Good afternoon. My name is Josh, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Q2 2019 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 Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, July 23. 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, Josh, and good afternoon, everyone. Welcome to Manhattan Associates 2019 second 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 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.

Well, good afternoon, everyone. And thank you for joining us to review the Manhattan Associates 2019 second quarter results. We delivered record Q2 revenue of $154 million applying ASC 606 retrospectively and $0.42 of adjusted EPS. In a pretty turbulent global macro, Q2 revenue grew 9%, it's a pretty solid 2018 comp and EPS exceeded our expectations by $0.07. License, cloud, maintenance and services revenues all exceeded Q2 targets. In fact services delivered a record revenue quarter posting double-digit growth across all three geos on strong demand from new license and cloud sales. Our operating margin exceeded our expectations on revenue performance, while we continue to invest significantly in the business to deliver long-term growth and earnings objectives. We're still early in that transition to cloud with aggressive transformative goals and investments earmarked for driving customer success. That said, despite appropriate cautions regarding global macro volatility, we remain bullish on our outlook for 2019 and we are again raising our 2019 full-year total revenue and earnings per share guidance, while maintaining our operating margin guidance. The positive business momentum we are seeing is driven via cloud transition progress to-date, as well as our focus on our four main growth areas: Firstly, our market-leading product innovation. We continue to invest aggressively in innovation with year-to-date R&D investment totaling about $40 million, that's up 21% over 2018 and we're on pace to achieve $80 million full-year 2019 R&D spend. Our development agility is enabling us to deliver new and competitively differentiated product and technology solutions to the market faster than we ever have before, resulting in encouraging pipeline growth and competitive wins. Secondly, our pipeline strength continues to be solid across the globe for license, cloud and services with upward trends across cloud and services. We do expect license revenues to continue…

Thanks Eddie. Overall Manhattan's growth, profitability, cash flow and balance sheet metrics continue to be solid in our business transition. Q2 total revenue was $154.3 million, up 9% over prior year, excluding FX, total revenue was up 10%. Adjusted earnings per share was $0.42 and our GAAP earnings per share was $0.32 with stock-based compensation accounting for the difference between adjusted EPS and GAAP. License revenue was $11.7 million, exceeding the $9 million target discussed in our Q1 call. For Q3 and Q4 2019, we are targeting about $8 million in each quarter's revenue mix transitions to cloud subscriptions. Our target reflects the expected impact of our cloud transition. For full-year 2019, we are raising our license estimate range to $38 million to $42 million, with license gross margin of about 93%. Our previous range estimate was $36 million to $40 million. Q2 cloud revenue was $9 million up 68% over Q2 2018. For Q3 2019, we are estimating our cloud revenue to be about $12.8 million, up 98% over prior year and 42% sequentially on solid demand for cloud solutions. For full-year 2019, we are raising our cloud revenue recognized range from our previous estimate of $36 million to $40 million, up to $42 million to $44 million, representing 82% to 90% growth over 2018. For total software representing cloud and license revenue combined, we are raising our 2019 full-year estimate to $83 million versus our previous estimate of $76 million. We are pegging the midpoint of our cloud and license range estimates, resulting in a 21% year-over-year increase versus our previous estimate of 11%. Regarding bookings, as we have discussed remaining performance obligation or RPO is the leading proxy for our cloud bookings performance and represents the value of contractual obligations required to be performed, otherwise referred to…

Okay. Well, thanks Dennis. So in summary, we're very pleased with the quarter and our continued cloud transition progress. Our underlying business fundamentals are certainly solid and we remain focused on extending our market leading position in supply chain and omnichannel commerce solutions. Our momentum of success continues to be underpinned by delivering innovation that anticipates the needs of an evolving market, focusing on our customer success and leveraging our deep domain expertise. Our first half performance continues to boost our confidence in the significant and expanded business opportunity in our core markets, driven by the ongoing retail evolution, this is also driving the need for supply chain modernization. Our competitive position is strong and we continue to invest in innovation to extend our addressable market, market leadership and differentiation. Customers' feedback and win rates continue to invalidate our investment strategy, and as always, we remain focused on our customer success and on driving sustainable long-term growth for our shareholders, with the world's most talented supply chain commerce employees, the best software solutions and market dynamics that require customer investment in supply chain innovation. We do believe that we are quite well positioned for the future. So with that, Josh, we'd be happy to take any questions.

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

Hey. Good afternoon, gentlemen. Can you hear me okay?

We can hear you, just fine. Terry.

Hey, Terry. How are you doing?

Well, I'm doing well and looks like you are all doing well too. Congrats on the results and nice to see that the low DSO and cash flow there Dennis. Couple of questions I had. I guess first, like as you all have been building out this cloud business, we've been listening to you all and your vision, and you've talked about data points and some guideposts on success, but like we saw a couple of quarters in a row here where we see the change that RPO of $20 million plus each quarter. In fact, I think, 2Q is up sequentially. And then Dennis, we're looking at this pretty material ramp sequentially in the actual subscription revenue for 3Q. What I'm curious about is, are we hitting an inflection point as it relates to just your sales team kind of finding their footing and learning how to sell this and they're starting to be some continuity and just consistency in terms of close rates or is it maybe some of the newer products like the POS or the CRM product? I'm just trying to get a sense on, if we've kind of hit an inflection point here, where not saying there will still be volatility, but maybe we've kind of hit the next inning or the next kind of milestone in the cloud business?

Yes. I mean I think it is multifaceted Terry as you point out. There's no question that our sales organization are getting a little more comfortable. As you know, the domain experts, domain rich and this is not a long bridge for them to cross, but I think there is a little more comfort there. I think some of the innovation clearly that we are delivering is inspiring our customers to move forward number one, number two their desire to essentially get their hands on the innovation that we're delivering to the marketplace is providing somewhat of an accelerant, and then the overall market dynamics like – and the leaning toward cloud in general is certainly helping the momentum as well.

Okay. And then just a follow-up question for either of you two is just related to the services. We get lots of questions on the services over time and it seems like there has been a real kind of strengthening of the services business. I think in the prepared remarks you talked about cloud deals and recent license activity, and then at some point you did add an upgrade. We had come across a lot of pent-up demand for upgrades, how much is that playing out in the services demand and just maybe kind of handicapping the visibility you have into that strength continuing as we move into 2020? Thank you.

Yes. So good visibility. There is no question that there is some pent-up demand for upgrades. Again, we do feel like the innovation that we're delivering to the marketplace is sort of unshackling that demand and really sort of driving the need inside of the upgrade process, but the uptick in services is really across the board. It is across the three theaters in which we operate. It's across all products and across the dimensions of initial implementation, upgrades and continued rollout of solutions across brands, stores and distribution centers. So yes, it's a pretty well balanced uptick frankly.

Okay. Thank you.

Our pleasure, Terry. Thank you.

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

Hi, gentlemen. Thanks for taking the question and congrats on the quarter. So first one, maybe for Eddie, just on customer deployment references. As we think about the WMS market longer term, I'm curious, what do you think about in terms of your customers potentially sticking with on-premise deployments given their desire to potentially customize in the investments that they've already made? Or do you feel like this will follow OMS in Active Omni, where there will be a kind of a massive shift towards the cloud over time?

Yes. Good question, Brian. So I think – frankly, I think there is an inevitability that everything that we do is moving to the cloud number one. The thing that you – the matter that you point out is a potential inhibitor, which is the customization of the – generally the heavy customization and integration of WMS. Frankly, we've cracked that nut. So any how, if look at the Manhattan Active Omni world, where there is a pretty healthy amount of customization there, we have a full version-less elastic product there, that is extensible. So every time a customer does an update to the software, let's say every 90 days, any customization they may have done will remain in place, will remain intact. There is no reporting or any of those kinds of things. So we expect those patterns to continue for all of our products as we transition into the cloud.

Got it. And Dennis maybe one for you. Just on the timing of expenses. It looks like you had a nice beat this quarter. Just trying to understand how the investments came in versus your expectation in the second quarter and if any of that shift into the back half of the year? Thanks guys.

None of that shifted to the back half of the year. It's the margin profile. Brian, it was really driven by solid revenue growth – topline growth.

Pretty good. Thank you, Brian.

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

Hey guys, thanks for taking my questions. And first one is start-up on the services business and maybe you could just comment now that you've been doing these cloud deals specifically Active Omni for some time now? How does the attach rate or revenue generated for professional services relate to a cloud deal relative to license?

Yes, very little impact. I mean, each project and so forth is always a little bit different, particularly on the order management side. So from deal-to-deal, the attach rate is a little bit different. But if you look across the body of work around the old or on-premise order management software and of course the new Manhattan Active Omni solutions, you'll find that the services attach rate is negligibly different.

Got it. And on the revenue raise for license and cloud, it was a nice raise, but you also gave some comments related to the macro that they were a bit cautious. So maybe you can just talk about raising the guidance and what sort of macro factors are in there? And is there anything from potential impact with your customer base from additional tariffs?

Well yes. So I'll take the first part and Dennis can take the second. The cautionary language really Matt is just around the things that you've alluded to, that we all know about the tariff issues, the Brexit issues and the trickle-on and trickle-down effects of those. Look, some could argue that the tariff issues could be advantageous to us as manufacturers bring manufacturing either near shore or onshore and have to retool for those things. But there are so many moving parts there that we just feel like it's prudent to offer cautionary language.

Yes, Matt. I don't really have much more to offer to that than what Eddie covered. It's just that if there is an extreme amount of volatility in the back half of the year, whether it's geo-political or trade tariffs, et cetera. It could pause buying cycle. So as Eddie said, it's just prudent for us to put that caution out there.

Yes. Got it. And seen more and more new customers in the pipeline and accounting for a larger percentage of your business has been a theme over the past several quarters and it sort of coincided with the move to Cloud and Active Omni. So maybe you can just comment on specifically why you think that is? And then those customers that you are seeing, is it a different industry, a different type of customer, what's specific about these new customers that’s may be different to your existing base?

Yes, I think there are sort of three things that spring to mind, Matt, that are really driving that in no particular sequence. There are some geographies that we traditionally haven't played in. They're really contributing for us number one. Number two, the innovation and of course that we're delivering to the marketplace is inspiring customers, but prospects that hadn't done business for this before, to take a look and invest in our solutions. And then thirdly, is sort of that changing – little bit change in business model where you're seeing manufacturers and wholesalers go direct to consumer and having to deliver to customer expectations, increases the complexity of the supply chain, and so forth. And then just my final comment there would be, around the innovation that we're delivering, when you are able to go into a geography, where frankly you have no or very little presence, you don't have much of a reputation, but we're able to win net new customers, I think it does speak to the level of innovation that we're delivering compared to the rest of the market.

Got it. That's all I had for you guys. Thanks for taking my questions.

Very good. Our pleasure, Matt. Thank you.

Your next question comes from Mark Schappel with Benchmark. Your line is open.

Hi guys. Thanks for taking my question and very nice job in the quarter.

Thank you, Mark.

Eddie, starting with you, in your prepared remarks, you mentioned that automation and warehouse robotics are some of the big driving trends in the warehouse these days and you also noted that next-generation WMS is what you say exactly like a master orchestration layer. I thought that was kind of interesting comment, I was just wondering if you could maybe build a little bit upon that?

Well, I think the short answer really Mark would be, machine learning can be applied very, very well, very, very effectively, especially when you've got lots of data available and frankly a lot of repetitive tasks. So you look at what's going on inside the distribution center and of course you've got those two attributes, right. You've got tons of data being created and you've got a healthy amount of repetitive tasks. So you can apply some really clever frankly and sophisticated machine learning techniques into that building. So whereas in decades gone by, yes software was driving tasks to individuals and so forth, but now you've got this much broader view of what used to happen and is likely what is going to happen inside the distribution center. So to use that expression, we can be the master orchestrator and the conductor in a much more elegant way than we've ever done and been able to before.

Great, thank you. And then I was wondering if you could just provide us an update with respect to the Company's recent push into the contact center. There has been some commentary around that over the last couple of quarters and I bring this up because historically the contact center hasn't necessarily been a Manhattan stronghold?

Right. Yes, we are making pretty good progress there. And it's all part of our effort to provide this very seamless, holistic view of the consumer across every channel that they shop and every channel that they interact with the retailer. So when you've got an order management system, a point-of-sale system, a set of store execution system, BOPUS and fulfill from store and so forth, along with sophisticated contact center solution that is looking across everything and every aspect of what the consumer is doing. The retailer can provide of course that single view, can provide great customer service, can provide great personalization in the way that I believe that we as individuals actually want to receive it because it improves customer service and so forth. And of course at the same time, being able to provide targeted marketing and effective cross-sell and up sell for the retailer.

Great and then finally, Dennis. With respect to your services demand, I was wondering if you could just give us a rough idea of what percent of that business is actually being driven by systems upgrades versus say new business?

I would go with about a third of it is system upgrades and the balance is being driven by new innovation, Mark.

Great, thank you. That's helpful. That's all from me. Thanks.

Okay. Thank you, Mark.

[Operator Instructions] There are no further questions at this time. I will turn the call back to the presenters.

Okay, well thank you, Josh, and thank you everybody for listening in to our Q2 earnings call. We thank you for your ongoing support. Hope you have a great continued summer and we'll look forward to speaking to you about 90 days from now with our Q3 results. Thanks again. Bye-bye.

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