Good afternoon, my name is Katherine, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Manhattan Associates Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, ladies and gentlemen, this call is being recorded today, the 22nd of October 2019. I'd now like to introduce Eddie Capel, CEO; Dennis Story, CFO; and Matt Humphries, Senior Director of Investor Relations. Mr. Humphries, you may begin your conference.

Thank you, Katherine, and good afternoon, everyone. Welcome to Manhattan Associates 2019 Third Quarter Earnings Conference 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 and 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 filed 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 year 2018 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.

Thanks, Matt. Well, good afternoon, everyone, and thank you for joining us to review the Manhattan Associates 2019 Third Quarter Results. Manhattan had a very positive quarter, posting all-time record revenue on strong demand across all of our core solutions. We delivered third quarter total revenue of $162 million and $0.51 of adjusted earnings per diluted share. Despite some ongoing global market volatility, third quarter revenue grew 14% compared with a year ago, and adjusted earnings per share exceeded our expectations by $0.15. Cloud, license and services revenue all exceeded their targets, driving strong operating results, all in our ongoing cloud transition. Adjusted operating margin results exceeded our expectations on stronger-than-forecasted license revenue performance with several large future pipeline deals accelerating into the quarter, creating some near-term variability in our operating margin performance. Our cloud transition continues to progress well. We set aggressive goals while strategically allocating capital toward investments to enable customer success and expand our addressable market, and we expect those efforts to further deliver on our long-term growth and earnings objectives. With that in mind, we remain optimistic on our outlook for the remainder of this year and into 2020. And as such, we're raising our 2019 full year total revenue, operating margin and earnings per share guidance. And we continue to see positive momentum in our business, driven by our ongoing cloud transition as well as our disciplined focus on the following four key growth areas. Firstly, our market-leading product innovation. We're investing aggressively in innovation, with year-to-date R&D investment spend of $61 million, up 21% versus 2018, and we're on pace to achieve over $80 million in R&D spend for the full year. Ad development agility enables us to deliver new, competitively differentiated products and technology solutions to the market much more rapidly, leading to…

Thanks, Eddie. Overall, our growth, profitability, cash flow and balance sheet metrics continue to be solid in our business transition. Third quarter total revenue was $162.3 million, with 14% organic growth over prior year. Excluding FX, total revenue was up 15%. Adjusted earnings per share was $0.51. GAAP earnings per share was $0.42 with stock-based compensation accounting for the difference between adjusted and GAAP EPS. License revenue for the quarter was $15.5 million, nearly double the $8 million target discussed in our Q2 call. The driver of the large Q3 beat was primarily timing related as we signed new deals in the third quarter versus our expectations of the fourth quarter and early 2020. For the fourth quarter of 2019, we are targeting approximately $7 million to $8 million as license revenue mix continues to transition to cloud subscriptions. For full year 2019, we are raising our license estimate range to $47 million to $48 million. Our previous range was $38 million to $42 million. Q3 cloud revenue was $14.2 million, up 121% versus Q3 2018, driven by robust customer demand for our cloud solutions, with 70% of our cloud deals and bookings driven by strong WMS demand, very positive. In the quarter, 60% of the bookings generated came from a healthy combination of net new customers to Manhattan and net new product sales to existing installed base customers. As Eddie mentioned, early in Q3, we successfully converted a large, long-standing customer from a managed services contract to a cloud contract, raising our quarterly cloud revenue run rate by approximately $3 million. The impact lowers our services growth rate, but in turn, positively impacts our cloud run rate, which we are reflecting both in our go-forward guidance. For the fourth quarter of 2019, we are estimating our cloud revenue to…

Well, thank you, Dennis. And in summary, look, we're very pleased with our performance in the quarter with our continued cloud transition progress. Our underlying business fundamentals remain same, and we continue to focus on extending our market-leading position in supply chain and omni-channel commerce solutions. Our momentum and success continue to be underpinned by delivering innovation that anticipates the needs of an evolving market, as well as focusing on our customer success and leveraging our deep domain expertise. Our year-to-date performance continues to increase our confidence in the significant expanded business opportunities within our core markets. Our competitive position remains strong, and we continue to invest in innovation to extend our addressable market, while expanding our market leadership and product differentiation. Our ongoing feedback from our customers and our strong competitive win rates continue to serve as guideposts for our investment strategy and capital allocation decisions. And as always, we remain absolutely committed to our customers' success while driving long-term sustainable growth for our shareholders. We're the world's most-talented and knowledgeable omni-channel and supply chain commerce employees, the best software solutions and the market dynamics requiring customer investments in innovation, we believe we have a market-leading position and are able to succeed in the long term. And with that, Katherine, we're ready to take any questions.

[Operator Instructions]. And your first question comes from the line of Terry Tillman with SunTrust.

Can you hear me okay?

We can, Terry, yes.

Welcome, Matt.

Thank you.

Yes. The first question I wanted to ask, and Dennis, you touched on this a little bit, I want to make sure I have this right, but it's kind of a multipart question on RPO. The net add was strong in terms of the RPO figure. First, did you say that this federal agency that migrated for managed services, there's not much or any impact in that RPO addition in the quarter? And then secondly, maybe you all could hone in on, what was the real drivers of the strength in RPO? And then I have a follow-up.

Terry, yes. So it is not included in the RPO. That deal is not. And the strength of the quarter in terms of driving bookings was really across all the solutions, but WM had a very strong showing, which is very encouraging in terms of early demand signals for WMS in the cloud.

Okay. And just my follow-up question, and then I'll rest. As it relates to investments for 2020, you gave us specific guidance on margins. So when we look at increased investments in '20, how would you stock rank investments -- incremental dollar investments in sales and marketing and R&D going into next year?

Yes, good question. We'll talk. We're in our annual budgeting cycle, and we'll talk about that in the Q4 earnings call.

But they will be the Top 2 investment categories, Terry, for sure.

Your next question comes from the line of Mark Schappel with Benchmark.

Congratulations on the quarter. Just Eddie, real quick, I was wondering if you could just provide some additional details around the government agency customer that decided to go to a full cloud deployment, maybe a little bit of color around what drove the change and whether you think -- maybe -- whether you expect further similar changes with other customers?

We do think that it's, frankly, inevitable, Mark, that everything that we do and frankly, our customers do will move to the cloud over time. Really, it's just a question of prioritization and timing. This is -- this particular client is FEMA. They've been a customer for over a decade. And as you probably know, there is, frankly, a pretty large initiative within the federal government to move to the cloud. And really, this was just part and parcel of that program. It happened kind of reasonably swiftly and certainly very efficiently from a product and an implementation perspective. But I think that we'll see, certainly, more of our customers go in that direction over time.

Great. And then it's a nice commentary around your TMS solution. I was wondering if you could just go into some of the demand drivers that are pushing customers to kind of upgrade the software category.

Yes. Yes. So look, the capacity constraints are certainly a factor. The continued desire for better and better and better visibility, because we all as consumers want better visibility into our packages. So in turn, we're seeing transportation providers and shippers provide that capability to their customers. And the other general factor is you're seeing many more frequent yet smaller shipments across transportation network, which requires better optimization and more advanced optimization to be able to make those moves, at least in a marginally, if not wholly profitable way.

Great. And then finally, also some favorable commentary around the cloud WMS solution. I think also in the past quarter or two, there's been a favorable commentary around that solution. I was wondering if you could sketch out for us the customer profile that is considering moving to a subscription model for WMS. Again, typically smaller customers or is it your newer customers? Maybe if you could just give us some details there.

Yes. So as we mentioned in our prepared comments, the momentum there and appetite is gradually building, I would say. It is interesting that we are seeing, really, the full gambit of customers, again, it's early days, but the -- a full gambit of customers are looking and executing on cloud deployments. So when I say full gambit of customers, smaller single distribution center customers to Tier 1 multi DC customers and also third-party logistics providers kind of in the middle there. So the drivers can be a little different. Certainly, for the third-party logistics customers cost advantage is one, but also the speed to deploy. As third-party logistics guys bring on new customers, they need to be able to stand up a solution very, very quickly for them and obviously, cloud technology offers that capability and facility for them.

Your next question comes from the line of Matt Pfau with William Blair.

First, I wanted to ask a follow-up on your commentary around the cloud WMS. So my understanding was that the current subscription version of WMS was more or less a hosted version, and there wasn't really a sort of true version-less WMS product like you have with the Active omni products yet. Is that not the case? Is it similar to Active Omni, where updates are automatically pushed across? Or is it more of a hosted version of the WMS product?

Well, so included in the subscription are updates to the WMS product for sure. Obviously, when we're reporting out from a financial perspective, WMS in the cloud, it is the economic model that we're referring to, we moved from the license line to the subscription line. But included in that subscription line are updates -- frequent updates to the WMS product.

Got it. Okay. And then I wanted to ask on the license beat. So is -- all that's included in the license now, is that all related to WMS and you still brought up -- even though you commented that some was pulled forward, you still brought up the license expectation for the full year. So obviously, there's -- you're seeing some strong demand there. So maybe some commentary on what's driving some of those license sales.

Yes. Strategic supply chain transformation for customers that still want to run on-premise. I mean, again, we're still convinced that eventually, there is -- it's inevitable that everything moves to the cloud, but that's timing related and there's a long tail on that. So there are some customers that still want on-premise solutions, and we're more than happy to execute and deploy in that mode. As far as overall license for the quarter, it was driven kind of largely by WMS for sure, given that Manhattan Active Omni is 100% deployed in the cloud and not all, but almost all of our TMS solutions are up in the cloud too.

Okay. Got it. And then last one for me, just on the point-of-sale solution. The commentary there about now being included in more RFPs. Maybe just what's the sort of feedback been on how your product now after making improvements on it over the past several years and having a few referenceable customers stacked up to the competition? And I guess, where are the main pushbacks you're seeing as to why somebody would choose a competing offering over yours?

Yes, yes. Great question. So the feedback on the solution, its capability and, frankly, especially the technology architecture is being almost overwhelming in terms of how positive it is. The implementations that we've done have been swift. They've been on time and very, very effective. So that's, I think, the reason that we're seeing this very, very strong momentum. Now just a quick reminder here. Whilst point-of-sale and the financial transaction that's consummated in the retail store is very important, our solution spans the entire retail suite of solutions inside the store. So store execution, customer engagement, customer service, point-of-sale across all channels, ensuring that we can sell anything to anybody from anywhere, which is a big leap forward in technology and capability from, frankly, point-of-sale solutions from the days gone by. In answer to your question, where do we get pushback? Clearly, we do not have hundreds and hundreds and hundreds of implementations around the world. So if there is a question that we're asked, and it is around how many deployments, how many countries, how many -- and all of those kinds of things, things that you can't overcome overnight, you overcome one successful implementation at a time, and that's really what we're focused on that.

And suffice to say, Matt, the pipeline is looking very solid with respect to POS opportunities.

Your next question comes from the line of Brian Peterson with Raymond James.

Congrats on the strong results. So I wanted to follow up on the point of sale. Eddie, did I hear you correctly that you talked about opportunities with new customers that are not currently Manhattan customers? And I'm curious if that's happened a little bit quicker than you would have expected. And should we be hearing about any stand-alone customer wins in the next few years on the point-of-sale side?

Well, we certainly hope so. I don't know that it's happening faster, Brian, but we are certainly picking up some momentum. And you did hear right that some of the inquiries and sales cycles that we're in are with new logos as the -- as it's generally noted. I think -- we're excited. We're excited about that. We're focused on those just as much, of course, as we are on implementations or potential implementations with our existing customers. So exciting times from a point-of-sale perspective, for sure.

Got it. And maybe one for Dennis. Just on the margin side. As we're thinking about the upside that you posted this year in the guidance for 2020, anything that you can say in terms of timing related to the hiring and the growth investments that happened this year? And did any of those shift into 2020?

Yes. We're continuing to hire just based on business demand. So it's a pretty full employment market out there, Brian. So the hiring, we're doing pretty well, but it's taken a little bit longer, as Eddie said, on the services side of the business. We've increased our capacity year-to-date, 13%. Last quarter, it was 10%. So we're definitely growing, but there are a lot more heads we need to pull into the business to meet customer demand. And then the investment cycles around the sales organization, we're quite active there. We're really active across the entire organization because growth is pressing the business. So investment in facilities, investment in IT, continued investment in cloud ops.

And your last question comes from the line of Yun Kim with Rosenblatt Securities.

Welcome, Matt. Congrats on a strong quarter. Eddie, very strong license revenue in the quarter. You mentioned that some of those were Q4 and first half 2020 deals. Can you mention what drove customers to pulling those deals into Q3?

I think it was just -- there was -- well, let me just say, from our perspective, it was not any kind of financial management. It was the desire to get started with the supply chain transformation and begin to see the value from the solution faster. I do have reasonably firsthand experience and knowledge of those -- a number of those particular deals and just customers who saw the value and wanted to get cracking, frankly.

Okay. That's great. And then just on the MST customer, just kind of curious, are there any other opportunity for any other large current MST customers to transition to the cloud in the near term? Or was that just a onetime event within your current MST installed base?

Yes. There certainly are additional opportunities, Yun. Again, we think that full cloud deployments is an inevitability for at least most of our customers, frankly, maybe even all of them over time. So we're working hard to make sure that our customers understand the value and the benefit of a full cloud deployment. But I would say that we're not about to do anything unnatural to encourage them to get there. We're letting them make that decision, make the right decision from a timing perspective for their business.

It's not a large percentage of our overall revenue either, Yun.

Okay. Great. And then just last one for you, Eddie. On the point-of-sales business momentum, how big are those point-of-sales deals, typically? I am just kind of curious.

Yes. Well, we're not going to -- obviously, we don't disclose the specific deal size, Yun. I'll say that they are nice deals and deals that we're very interested in closing. They are large, medium-to-large footprint stores, so deals that matter for sure.

Okay. And for you, Dennis, surprised no one asked you yet, the contract length of new subscription deals that you signed in the quarter that show up into RPO, has that changed much in the quarter?

No.

And there are no further questions at this time.

Very good, Katherine. Thank you. Well, thank you, everybody, for joining us on the Q3 call. We're, again, excited about the progress that we've made and look forward to another strong quarter and reporting that out to you in about 90 days or so. In the meantime, have a wonderful holiday season. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.