is that a material portion of the cloud contracts? And then, I guess, just overall, is there a big variation in the duration of the cloud contracts? And I know you mentioned previously that you're going to see maybe a shift from a three to a five-year contract. So, just trying to figure out how those factors play into this metric?

Yes. So, less than one year is not a material portion at all with respect to cloud. And I would say the weighting is moving more towards the longer-term deals, Matt.

Got it. Great. And then, I wanted to hit on the services revenue growth expectation for 2019 of flat to top 3%. So, I think you talked about this in a prior question, but there's probably some pent-up demand from retailers delaying upgrades and such over the past two years. So, how much of that sort of plays into this growth for 2019? And, I guess, how much of it is just more of like the normalized activity that you would expect to see? And, I guess, what I'm trying to get at from a longer-term perspective is, as we continue to go through this cloud transition, how should we think about that impact on the professional services revenue line? And is 2019 kind of a good baseline or are there some sort of one-off things going on there that don't make it a good indicator perhaps going forward?

I don't think there was any particular one-off things in there, Matt. Look, it's a little hard to project services revenue line out couple of, three years on a year-over-year basis at a detailed level. But there is nothing particularly cyclic going on in 2019. I think we are seeing the – call it, the purse strings open up, just a little bit. Some of the folks that have been postponing those upgrades, those roll-outs and so forth, saw some good momentum in Q4 and the retail peak season came in strong and they want to make the most of the market gains and market share that is out there and available to them, but there's nothing particularly untoward going on. So, we're definitely encouraged by the demand that we're seeing. I think, look, at the end of the day, the key for us is to keep innovating, right? If we keep innovating and delivering things like order streaming, warehouse execution system built into WMS, and all of those kinds of things, we'll see that services business stay robust.

Yeah. So, Matt, just to piggyback on what Eddie is saying, the services are firing on. Our cloud successes and implementations there, they're very busy there. The license successes that we've had this year, even though it's been a challenging year with license, and then to Eddie's point, we're seeing return on investment from the innovation on the WMS side, particularly related to order streaming.

Great. Thanks a lot, guys. That's it for me.

All right. Thanks, Matt. Well, listen, you sound a bit under the weather, to say the least. So, appreciate you taking the time and toughening it out to join us on the call. See you.

Thank you. Our next question or comment comes from the line of Mark Schappel from Benchmark. Your line is open.

Hi, guys. Good evening. Nice job on the quarter.

Thank you.

Just a couple of questions. Eddie, on the hiring front, the company has some very aggressive plans to hire up, particularly in sales and marketing. However, if I look at the quota carrier numbers throughout the year, they're relatively flat, and I was just wondering if you could just address the hiring environment and what you're seeing there and why the delay?

Yeah. The delays is making sure that we hire the right talent, frankly. We've got open racks [ph] that we're actively recruiting for. In marketing, largely focused on driving awareness across our new solutions and, to some extent, in new geographies. And then, on the sales side and the quota-carrying side, what we’re specifically looking for there is some folks with some real deep domain in the areas that are little more emerging for us. We've got, frankly, terrific coverage in our core markets – WMS, TMS, inventory, omni and so forth – but could use some bolstering in the areas that, as I say, a little newer for us. But we're working on it. Working on it hard, as you know, when the tenure in our sales organization is terrific. So, we don't spin through these guys quickly and we make sure that we hire the best folks available for sure.

Okay, great. And then, with respect to the sales force, besides just adding capacity, maybe you could just speak a little bit about some of the changes you're putting forward in the sales organization, principally, as you focus more and more on signing new customers?

Yeah. Look, at the end of the day, it's focusing on the areas that are particularly incremental for us. So, whether that would be new geographies, new verticals that we're focused on or making sure we've got the right talent to be able to deliver value from the new innovation and the new products that we're releasing. And that's really where the focus is from a sales org perspective.

Okay, great. And then, one final question. In your prepared remarks, you called out a customer that is using your new machine learning, order streaming solution. I was wondering if you could just give us some additional details and how that particular customer is using your new machine learning capabilities?

Yeah. Really, it's all about getting much better and much faster throughput through the distribution center from a fulfillment perspective. So, we are seeing productivity and fulfillment increases way high into the double digits, frankly. And then, those click-to-ship ratios coming down in the 30% to 40% range. So, really, quite dramatic – well, increases and decreases as the case maybe. And, hopefully, maybe you'll be able to make it to our customer conference in May because we'll be certainly providing detailed case studies at that event.

Great, thank you.

My pleasure, Mark. Thank you.

Thank you. [Operator Instructions].

Good. Sounds like we've wrapped up on the Q&A, Howard. So, thank you very much to everybody for joining the call. As always, we appreciate the support. Appreciate your time on the call. And we look forward to talking to you in about 90 days, reporting out on our Q1 2019. Thanks, everybody, and good evening.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.