Manhattan Associates, Inc. (MANH) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Stephanie and I will be your conference facilitator today. At this time, I would like to welcome everyone to Manhattan Associates Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, October 18, 2016. I would now like to introduce Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

Thank you, Stephanie and good afternoon everyone. Welcome to Manhattan Associates 2016 third 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 on our annual report on Form 10-K for fiscal 2015 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 our 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.

Great. Well, good afternoon everybody. We delivered solid financial performance in Q3 and we are certainly upbeat on delivering another record year as we wrap up 2016 and look forward to 2017. We are optimistic about our near-term and long-term growth outlook as customers and prospects continue to invest in core supply chain and omni-channel commerce initiatives. Our customer satisfaction is strong across the globe and our competitive position in the marketplace continues to be strong driven by our pursuit to be the leading innovator in the supply chain commerce markets. We delivered record Q3 total revenue of $152.2 million, up 7% with record adjusted earnings per share of $0.50, increasing 19% over Q3 2015. Software license revenue for the quarter was a record $21.6 million, up 13% as we closed 5 $1 million plus license deals in the quarter, 2 with new customers and 3 with existing customers. 4 of these large deals were in the U.S. and 1 of them was in Latin America. With 2 of the 5 deals, we won against very strong head-to-head competition. And for the quarter, our large and midsized deal activity was driven by a healthy mix of warehouse management solutions, transportation management and omni-channel initiatives. And our sales team continued to execute very well and our competitive win rates against head-to-head – or head-to-head against our major competitors remained strong at about 75%. For the quarter, our license revenue from net new customers was 31%, reinforcing the strength of those midsized deals below the $1 million mark. Our year-to-date percentage stands at about 35% coming from new customers, the key takeaway here. Well, our innovation and strong customer focus is winning net new Tier 1 and Tier 2 customers in our target markets and enabling us to leverage our existing customers into which we are selling new solutions. Despite a tough macro and a challenging environment for retailers, we believe our focus on the customer and delivering meaningful new innovation continues to validate it in our results. While we are upbeat regarding our business fundamentals, in the near-term, we do remain cautious regarding potential macroeconomic, geopolitical and FX headwinds and their related impacts on our target market. As we discussed in our last earnings call, we experienced some clients delaying services projects resulting in our consulting services growing 5% over Q3 2015. We believe this is retail and macro driven and is also customer-specific versus a broad secular trend. These are strategic investments for our customers and we have seen some encouraging incremental movement to the upside in Q4 and early 2017 and we are not aware of any lost business and we expect Q4 growth to improve over Q3’s performance. With our solid Q3 performance and services backdrop, we are raising our full year earnings per share growth guidance and ratcheting down modestly our full year total revenue growth guidance due to client implementation delays and some FX headwinds, mainly in the UK and Europe. Our customers continue to face transformational challenges converging physical and digital retail with personalized service to the consumer. And we are focused on posting quality Q4 and full year 2016 results, while planning for 2017 to deliver growth, profitability and meaningful new innovation into the market. And I will provide more color in my business update following Dennis’ review of our financial results.

Thanks, Eddie. I will review our financial performance, our 2016 full year guidance and finish with some initial comments on 2017. So, Manhattan continues to deliver strong organic top line growth and quality earnings leverage. We posted total revenue of $152.2 million, increasing 7% over Q3 2015. Adjusting for negative currency impact mainly in the pound, total revenue grew 8% organic. By region, Americas grew 8%, APAC grew 31% and EMEA declined by 10% compared to Q3 last year. Overall, demand for our solutions continues to be solid in our target markets. Adjusted earnings per share for the quarter, was a record $0.50 increasing 19% over prior year on solid revenue growth, strong expense management and our buyback program. Our GAAP diluted earnings per share also was a record $0.47, increasing 24% over Q3 2015 on our strong operating performance. A detailed reconciliation of GAAP to non-GAAP adjustments is included in our earnings release today. The remainder of my P&L discussion represents our adjusted results. License revenue for the quarter totaled $21.6 million, up 13% over prior year. License revenue exceeded our Q3 expectations slightly as we managed to close a couple of midsized deals we forecasted to close in Q4 as part of our previous guidance. From a regional perspective, Americas posted license of $18.1 million, EMEA $1.8 million and APAC $1.7 million. As always, our license performance depends heavily on the number and relative value of large deals we close in any quarter. With the strength of Q3 license and a sluggish global macro, we expect full year 2016 license growth to come in at about 6%, resulting in about $83 million of total license revenue in 2016. Shifting to services, while overall customer demand remains solid, our services revenue came in below our expectations in the quarter as several implementations were delayed into Q4 and 2017. As Eddie mentioned, these are customer-specific, mostly concentrated in retail and appear to be driven by retail and macro sluggishness. Q3 services revenue totaled $119.3 million increasing 6% year-over-year. While we expect Q4 total services to be down sequentially from Q3 about 2% to 3%, we are expecting year-over-year growth of about 8% to 9% in Q4. Our services revenue is comprised of two revenue streams, consulting and maintenance. Our consulting revenue for the quarter totaled $84.8 million growing 5% over Q3 last year. As a reminder, with Q4 holiday seasonality and many retail clients idling back implementations in preparation for the peak season, we typically expect Q4 to be down sequentially due to the seasonality from Q3 by about 2% to 3%. We do expect Q4 year-over-year growth to be about 9% to 11%. Year-over-year, we have grown our services practice by about 150 associates, up 8%. We continue to actively recruit and hire additional associates to support demand and focus on customer satisfaction. For Q4, we are targeting about 40 hires globally and another 100 plus hires, primarily in the first half of 2017. Maintenance revenue for the quarter totaled $34.4 million, increasing 9% over last year on license revenue performance. Retention rates also remained very strong at 90 plus percent, while there were no major impacts this quarter. As a reminder, we recognized annual maintenance renewal revenue on a cash basis, so the timing of cash collections can cause quarter-to-quarter lumpiness. Consolidated services margins were a strong 59.2% in the quarter on revenue growth and solid utilization. For the year, we expect our 2016 services margins to be in the 58.3% to 58.5% range. As in prior years, Q4 services margins will decline sequentially over Q3, principally driven by the retail holiday season as clients idle implementations and the absorption of second half hiring takes place. All in, we expect Q4 services margins to land in the 57.2% to 57.8% range. Turning to operating income and margins, Q3 adjusted operating income totaled a record $57.2 million with operating margin of 37.6% compared to 34.5% in Q3 2015. We don’t expect 37.6% to be our go forward baseline as we are still investing for long-term growth. The quality of our earnings leverage this quarter is driven by record revenues and strong services margin and expense discipline. In addition to the services personnel I mentioned, we also are recruiting for R&D and sales and marketing talent. Year-to-date, excluding currency, our adjusted operating margin is 34.9% versus reported 35.2%. So for 2016 full year, we expect about 280 basis point expansion in operating margin over 2015, pegging 2016 full year adjusted operating income growth at 19% or about $209 million and an operating margin of about 34.5%. Finally as a reminder, Q4 margins are sequentially lower than Q3, driven by traditional seasonality. So that covers the operating results. Regarding taxes, our adjusted effective income tax rate was 37.6% for the quarter. We now expect our full year 2016 effective tax rate to be about 37.2% with Q4 to remain at 37.0%. Transitioning to diluted shares for the quarter, diluted shares totaled 71.7 million shares, down from Q2 2016 72.2 million shares. We invested $25 million, repurchasing about 420,000 shares of Manhattan stock in Q3. Year-to-date, we have invested $108.5 million, reducing common shares outstanding by 1.9 million shares. For the balance of 2016, assuming no Q4 share repurchases, we estimate Q4 diluted shares to be about 71.7 million shares and the full year weighted average diluted shares to be 72.2 million. And finally on shares, last week our Board approved raising our share repurchase authority limit to a total of $50 million. Turning to cash flow, for the quarter, cash flow from operations totaled a record $42 million, bringing year-to-date cash flow from operations to $101.5 million, up 21% over prior year. DSOs were 60 days compared to 55 days in Q2 2016 and capital expenditures were $1.4 million in Q3. We estimate full year CapEx to be in the range of $7 million to $8 million. So as you can see our balance sheet continues to support long-term strategic flexibility and stability with cash and investments totaling $111 million and zero debt at September 30, 2016, compared to $95 million at June 30, 2016. That covers my Q3 remarks. Let’s move on to our updated 2016 guidance and some early comments on 2017. For 2016, adjusted earnings per share with our better than expected Q3 earnings per share performance, we are raising our guidance estimate to $1.82 to $1.84 from our previous range of $1.78 to $1.81. The new range represents 20% to 21% growth over our 2015 adjusted EPS of $1.52. For Q4, we expect earnings per share to be lower than Q3 2016, given the combined impact of seasonally lower Q4 services revenue due to the retail busy season and new hire activity. Full year GAAP EPS guidance estimates increased to $1.68 to $1.70 from our previous estimate of $1.63 to $1.66, representing 20% to 21% growth over our 2015 GAAP EPS of $1.40. For reference, the guidance table is provided in today’s earnings release. For 2016 revenue, we are scaling back our full year revenue growth estimates from 10% to 11.5% to 8.5% to 9.5% or $603 million to $609 million. The adjustment is timing and risk driven. Regarding timing, we are factoring in the Q3 client project implementation pushes combined with traditional Q4 retail holiday busy season where many retailers naturally idle implementations. On the risk side, we expect more European FX headwinds, about 1 to 2 points of risk there and the general anemic macro hangover to continue in Q4. In summary, I expect us to come in above the midpoint of our guidance range for revenue and EPS. I said come in above the midpoint of our guidance range for revenue and EPS, posting another record year in total revenue, operating profit and earnings per share, with an organic growth profile for total revenue of 8.5% to 9.5%, operating profit, 19% to 20% and adjusted earnings per share, 20% to 21%. That covers my comments on 2016. Shifting focus to 2017, very, very early, but similar to prior years. We are just starting our 2017 budget cycle to hear a few comments for adjusted EPS modeling purposes. Overall, we expect the competitive environment to be about the same and continue to remain cautious on the global macro environment. Our thesis hasn’t changed. We are committed to driving shareholder return through steady revenue growth, consistent earnings growth and efficient management of our capital structure. With our growth strategy and competitive position, we are positive on our outlook and still believe there is solid opportunity to take market share and drive potential earnings leverage. For revenue, consistent with prior years, we are targeting organic total revenue growth in the high single to low double digit range. We are pegging at 8% to 10% currently. This estimate is currently consistent with Street estimates, which we will fine tune on our Q4 earnings call. Adjusted operating margins, we are targeting operating margin expansion of about 25 basis points over 2016, net of incremental strategic investments in R&D and sales and marketing initiatives to drive further competitive differentiation, growth and market awareness. Any potential upside will be addressed on a quarter-to-quarter basis going forward. For an effective tax rate, our best estimate at this stage is 37.0%, subject to U.S. federal, state and foreign tax legislation changes. Diluted shares were currently projecting 72 million diluted shares per quarter, which assumes no buyback activity in Q4 2016 or the full year 2017. So that covers my financial update. Now I will turn the call back to Eddie for the business update.

Well, thanks Dennis. Well, despite a challenging macro environment, we continue to see solid progress in our core verticals, led by retail and with a meaningful portion of our WMS and non-WMS license and service revenue activity driven by digital commerce and technology modernization programs. Our competitive position continues to be quite strong. We continue to be in growth and investment phase, investing in innovation, marketing and business infrastructure to support our company growth and increase market share positioning Manhattan Associates for the next wave of retail multi-channel selling entering 2017. As I discussed at the beginning of the call, we have recognized 5 large deals in the quarter, 2 with new and 3 with existing customers, 4 in retail and 1 in food and beverage. 3 of the 5 deals were driven by strategic supply chain modernization programs. In Q3, our license fee mix was weighted at about 51% 49% between our warehouse management and other solutions. And a meaningful portion of our WMS and non-WMS license and services revenue activity continues to be driven by existing and new customer omni-channel initiatives and legacy supply chain modernization. The retail, consumer goods and food and beverage verticals were our strongest license fee contributors, making up more than half of our Q3 license revenue. Q3 software license wins with customers who have committed us to share their names include Arhaus, Brightstar, Custom Goods, Euromaster Tires, LTI Trucking, Raia Drogasil, Saint-Gobain and STR Distribution Services. Q3 expanding relationships with existing customers included Allen Edmonds, Asda, Bally Technologies, Conair, Five Below, Floor & Decor, Hy-Vee, J.Crew, L Brands, National DCP, O’Key, Ozburn-Hessey Logistics, Perfect 10, Precision Planting, Rhee Brothers, Simplehuman, Stella & Dot, Super Retail Group, Thermwell Products, TwinMed, Uline, Uni-Select, UPS Supply Chain, VF Services and West Coast Distribution. Our professional services business around the world continues to perform very well. Despite the recent client project delays, Q3 revenues grew 5% and the teams are receiving high marks for customer satisfaction. Our global services team continues to be very busy with core supply chain and retail omni-channel supply chain commerce enablement initiatives with over 300 system go-lives in the past 12 months. The overall services pipeline is strengthening for 2016. And as previously mentioned we expect Q4 year-over-year growth to improve over Q3’s performance. Demand and visibility continues to be pretty solid. We added about 60 associates to our global team in Q3. And for the balance of 2016, we are targeting adding about 40 more new associates to meet customer demand. And we will closely monitor how customers and prospects adapt to the recent macro headwinds and if required, we will adjust accordingly to balance the capacity with demand and customer satisfaction. Now as you know, we continue to be the leading innovator in supply chain technology. Year-to-date, we have invested about $42 million in research and development with about 675 people dedicated to R&D and we should closeout 2016 at about a $56 million total spend. And at the core of our success is our strategy to be a serial investor in innovation, to expand our addressable market and deliver market leading differentiated capabilities for our customers. And this is evident in our evolution of our omni-channel applications. Both in our R&D labs and on active projects, we continue to help our customers make the transition from enablement to optimization. For a number of years now, we have helped our customers significantly accelerate growth in their direct channels and improve customer service through the implementation of omni-channel fulfillment programs. Now, as a reminder, omni-channel fulfillment helps our customers move from fulfilling orders out of 1 or 2 distribution centers to shipping from hundreds or thousands of stores, offering pickup in-store, site-to-store, same day delivery and many other innovations centered around order and demand fulfillment. Activating these programs for Tier 1 and Tier 2 customers requires the ability to handle massive amounts of transactional data, especially considering the large volume spikes associated with cyber sales. But more recently, we have shifted our focus to enhancing the margin generation from this increasing stream of direct-to-consumer transactions. Maximizing margins on omni-channel fulfillment is a complex and – is complex and multifaceted. It involves everything from leveraging demand forecasting data to predicting the likelihood of a markdown on an individual unit at a particular location through leveraging mobility, logistics based best practices to enhance fulfillment productivity in that retail store. And because of our long history in data science-based logistics optimization and our multiyear head start on mobile-based fulfillment processes, we feel like we are uniquely positioned to lead the market in this next phase of omni-channel fulfillment. And as we mentioned in previous quarters, we are very fortunate to have world class customers with whom we can partner as we vet our solution designs and collaborate on the next generation of enterprise class omni-channel fulfillment and service applications and I certainly look forward to sharing more specifics with you in the coming quarters as these exciting product pipeline initiatives become generally available next year. And as we evaluate and analyze the strategic distribution roadmap of our global customers and prospects, we remain energized by a market that continues to evolve as the nature of distribution center fulfillment continues to move forward more – to more rapid fulfillment of smaller order quantities. And this transition is driven most obviously by an increase of the number of enterprise shipping direct to consumer, but is also fueled by a mindset shift in retail replenishment, which prefers to hold more inventory back at the DC and then later replenish into demand. And in both of these cases, our distribution center model, which optimizes for continuous stream of outbound activity by fully utilizing all existing resources, both human and capital delivers that most effective outbound solution. Given our market leadership position in direct-to-consumer fulfillment, again, we are in a position to work with leading fulfillment operations in the world to collaborate on software solutions to power the next era of rapid fulfillment. Topics like enhanced use of mobility, data science and machine learning-based fulfillment techniques and applications which allow our customers to engage and enhance the productivity of the distribution center workforce are leading us to a very interesting set of new capabilities for next generation fulfillment. Unlike with omni-channel, I look forward to sharing more details about our solution innovations currently under development in coming quarters. Finally, regarding transportation management, consistent with the themes above regarding globalization and designing a channel agnostic network, we continue to invest in our TMS to expand its addressable market. These investments range from more pronounced marketing efforts outside our traditional core verticals of retail and grocery to more investments in mobility to the ongoing enhancements within our cloud offering to offer more out-of-the-box connectivity with carriers, 3PLs and track-and-trace applications. We have experienced significant improvements in market traction, win rate and revenues for TMS in recent years, but we still believe the solution retains untapped potential. Now, turning to our associates, we ended Q3 with about 3,050 employees around the globe, that’s a 5% of our prior year Q3. Nearly 90% of our headcount growth is in professional services on strong demand to support top line growth and customer satisfaction. We have finished the quarter with 66 people in sales and sales management, with 60 quota carrying reps, that’s up 3 from last quarter and we continue to be opportunistic, looking to add about half a dozen or more talented sales professionals to the company globally. So, let me close my prepared remarks with a brief summary. We expect to close out 2016 with solid performance. While global macroeconomic growth and volatility risk continues to give us reason to be somewhat cautious, we are excited about our future and remained focus on investing in our customers and delivering differentiated innovation. Retail, commerce and supply chain complexity in our target markets continues to increase driven by the digitalization and e-commerce world and this is fueling multiyear investment cycles. And we are confident that our competitive position and our planned innovation strategy will deliver value to our shareholders and customers alike. Our relative competitive position continues to be strong and improving as we continue to invest in innovation to extend our addressable market, market leadership and differentiation. With the world’s most talented supply chain employees, the best software solutions and good market momentum, we believe we are well positioned for the balance of 2016, into 2017 and beyond. So Stephanie, now we would be happy to take any questions.

[Operator Instructions] Our first question comes from the line of Terry Tillman with Raymond James.

Hi, good afternoon guys. Hi Eddie and I welcome back Dennis.

Hi Terry. Thanks.

I guess Eddie, the first question for you or Dennis is just a little bit more reconciling what was really good license strength, I mean people were worried about enterprise software in the third quarter and you saw good growth acceleration and if I am not mistaken, I think you said four retail deals over $1 million of license fees compared to one deal last quarter, so that works really good on the surface and I guess I am just curious because we did see that real downtick in pro services, is it as much as retail is just a tough neighborhood or is it just really a perfect storm with a couple specific customers?

Yes. I mean it’s more than a couple of specific customers, Terry. There are a number of customers who, for a various different reasons have slowed down programs. These programs are a very large and very complex, as you know. We have seen general softness in the retail space and some of the programs clearly could not be completed before the busy season, so we saw a bit of a slowdown and the push of some programs. These are as you know very strategic initiatives. They are large initiatives and need to be conducted thoughtfully. And I think frankly, our retail customers are doing that. Now, just to reiterate, we haven’t lost any business. These are programs that have slowed and initiatives that have pushed again, largely due to the advent of the peak season. So we are certainly pleased with the license performance in the quarter. And as we all know, is indicative of long-term services health and health of our company.

And Eddie, in terms of like you said, you saw some bright spots or some positive signals that may be just spending intentions are actually picking up if I am not – maybe I hope I didn’t mischaracterized that, but I am talking about pro services, is it related to like formal backlog or visible financial commitments or is it third-parties you do some work with or is it just your own field professional services force, talk a little bit more, if you don’t mind, about how you see some glimmers of hope or maybe an inflection point there?

Yes. It’s a little bit of all of those things Terry, but mostly what we are seeing frankly, of course we did see solid license revenue here in, well both – Q1, Q2, Q3 from a big global brands with strategic initiatives. And maybe the up-tick might be a slight misnomer. The point is that whilst we have seen programs slowdown, certainly our customers are saying, hey look, we have got to pick these back up pretty soon here. So these are committed programs that we are already engaged in. It just slowed down. We certainly expect them to pick back up as soon as these guys come back up for a breadth of air.

And I would like asking about this because this is the newest part of your business and potentially a big growth engine, the retail store initiatives, I know you have a couple of kind of lighthouse, bellwether accounts that are the early users, but can you give us an update in terms of maybe sales activity with other potential prospects and/or just how to set expectations for that into ‘17?

Yes. So I think you are right, we have got two – a couple of early adopter customers. Activity is good. I would say the activity for retail store systems across our portfolio is very strong. Now there is a little bit of sort of a bright line there between our store execution systems and specifically our next generation of point of sale that we are developing. But of course, the point is as we see more activity inside the retail store period, we think it bodes really well for our next generation POS strategy. It’s – so market momentum is good, conversations are good. But as we have cautioned before, we don’t expect to see a massive hockey stick in 2017. As early adopters in 2016 well, we expect to sign some more strategic clients in ‘17 and POS is really an ‘18, ‘19, ‘20 play for us.

Okay. And I don’t want to hijack this call, I will just stop after this, but I feel compelled to ask this as a question, put this back in the saddle, the 25 basis points, I mean usually if I am not mistaken, it’s 50 or thereabouts, so it’s a little lower, I mean obviously, you have had big out-performance this year, but you mentioned that there will be some sales and marketing as well as kind of innovation R&D focused expenses, could you maybe talk about like is there – how would you stack rank those, is a lot of the expense investment going to be in one or the other? Thank you.

Yes. Number one, innovation, continued to innovate. We have some exciting innovation coming that will be introducing into the market and we will talk about that later in the year in Q1. So number one innovation, continue to create competitive differentiation against our competitors. And then sales and marketing kind of in the same boat, so looking to make some strategic hires there, invest in some great market awareness programs.

Okay, thank you.

Thank you, Terry.

Your next question is from Matt Pfau with William Blair.

Hey guys. Thanks for taking my questions. First, welcome back Dennis and I had a quick one for you on the guidance. So I just want to make sure I understand this correctly, the total growth guidance for the top line is lower by about 3 percentage points and you said, 1 to 2 points of that 3 points is from FX and the rest is from the delayed deals?

Yes.

Okay, great. And then I wanted to just touch on the competitive environment for a minute, there has been some changes with some of your competitors, JDA recently tried to sell themselves and then recapitalize and Oracle bought LogFire, a smaller company out in the market, so any changes that you are seeing out there competitively from either of those transactions or anything else?

Yes. Eddie here. Matt, no, not really, frankly I think that JDA – as you said, JDA put themselves in the market, ended up taking some equity from a couple of private equity firms and so forth to help de-lever. But no real change in that competitive landscape, Oracle acquiring LogFire. They had been – they I think had largely ceased development of their own WMS for some time ago and have been partnering with LogFire. So it seem like a pretty obvious union there, but haven’t seen any competitive changes. And as you know, for the last 1 year or 2 years, frankly maybe even a little more, we have seen competitive win rates in the 75% range and expects to be in that range or better going forward.

Got it. And then obviously, a nice license sale quarter for you guys, but are you seeing any change in tone from customers on the license sales side in terms of potentially sales cycles lengthening or is the push primarily only something that’s related to the services side of the business?

Yes. I mean the services side, as I talked about before, the good news, bad news is that these programs are big, sophisticated and complex. And particularly when you are operating in retail, they get banged by that busy season and sometimes you have to kind of push past those. Push past the busy season and pick them up later. That’s certainly one of the dynamics. With regard to license revenue, several strong quarters, but certainly another strong quarter in Q3. I think we have indicated before that we are seeing just slightly lengthening sales cycles and it does feel like there is one or two or one or two more trims at the crank to get to approval, but nothing that is really changed the market dynamic.

Got it. That’s it for me. Thanks guys.

Okay. Thank you, Matt.

Your next question is from Mark Schappel with Benchmark.

Hi, good evening. Thanks for taking my question and Dennis welcome back.

Thanks Mark.

Eddie, just kind of building on Terry’s question regarding delayed services projects, in your view are these delays just kind of due to this year complexity of these omni-channel initiatives, given that there is typically a significant reengineering effort that kind of accompanies these projects?

Yes. I mean, that’s certainly the primary reason, Mark. I mean, there is a few other things around the edges. I don’t want to say that it’s only big omni-channel programs that are slowing down. There is certainly a few other things around the edges. Look, as we look back in the year to Q1 and Q2, we exceeded professional services revenue in both Q1 and Q2, which closes to raise revenue throughout the year. So, as we reflect back on that, you can see clearly that some of our customers were working diligently and swiftly to be able to get programs implemented successfully delivering ROI earlier in the year. The other thing that I think we all know just – and maybe should have anticipated a little more is with such emphasis on Black Friday, Cyber Monday and the preparation for that. Some of the retail, some of the kind of cold freezes and implementation freezes have moved a little earlier in the year. So, you can put all those things – put all those things together and that’s largely what we are seeing.

Okay, great. Thank you. And then on the sales front, your quota carriers did pickup a couple this quarter but they are still down from where they were in Q1. And I was wondering maybe if you could just give us a little bit of what you are seeing on the hiring front. Are you having just a harder time hiring guys these days than maybe a year or two ago or is there just – or you are just kind of behind the ballgame here a little bit just due to some things going on internally?

No, no. We just – frankly, Mark, we are very selective. So, I am pretty comfortable with the capacity we have got. We are not under capacity, we are able to service the need and so forth, hence, been able to deliver the license revenue and so forth that we have in the past few quarters. We talked about it. Last quarter, we were down three more I think last quarter. I have indicated to you on that call, to the team on that call, that there is a timing issue there. We had actually brought a couple of these guys on in between the end of the last quarter in the earnings call. We continue to be very selective. As you know, we have got a very consultative sales process. So, this is not a question of picking up professional, purely professional sales reps, we need people with demand expertise that can really help develop the value proposition for the customer. So, we will continue to look. We will continue to promote from within as well.

Great, thank you. And then turning it in your prepared remarks, you know it’s a meaningful investment you are planning to make in your TMS solutions. And I was wondering if maybe you could just give us an idea of why that maybe? Are you seeing some opportunities there that maybe didn’t exist a year or two back?

Yes. Well, let’s see. There is a couple of three things there. One is we have been quite selective as to the international markets that we have offered our TMS solution in. So, we plan to begin more aggressively marketing TMS internationally. So that would be number one. Certainly, the popularity, frankly, of our cloud-based TMS solution has picked up markedly over the last 18 to 24 months, which by the way plays into the enablement of TMS in other geographic regions a little bit more effectively. And candidly, the competitive landscape has gotten a little bit better yet again for us over the last 12 months. Certainly, that’s what we have seen and we think we have the opportunity to penetrate some verticals that we have – that have been less successful for us over the years. We have always been very successful in retail and grocery, grocery retail, food wholesale and so forth. But because of the dislocation and the competitive environment, we think there are some opportunities out in with our nontraditional verticals for us.

Great, thanks. And that’s all for me.

Good. Thank you, Mark.

[Operator Instructions] Your next question is from Yun Kim with Brean Capital.

Thank you. Hi, Eddie and welcome back, Dennis. So first, congrats on a solid quarter, but obviously the focus here seems to be on the professional services business today. So, the softness that you are seeing with the delayed implementation work, are you at all seeing that in your license sales pipeline at all? And then do you expect the increasing complexity of your omni-channel – the increasing complexity of the scope of the omni-channel initiatives? Perhaps it drives some volatility in your business, professional services business going forward with many of your customers having a hard stop on the implementation work in Q3? And then also, like could this also impact the timing and seasonality of your license business, especially around large deals as they are trying to time the longer implementation work related to closing a large deal? So, still want to fairly have to stop the project in the middle?

Yes, all good questions, Yun. I think there were three of them in there. One is I haven’t really seen any change in license pipeline. As I have talked about before maybe just modest lengthening of sales cycles, one or two extra approval cycles and so forth, but no real material change to the outlook to the marketplace and to the dynamic there. With regard to change in seasonality of the professional services business, it is something I think that we will certainly have to keep our eye on. Again, we saw very strong and frankly stronger than ever professional services revenue in the first half of 2016, right and obviously saw a little bit of a slowdown in Q3. I do think that the kind of the retail freeze does seem to be moving a little earlier than it once was largely driven by these huge peaks of Black Friday, Cyber Monday that retailers have to prepare for, because they are so much more acute today than they were ever before. But – so we will have to keep our eye on that and work with our customers, obviously, to make sure we smooth out the profiles there and meet their needs. With regard to the license revenue seasonality changing based upon this dynamic, frankly, I don’t think so. These are very strategic purchases. They do have long design cycles and those kinds of things as well. So, I don’t expect the license sequencing and cycles to change materially.

Okay, thanks. And then can we expect the professional services business to show at least temporarily some acceleration over the next several quarters? Some of these delays projects get caught up, you can start again maybe perhaps end of this quarter to – especially in the first half of next year?

Yes. Well, Yun, I will take a shot at that and then Eddie can chime in as well. So traditionally, we are down sequentially Q3 to Q4 and we expect that as clients idle back during the retail busy season. We do expect our services growth year-over-year, growth profile to be better in Q4 than it was in Q3. So, that’s a positive. We will give you more color at the end of Q4 on the first half of 2017. We will see how the pipeline continues to evolve and activity and – this is not – I want to reemphasize, too, in Eddie’s communication during the call, this is not an episodic kind of event. It’s not a wave across our entire customer base or some specific customers that with their business model challenges delayed implementation. So, we will come back to you at the end of Q4 and give you a perspective on first half of 2017.

Okay. And then so for Dennis, so despite the softness in the professional services business in the quarter, you did put up – again, another strong services margin. So, this potential softness and may be some little volatility here and there regarding increasing complexity of the projects that shouldn’t necessarily impact the gross margin?

I like increasing complexity. That’s what we – that’s how we really differentiate. And generally, it’s an opportunity to increase margins in our business, increasing complexity in our space. I would also like to say 22 consecutive quarters of revenue and operating profit growth with margin expansion. So I am looking forward to number 23, Q4.

Alright. So we are coming down here as well. Thanks a lot. That’s it for me.

Alright. Thank you. I appreciate it.

[Operator Instructions] At this time, there are no additional questions in queue.

Okay. Thank you, Stephanie and thank you, everybody for joining us this afternoon. We appreciate your support and your interest in Manhattan Associates. And we look forward to speaking with you again right after the first of the year in about 90 days. Thanks. Bye-bye.

Thank you. This concludes today’s conference. You may now disconnect.