Manhattan Associates - Earnings Call - Q3 2020
October 22, 2020
Transcript
Operator (participant)
Good afternoon. My name is Mike, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Q3 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. As a reminder, ladies and gentlemen, this conference is being recorded today, October 22nd, 2020. I would 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.
Matt Humphries (Senior Director of Investor Relations)
Thank you, Mike, and good afternoon, everyone. Welcome to Manhattan Associates' third quarter 2020 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. We caution you that these forward-looking statements involve risk 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 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 year 2019 and the risk factor discussion in that report, as well as any risk factor updates we provide in our subsequent Form 10-Qs. We note in particular that uncertainty regarding the impact of the COVID-19 pandemic on our performance could cause actual results to differ materially from our projections. 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. We have reconciled all non-GAAP measures 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.
Eddie Capel (CEO)
Terrific. Thanks, Matt. Well, good afternoon, everybody, and thank you for joining us as we review our third quarter 2020 results, discuss, all right, look for the remainder of the year, and provide at least some initial thinking around 2021. So for the quarter, Manhattan reported total revenue of $150 million and adjusted earnings per diluted share of $0.51. Both of these exceeded our expectations. Broad revenue outperformance across really all of our business lines, combined with a continued focus on expense management, also drove strong earnings leverage in the quarter. Now, using our markets and our customer base as reference points, we're starting to see some modest improvement in the global macroeconomic situation.
While clearly there's still a very long way to go in terms of reaching back to a normal operating environment, we are encouraged by the level of activity we're seeing in our pipeline, specifically with our new Manhattan Active Warehouse Management solution. In fact, we closed a record multi-million-dollar Manhattan Active WM deal in Q3 with a large national beverage distributor, and while early, we're off to a solid start in Q4 as well. And as such, we're raising our full year total revenue and adjusted EPS guidance to reflect our views for the balance of the year. Additionally, despite the turmoil globally, we remain committed to organic growth. We're on track to invest nearly $80 million into research and development this year, furthering our competitive positioning through new innovation while growing our addressable market.
Now, through our ongoing engagement with customers and prospects, we continue to see business fundamentally rethinking the future state of their supply chains, distribution footprints, and omnichannel commerce strategies. Some of this rethinking is being driven by consumer demand, with nine out of 10 consumers wanting an omni-channel experience with seamless service levels between sales channels. Other reasons are more growth-oriented, as average omnichannel customers spend 4% more in store and 10% more online than single-channel consumers. These changes will no doubt require a thoughtful approach to implementing modern, agile, and scalable software solutions. The growing demands placed on legacy systems and software are no longer going to be suited to a multi-channel digital world, and we feel the long-term opportunity set in front of us, based on these favorable demand trends, is robust, and will continue to provide meaningful opportunity for us to grow and scale our business.
As a result of these asymmetrical tailwinds and headwinds, coupled with our market-leading solutions and applications, we see our global pipeline opportunities trending favorably. Our recently released Manhattan Active Warehouse Management solution is driving very positive market interest, validation for the countless man days and the many millions of dollars in R&D that we've invested in developing the product over the past several years. At the end of the third quarter, over 80% of our global bookings pipeline is comprised of cloud opportunities, and about 45% of our deal opportunities continue to be represented by net new logos globally. This certainly should provide ample opportunity to land new business for us while we also focus on expanding our relationships with existing customers.
Now, speaking of customers, you may recall a few weeks ago we announced that part of a very rigorous selection process, L'Oréal, the world's leading beauty company, chose to implement our Manhattan Active WM solution across its distribution footprint globally. L'Oréal was looking for an agile, cloud-native solution that could provide the necessary adaptability and scalability that their business demands as it continues to grow with a positive trajectory. We're obviously honored and humbled by their choice, and our professional services team certainly is looking forward to implementing this solution into their distribution network over the next several years. Now, regarding services, despite the challenges that have been caused by the global pandemic, we're delivering on our promises to our customers around the world. In the third quarter, we conducted 161 go-lives globally, once again showcasing our flexibility and expertise at delivering technical implementation work through really any delivery channel.
Now, it is worth maybe reminding you that billable travel, which is margin neutral but contributes to the overall services revenue, was about 5% of a headwind year-over-year to our services revenue growth. Now, turning to sales and marketing, our teams remain very active and engaged, pursuing opportunities across our installed base while simultaneously moving brand new business opportunities forward across all of our product portfolio. Of note, we recently hosted our EMEA Exchange Connect event, our virtual customer conference for that particular region, and feedback from the conference participants was overwhelmingly positive, and participation from our partners and customers was very well received. Our competitive win rates remain very strong at 70%+ against head-to-head competition, with about 25% of our license and cloud deals representing net new customers in the quarter.
Verticals that collectively drove more than 50% of our cloud and license revenues in the quarter were retail, consumer goods, government, food and beverage, and grocery. Now, if I can, I'll just turn the discussion a little towards our product pipeline. Last quarter, I updated you on the launch of arguably the most important product in Manhattan's history, Manhattan Active Warehouse Management, the next generation of warehouse management software. We announced this new cloud-native version of WMS at our virtual user conference in May of this year. And today, I'd like to provide an update on Manhattan Active WM along really three key dimensions: customer success, new customer acquisition, and ongoing product development. So let's start firstly with customer success. So you'll recall that at the time of launch, Pet Supplies Plus was already live on Manhattan Active WM, and since then, they've reported some really exciting accomplishments.
They're shipping record volumes using our application. The onboarding times for new associates have been cut in half using our all-new mobile app for the distribution center associates, and they've actually already taken their second site live and in the process of planning to turn on a third site as well, and I'm happy to report that Q3 was a strong quarter for customer acquisition. We now have several additional projects in flight across a variety of industries and regions, and we're seeing strong activity in the grocery, food and beverage, health, and beauty sectors with Manhattan Active Warehouse Management. Our message of a next-generation versionless cloud-native WMS certainly seems to be resonating well with the market, and finally, I'm happy to report that per our plan, we shipped our first quarterly follow-on release of Manhattan Active WM on time.
Our 2020.3 release hit our customers' environments in August, delivering additional innovation and functional capability, and we're on track to deliver our 20.4 release next month in November as well. So in short, we're off to a great start executing on our vision of providing the industry's only cloud-native, fully extensible, versionless warehouse management system. And we continue to compete pretty effectively in the TMS space as well, evidenced by our signing, among other deals, a large TMS SaaS contract in the quarter with a global distributor. The combination of our best-in-class optimization technology, international capabilities, and strong sales and delivery teams were really the keys to this win. And we continue to make progress outside of supply chain execution as well. This quarter, Q3, we introduced Manhattan Active Allocation as part of our suite of inventory optimization solutions.
Built on our Manhattan Active Application Architecture, this new allocation solution is purpose-designed and built for the fashion and apparel businesses. Historically speaking, our inventory solutions have been very strong for hardline replenishment-based businesses where sophisticated demand forecasts and mathematically optimized replenishment plans are key but the world of fast fashion is quite different. It requires a different set of technology for calculating how much inventory to forward position in each store in any given season and Manhattan Active Allocation solves this inventory positioning problem, and crucially, it solves it with omnichannel in mind, ensuring both digital and standard footfall demand are particularly well served and finally, I'd like to close out my product-related remarks with a quick update on Manhattan Active Omni, our collection of cloud-native order management, customer engagement, and store technologies. This quarter, we announced Interactive Inventory, a really significant advancement for our order management customers.
Interactive Inventory provides ultra-high-speed delivery date projections for digital customers regardless of where they are in the buying journey. Unlike other solutions which rely really on historical averages for projected delivery time, Interactive Inventory factors the customer's delivery location, other items in their cart, the current position of every unit of inventory into the network, and the merchant's optimized fulfillment plan for that eventual order. The Interactive Inventory combines really everything that set us apart historically: a curated view of enterprise inventory, the industry's best fulfillment optimization algorithm, cutting-edge cloud-based technology, and access to real-time operational data, all while making that delivery promise to the consumer. Speaking of delivery, I am proud to report that in the quarter, we also took a leading footwear brand live in six weeks on our order management and store fulfillment applications.
This particular customer was looking to enable both standard pickup in store and curbside pickup with time to spare before the holiday season. And our professional services organization really delivered for them. And now they're live with pickup and curbside across the U.S. and Canada, and they're beginning to roll these capabilities out internationally as well. So that concludes my business update. Dennis is going to provide you with an update on our financial performance, discuss our updated 2020 full-year guidance, and provide you with our initial view of 2021. And then I'll close our prepared remarks today with a brief summary before we move into Q&A. So Dennis?
Dennis Story (CFO)
Thanks, Eddie. As mentioned, third quarter total revenue was $150 million, down 8% over prior year, due pretty much solely to COVID-19. Our total revenue estimate for the fourth quarter is a range of $135 million-$140 million.
Adjusted earnings per share was $0.51 in the quarter. GAAP earnings per share was $0.39, with stock-based compensation accounting for the difference between adjusted and GAAP EPS. Our adjusted earnings per share target for the fourth quarter is $0.32 within a range of $0.30-$0.34. Starting with cloud, revenue for the quarter was $21.1 million, up 14% sequentially and up 48% year-over-year, despite a tough comp due to our Q3 2019 FEMA cloud deal. We signed two new Manhattan Active Warehouse Management deals in the third quarter, both global Tier 1 customers, and continue to see strong pipeline demand for our cloud solutions with notable strength in Manhattan Active WM, Manhattan Active Omni, and TMS solutions. About 50% of our deals in the quarter came from Active DM products, and over 20% of our bookings were from new customers.
For Q4, we estimate our cloud revenue will be about $22 million, which represents about 40% growth year-over-year. For the full year, we estimate our cloud revenue will be $78 million-$79 million, up 68% year-over-year from the midpoint. License revenue was solid in the quarter at $13.2 million, well above our expectations as several Q4 pipeline opportunities accelerated into Q3. Overall, licenses down 28% year to date and continues to attract a strong demand for our solutions that continues to shift to cloud. We signed three $1 million-plus deals in the quarter, with roughly 30% of all license deals coming from new customers. For the fourth quarter, we expect between $4 million and $5 million in license revenue, and for the full year, we now estimate license revenue will be approximately $33 million-$34 million.
Of course, as we've pointed out in our release and earlier in the call, uncertainty about the COVID-19 pandemic could affect our performance against our estimates. Cloud and licensed software mix will be approximately 70% cloud to 30% license for the full year, with total software revenue of $111 million-$113 million, up 17% year-over-year at the midpoint, a record number despite a 31% or $15 million decline in license revenue versus 2019. Turning to bookings, as we've 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 as unearned revenue or bookings. Our RPO for the quarter totaled $257 million, up 69% over prior year and up 14% sequentially.
We now expect that our year-end RPO will fall within a range of $275 million-$290 million, driven by booking strength in cloud, particularly with Manhattan Active WM. For Manhattan, this disclosed value represents our cloud bookings' value of unearned revenue under non-cancellable contracts greater than one year. Contracts with a non-cancellable term of one year or less are excluded from the reported amount. One last point on license and cloud: our performance continues to depend on the number and relative value of large deals we close in any quarter. Further, some customers have longer implementation cycles associated with large projects requiring a multi-year annual subscription ramp built into the contract term. As an example, for a five-year contract, the ramp results in year five of contracted revenue being significantly larger than year one.
In the near term, as Manhattan scales, large ramp deals will impact sequential and year-over-year revenue growth percentages. Now shifting to maintenance, revenue for the quarter totaled $37.3 million, down 1% versus the prior year. Our customer retention rates remain strong at greater than 95-plus%. And for the fourth quarter, we estimate our maintenance revenue will be between $36 million and $37 million. And for full year 2020, our estimate is $145.5 million. Turning to services, our professional services revenue for the quarter totaled $73.5 million, down 20% year-over-year as expected. Again, I would like to point out that excluding billed travel, we're down about 15% year-over-year. We expect near-term services revenue trends will be tied to the pace and degree of global economic improvement.
We estimate our services revenue for Q4 will be approximately $71 million, and our full year 2020 services revenue will be in the range of $303 million-$305 million. At the midpoint, this is really difficult math, but $304 million services will be down about 16% versus 2019. Excluding billed travel, services revenue is down 12%. These estimates include our expected seasonal fourth quarter sequential decline over Q3 due to retail peak season. Regarding consolidated subscription, maintenance, and services margin, for the quarter, we generated 53% margins driven by continued operating leverage in cloud. Our fourth quarter estimate is approximately 51.9%, about 100 basis points higher than 2019. Our full year estimate is approximately 51.4%. Turning to operating income and margin, Q3 adjusted operating income totaled $44.1 million with an adjusted operating margin of 29.4%, driven by higher license revenue performance combined with very strong expense management.
For the fourth quarter, we estimate our adjusted operating margin to be within a range of 19.2%-20.2%. Our Q3 adjusted effective income tax rate was 23.5%. We estimate our fourth quarter rate to be 24%, and full year tax rate will be approximately 23.6%. Regarding our capital structure, our share repurchase program remains suspended, and our repurchase authority limit remains at $50 million. We continue to assess the appropriate timing for a resumption of buyback activities dictated primarily by broader macroeconomic improvement. For the fourth quarter and full year, we estimate our diluted shares outstanding will be approximately 64.4 million shares. Turning to cash, we closed the quarter with cash and investments of $166 million and zero debt. That's right, $166 million and zero debt. Our current deferred revenue balance totaled $113 million, down 5% sequentially on just timing of revenue recognition.
Q3 cash flow from operations totaled $42 million, up 6% over prior year. Year-to-date operating cash flow totaled $103 million, down just 8%. Finally, capital expenditures totaled $200,000 in Q3. We estimate full year capital expenditures to be between $3 and $5 million. Now turning to our updated annual guidance, we continue to model and review multiple scenarios in order to provide investors with our best estimate of financial performance for the remainder of the year. Of note, there are certain external factors that are out of our control and may produce results that are different from expectations. Specifically for 2020 annual guidance, our full year total revenue range is now expected to be between $574-$579 million. Our target objective is $576.5 million in total revenue versus prior guidance of $562 million.
Our full year adjusted earnings per diluted share range is expected to be between $1.62-$1.66. Our target objective midpoint is $1.64 compared to our previous guidance midpoint of $1.56. Our full year GAAP earnings per diluted share range is expected to be $1.23-$1.27, with a midpoint of $1.25. And we expect our full year adjusted operating margin to be in the range of 23.5%-24%. That covers the 2020 guidance. Before discussing our preliminary 2021 targets, we want to remind you that the views we have today are subject to a variety of factors that may manifest themselves over the upcoming months, and hence are subject to change, so appropriately conservative for the environment in which we are operating. We expect to provide formal 2021 guidance on our 4Q 2020 call next year.
One final note before going further: our preliminary 2021 targets reflect year-over-year growth rates that are based on the midpoint of our updated 2020 guidance for the respective metrics, so at a high level, we view 2021 currently as a tale of two halves. Specifically, we expect H2 will be stronger than H1, provided an economic recovery picks up steam in the back half of the year. Our continued business transition is masking our underlying growth and value creation due to both license are trading to cloud and global Tier 1 customers ramping up their global footprints over multiple periods. We continue to believe RPO is the best go-forward metric in tracking the progress of our transition. Our 2021 full year total revenue range is now expected to be between $585 million-$625 million, representing a 1%-8% year-over-year growth range.
Our target objective is to achieve $605 million, representing 5% growth. Excluding our declining license impact, year-over-year total revenue growth is 8%. As you know, Q1 2020 was an all-time record Q1 revenue performance pre-COVID, creating a tough comp for Q1 2021. We expect Q1 2021 total revenue to be down 7%-9% over Q1 2020. We expect our H1 total revenue split to be about $292 million, with 1% year-over-year growth given the Q1 COVID comp, and H2 split to be about $313 million. This is the revenue split with a 9% growth rate. For software revenue, we are estimating $123 million-$130 million, with a midpoint growth of 13%. We are targeting $108 million-$110 million in cloud growth, with midpoint growth of about 40%. Importantly, we expect license revenue to decline almost 50% in 2021 as customers and prospects choose our cloud solutions.
License revenue will be in the $15 million-$20 million range, with a midpoint of $17.5 million. Regarding 2021 RPO, our preliminary estimate is between $385 million-$390 million, up about 40% over 2020. As Eddie mentioned, we're off to a very good start in Q4 on strong cloud demand. With the backdrop of COVID, government elections, and retail peak season in play, and a second full selling quarter of Manhattan Active WM under our belt, this will certainly help us calibrate the camshafts on our RPO entering 2021. For consulting services, we are targeting $306-$334 million, with a $320 million midpoint, representing about 5% year-over-year growth. We expect H1 revenue to be down about 3%-5% year-over-year, with Q1 being down 15% against 2020's record services comp.
The rate of year-over-year growth in services will be dictated by the pace and cadence of economic recovery for the balance of 2021, and for maintenance, we are estimating $140 million-$145 million, or a 4% decline to flat growth year-over-year, as we expect more existing customers to convert to cloud subscriptions. That covers the critical revenue targets. Our full year 2021 adjusted earnings per share range is $1.37-$1.54, with a midpoint of $1.46. H1 to H2 percentage splits will be 45% H1 and 55% H2 for the annual EPS splits. Q1 will be our lowest EPS quarter, totaling about 21% of full year EPS, or $0.31. The primary drivers of lower year-over-year earnings per share are related to three major components. First, the continued decline of license revenue. Second, the reversal of prior cost actions we took in April of this year.
And third, continued strategic investments in innovation and tooling for cloud ops to execute on the cloud growth we see in front of us. Adjusted operating margin is expected to decline year-over-year to 20%-21%, reflecting the operating imperatives covered in our outlook for EPS. You may recall, in our Q4 2019 call, we guided to an adjusted operating margin range of 20%-20.5%, with a trough of 20%. Unfortunately, in our Q1 2020 call, the pandemic required us to downshift a few gears to protect liquidity, customers, and our employees without sacrificing investment in R&D. With business conditions improving, we are refocused on the same objective, with 2021 now representing our margin trough. Overall, our objective is to achieve long-term sustainable double-digit top-line growth with top quartile operating margins.
Manhattan's effective tax rate is expected to run at approximately 24.5%, subject to any changes to federal, state, or foreign tax legislation. And finally, we expect that our share count will be approximately 65 million, which assumes no buyback activity in either Q4 2020 or fiscal year 2021. That covers the financial update. Back to Eddie for some closing comments.
Eddie Capel (CEO)
All right. Thanks, Dennis. Well, look, overall, we're very pleased with our performance this quarter. And while clearly we're operating in challenging times, we continue to focus on driving operational and financial results as we progress further on our cloud journey. With a strong business foundation, we expect to further extend our market leading position with the supply chain and omnichannel commerce solutions. And as we do so, we'll be continuing to innovate in advance of market demand, leveraging our technical and domain expertise in order to provide our customers solutions which position them for success in a dynamically and rapidly changing world. We certainly see no shortage of opportunities to expand our addressable market while further strengthening our competitive position.
So in closing today's call, I did want to take a brief moment to thank all of our customers, thank our employees, and our shareholders around the world for all of your patience, focus, and engagement over the past seven months or so. It's been nothing short of remarkable, and for one, I'm grateful for it. So again, I expect Manhattan will continue to push possible, expanding our industry-leading product portfolio while driving revenue growth and profitable execution for years to come as we benefit from the growing tailwinds within supply chain and omnichannel commerce. So Mike, over to you, and we're now ready to take questions.
Operator (participant)
As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Terry Tillman from Truist Securities.
Terry Tillman (Managing Director)
Yeah. Hi. Good afternoon, and thanks for taking my questions. Congrats on the quarter and the strength of the cloud WMS. Eddie, maybe the first question just for you is, as we go back and look at historical kind of cycles around WMS upgrades and we look at currently this e-commerce megatrend, maybe could you talk about, are we starting to see a WMS upgrade cycle? And if so, how does that compare to prior upgrade cycles? Just would love to learn a little bit more about that potential and in relationship to e-commerce.
Eddie Capel (CEO)
Yeah. Well, I mean, there's a couple of dynamics, Terry. You pointed out the e-commerce dynamic. No question that we've all seen that accelerate. It's been accelerating for the last several years, but over the last seven months or so, a real acceleration there. I think we would all agree. We don't see it turning back. You look at it there at distribution center construction, it's still very, very vibrant for sure. The need for modern facilities that are highly automated, driven with a balance of robotics and human capital certainly drives the need for a modern, flexible, agile warehouse management system, and that's where we've positioned ourselves.
We've got kind of two dynamics going here: the growth of e-commerce, but also, as you pointed out, that replacement cycle in, frankly, some of the industries that have not seen strong replacement cycles historically, particularly grocery, food, and beverage that have been pretty static from a distribution technology perspective over a number of years, now starting to see the need and driven by consumer demand to drive through modern warehouse management systems. We feel like we're on the forefront of that. The fact that we're now delivering our warehouse management system versionless and in the cloud is really an added advantage, right? It's access to near immediate innovation and speed of deployment in a world that certainly requires that. As we pointed out, the market enthusiasm seems to be strong.
Terry Tillman (Managing Director)
Understood. And I guess, Dennis, just a follow-up question as it relates to the guidance. When we're looking into 2021, I guess I'd like to hear a little bit more perspective. One of the prepared remarks you made was, with some of these transactions in the cloud side, year five of the relationship could be much larger than year one. So what I'm curious about, you launched cloud WMS, the native WMS cloud product in May. If you're signing large deals, whether it's in 2Q or 3Q or even 4Q, is it safe to say there's actually just not a lot of subscription revenue impact into 2021, and it really starts to ramp more into 2022? Just trying to understand kind of how that would phase in. Thank you.
Dennis Story (CFO)
Yeah, that's correct, Terry. It'll phase in. It'll actually phase in into the first, second, and third year of the contract as a general rule. But short-term drag on cloud revenue, but long-term value created for Manhattan on the go forward.
Eddie Capel (CEO)
You see that in the RPO.
Dennis Story (CFO)
Yep.
Terry Tillman (Managing Director)
Yeah. Well, and then just last question is, on the RPO, has there been any duration change? Just how is the consumption coming along from a contracting standpoint? What is the duration like compared to prior quarters? So we can kind of look at that on the RPO. Thank you.
Eddie Capel (CEO)
Yeah. That's the same. In the very early days, we were seeing a little bit shorter contract values, but it seems to be stabilizing kind of around that five-year mark on the average, Terry.
Terry Tillman (Managing Director)
[What?]
Operator (participant)
Your next question comes from Matt Pfau from William Blair.
Matt Pfau (Equity Research Analyst)
Hey, guys. Thanks for taking my question. First, wanted to ask on, I think a lot of retailers are getting geared up for the holiday season earlier than normal this year. Just wondering if that dynamic had any impact on either your third quarter results or how you're sort of thinking about the fourth quarter?
Eddie Capel (CEO)
No, not really, Matt. Frankly, I agree with you, and we're certainly seeing folks get geared up a little earlier. I think we, as consumers, can expect to see some promotions and so forth earlier in the season. Indications are that Black Friday will be not quite and Cyber Monday will not be quite the peaks that we've seen in prior years, yet the season will start 10 days to 14 days earlier. So agree with all of that. But frankly, we've really not seen much impact from that. Retailers start preparing really in March and April for peak season. So that couple-week variability hasn't really had much effect on us.
Matt Pfau (Equity Research Analyst)
Got it and then with the accelerated shift to e-commerce, I think we're most likely going to see a lot of fulfillment and last-mile challenges here in the upcoming holiday season and one way to relieve that, right, is through BOPUS and curbside pickup. But I didn't really hear you talk too much about those in your prepared remarks, but just sort of wondering if that dynamic's having any impact on your business either.
Eddie Capel (CEO)
Yeah. No, it is. There's no question. Those capabilities are kind of associated with our Omnichannel suite of solutions, their extensions thereof. I did point out there was one particular customer that saw exactly the dynamic they're talking about and said, "Hey, we have got to have particularly curbside, in this case, up and running well before the holiday season." And we were able to implement order management and that capability in six weeks, which we were pleased about. It's not the only circumstance, but six weeks from start to finish is pretty impressive. We were pleased with that. But certainly, BOPUS and curbside are big parts of what all retailers are looking for, given the capacity constraints that everybody expects to see in parcel and home delivery.
Matt Pfau (Equity Research Analyst)
Got it. Last one for me. You guys are guiding for license to be down significantly next year. But I guess the question would be, why would anybody buy a license for WMS now that you have the cloud version? Just sort of wondering what the rationale on the customer side would be there?
Eddie Capel (CEO)
Yeah. Well, let's see. So first of all, you've got existing customers that certainly have an on-premise solution that, frankly, want to roll that out to additional facilities. They need to buy more users because of capacity, those types of scenarios. Look, and there are not many, but there are a few customers that still have a propensity for on-premise solutions. They are, again, few and far between now, but there are a few. There are some of our other solutions. While we offer them in the cloud, our demand forecasting and inventory optimization solutions that still have a balance of cloud and on-premise demand to them. So there's a number of reasons. And kind of the final one, I would say that geographically around the world, there are still some spots where on-premise currently makes sense.
Matt Pfau (Equity Research Analyst)
Great. Thanks a lot, guys. Appreciate it.
Eddie Capel (CEO)
Thank you, Matt.
Matt Humphries (Senior Director of Investor Relations)
Your next question comes from Joe Vruwink from Baird.
Joe Vruwink (Senior Research Analyst)
Great. Hi, everyone. I wanted to go back to the Go Live activity because I think I heard 160 in the quarter. So that's the second straight quarter where it's in above normal level. And I'd imagine that you're seeing a lot of activity to get the "easy extensions" adding BOPUS and curbside onto order management, things like that. The question is, are you seeing follow-on activity come from these engagements? And now that everything is on the cloud, if, let's say, these engagements are starting out more short-term in nature, can you use this as an opportunity to circle back and maybe get customers thinking about an upgrade cycle going back to things like warehouse management?
Eddie Capel (CEO)
It's a great question, Joe. It does depend. Certainly, to kind of the first part of your question, there is an opportunity for ongoing deployments. So just to use the examples that you talked about there with BOPUS and curbside, there is certainly some enthusiasm around those two strategies for the reasons that we've already discussed, and particularly prior to peak and so forth. There are follow-on activities and capabilities around BOPUS and curbside with digital self-service that typically is kind of a fast follower to those capabilities. Customer engagement strategies around those delivery mechanisms tend to be fast followers. So there's quite a bit of ongoing activity and ongoing cross-sell, up-sell capability associated with those.
Now, as it relates to sort of, if you want to call it, going backwards down the supply chain to whether it be transportation management solutions and warehouse management solutions, it's not so much I wouldn't characterize it as a natural kind of extension of BOPUS and curbside at all. But as noted in some of the previous conversations, the modernization of distribution centers is, frankly, becoming imperative. A combination of the need to be able to execute on smaller orders, e-commerce orders, and the level of automation and robotics that's being driven into warehouses to drive both throughput and accommodate for the challenging labor market in that particular segment.
Joe Vruwink (Senior Research Analyst)
Okay. Great. And just on the last point, Eddie, in terms of some of the early adopters where you've seen interest in Active Warehouse Management, it strikes me as segments that have probably been comparatively resilient this year, thinking about food and beverage, grocery, CPG. And so you're launching new technology into a pretty healthy demand environment. These are also applications where there's a lot of variety and SKUs, very high volume. And so I suppose the question is, when you launched Active Warehouse Management, did you feel like there were certain customer segments where, if you got traction early, it would drive maybe better referenceability later on? And are you seeing that so far with the early awards?
Eddie Capel (CEO)
Not particularly in terms of focused on early referenceability and those kinds of things. We're seeing solid traction and deals, frankly, both from our customer base who want to get onto a cloud strategy and a cloud platform and new customer logos. And we'll start, obviously, to publish this as and when we are as and when we're able. But you'll see a nice blend of customers across both verticals and geographies.
Dennis Story (CFO)
Hey, Joe, this is Dennis. Just to piggyback on what Eddie's saying, I would tell you, based on the demand and the pace of growth for Manhattan Active WM and our pipeline, I would say we're in the early stages of a pretty significant replacement cycle.
And keep in mind that a large part of that's our installed base, but also about 45%, not all Manhattan Active WM, but 45% of our cloud pipeline is net new opportunities, net new customers as well.
Joe Vruwink (Senior Research Analyst)
Okay. Great. Thanks, Dennis. Thanks, Eddie. I'll leave it there.
Eddie Capel (CEO)
Okay. Thank you, Joe. See you.
Operator (participant)
Your next question comes from Mark Schappel from Benchmark.
Mark Schappel (Director of Equity Research and Enterprise Software Analyst)
Hi. Thank you for taking my question and nice work on the quarter. Eddie, starting with you, one of the benefits of your Active WMS solution is that it gives you an opportunity to really move into verticals where maybe you just weren't all that penetrated before, industrial manufacturing or two that come to mind. So I was wondering if you could just address or just give an example or so of maybe some of the early customer interest you're seeing in Active WM from some of these non-traditional Manhattan verticals.
Eddie Capel (CEO)
Yeah. I mean, we're certainly beginning to see some interest there. Mark, I'm not going to obviously drop names and so forth at this particular juncture, but as you see customers of ours and industries that have typically been kind of heavy wholesale, heavy manufacturing, and not had any kind of consumer contact or direct-to-consumer strategy, but frankly now are, right? So they're starting to sell direct-to-consumer and require a good bit more sophistication in their distribution strategy. There's a lot of early interest from those opportunities. The other dynamic, though, is that what we've now introduced here is a cloud-based solution that always has immediate access to innovation and is extensible, and that's a new phenomenon regardless of vertical.
Some of those old verticals that are running old solutions that have been highly customized over the years have been difficult to get access to, whether it be modern innovation or modern underlying technology. They now have easy access to that with Manhattan Active Warehouse Management System. We're, again, starting to see a good bit of enthusiasm there.
Mark Schappel (Director of Equity Research and Enterprise Software Analyst)
Great. Thank you. And then you mentioned your Manhattan Active Allocation Solution, which I guess is new this quarter. Sounds intriguing. Sounds interesting. I wonder if you just provide a few more details on the solution itself and some of the opportunities you see there.
Eddie Capel (CEO)
Yeah, sure. So I'll keep it brief. And because of that, a bit of an overly simplified description, Mark, given the time we have. But particularly in the fast fashion and apparel world, you see companies buy for a season and then push product out to the stores. And you don't see a lot of replenishment and inventory optimization activities. When you're pushing that product out to the store, there's still a healthy amount of sophistication. Where do I push that product to? Whether it be climate-based, consumer demand-based, size of store, all those kinds of things. And that's been sort of the traditional way that one would push and allocate product out. But in the new world, where we've got buy online pickup in store, curbside pickup, buy online return from store, it requires another level of sophistication in calculating how you push that product out to the store.
So Manhattan Active Allocation is a brand new rethink of how to go about softlines and fast fashion distribution and allocation of inventory. And of course, we built it on our cloud platform, which offers speed of implementation and access to immediate innovation.
Mark Schappel (Director of Equity Research and Enterprise Software Analyst)
Great. Thank you.
Eddie Capel (CEO)
My pleasure, Mark. Thank you.
Operator (participant)
Your next question comes from Brian Peterson from Raymond James.
Brian Peterson (Managing Director of Application Software)
Good evening, gentlemen. Hey, thanks for taking the question. So Eddie, it's come up a couple of times, just the idea of a WMS refresh. I'm curious, to what extent does the multi-tenant cloud portfolio, you think, change that? And I'm a little bit more interested not on the existing install base versus the opportunity for some of these legacy competitors. I'm curious, how would you think about a pace of this refresh opportunity relative to what we've seen in past years?
Eddie Capel (CEO)
Look, WMS systems don't flip in a matter of days or a matter of weeks, Brian, as you know. But look, we've all seen this acceleration of customer demand, e-commerce demand, delivery expectations, and so forth, even over the last seven, eight months or so. And it's real. And it's real. We do think that companies, certainly with customer-facing requirements and so forth, are under an awful lot of pressure to be able to deliver the consumer expectations, consumer demands. And it requires modern technology. Old, tired warehouse management systems that haven't been modernized for years are not going to really be able to get the job done. So, no question, we're seeing a refresh cycle happening. I don't know that it's going to be much, much, much faster than cycles that we've seen before. But it's there.
The good news is, as we've moved to cloud-based technology, there is a speed component in terms of being able to get these solutions rolled out to customers and prospects.
Brian Peterson (Managing Director of Application Software)
Got it. Thanks, Eddie. And maybe one for Dennis. And I appreciate all the components of the guidance. But just in terms of the investments, I know they're picking up a little bit next year. Is there anything that you'd call out in terms of products or go-to-market that we should be paying attention to on margins next year? Thanks, Dennis.
Dennis Story (CFO)
No, not really. Not really. We expect to be able to benefit from scale, of course. But no major product-by-product margin impacts. We see a lot of opportunity clearly in front of us. And our appetite to be able to invest in innovation has not been quenched at all, that's for sure. So we expect to continue to invest in innovation. And that has a near-term impact on margins.
Eddie Capel (CEO)
Yeah. Brian, just to piggyback on that, there's also, as the cloud business continues to scale, we're investing in just tooling with our business to drive the margins up, future margins up. So requiring investment as the business scales over the next year to two.
Brian Peterson (Managing Director of Application Software)
Understood. Thanks, Dennis.
Eddie Capel (CEO)
Thank you, Brian.
Operator (participant)
Your next question comes from Yun Kim from Loop Capital Markets.
Yun Kim (Managing Director)
Thanks. Hey, Eddie and Dennis, congrats on a strong quarter, especially in a tough environment for you guys. Just following up on Terry's question early on, Dennis, I just want to make sure I understand it. So how does the ramp cloud deal affect RPO? Does the whole value of the contract show up in the RPO upfront, or does it get added when the next ramp starts, just like the revenue?
Eddie Capel (CEO)
No, it shows up. When we close the deal, the bookings show up in RPO or are reported in RPO.
Terry Tillman (Managing Director)
Got it. Okay. So that could potentially be choppy if you close a larger deal, right, down the road?
Eddie Capel (CEO)
I don't know if it would be choppy. I think just the reason we put that out there is, on the year-one ramp, the revenue can be much smaller, and the exiting annual subscription value can be significantly larger. So that impact in terms of cloud revenue can squeeze your sequential decline. So it could be a little bit more lumpy on the revenue side, not as much on the booking side.
Yun Kim (Managing Director)
Okay. Great. Thanks for that. And then, Dennis, it's a very basic question. Can you just give us an update on your business around the brick-and-mortar or the big-box retailers? I am assuming that particular part of the business for you guys is still being pressured. Any update there on when we can start to see that business coming back? And then also, how much of your professional services business is still kind of tied to that retail vertical slowdown? I am assuming some of that weakness in professional services, or at least a year-over-year decline, is driven by some of the projects that were more or less postponed that was ongoing prior to COVID?
Dennis Story (CFO)
Yeah. Yes. Certainly, some of the services, most of the services decline is associated with some of the kind of retail slowdown and kind of retail hunkering down, frankly. We've got a combination of some sub-verticals in retail being very, very busy and focused on meeting customer expectations, others being impacted by their stores being closed and so forth and putting projects on hold, pausing them, and so forth. We're beginning to see those lights back up and so forth. So that's encouraging. In terms of the first part of your question, which was, are we seeing activity around big-box retail and how are our big-box retail customers doing? The answer is, well, but generally in the e-commerce channel, right? You see big-box e-commerce retail channels growing 200% year-over-year, putting all kinds of stress on the distribution network. So for us, we're still quite busy in that big-box space.
Eddie Capel (CEO)
Yeah. And we haven't had, from a retail perspective, it's a strategic vertical for us and a great growth opportunity. A lot of demand when you go across sub-verticals within retail itself. In addition to that, we've had very minimal bankruptcy events, no liquidations, Chapter 11, and customers are taking that opportunity to restructure their business. And really, the challenge for retailers has been the mandated government shutdowns of their retail businesses. So we've seen a lot of positive activity, not just in closing deals with retail, but we're also seeing a lot of positive activity from the retail sector in the pipeline as well.
Yun Kim (Managing Director)
Okay. Great. I'm assuming I'm the last one. Just a high-level question for you guys. The omnichannel commerce has been a hot secular trend for the past several years, and obviously, it has evolved very quickly to be more strategic since the COVID. Now that you guys have a cloud-based WMS solution in the market, which should reduce the overall complexity of the implementation and should be less of customization in the deployment, are you at all kind of maybe open to adopting a larger partner ecosystem that includes large global system integrators and perhaps even giving them access to some of your professional services work to help them ramp?
Eddie Capel (CEO)
Look, that's probably a reasonably long answer. At the end of the day, we have a large partner ecosystem around the world that ranges from big global companies like Deloitte all the way down to the smaller supply chain-focused boutique companies. And of course, you've been at that customer conference, and there's no shortage of implementation partners at that customer conference. In terms of customization and so forth, there is still going to be customization required regardless of whether it's on-prem or in the cloud. One of the unique features or capabilities of our cloud solution is it is extensible, right? It is extensible. So we'll still allow that customization to happen. We'll honor all of the contracts of the customization APIs and so forth so that as we do these updates every quarter, there's no kind of regression issues or implications having to re-implement customization and so forth.
So it's certainly a valuable capability to be able to customize the solution and have access to immediate innovation.
Yun Kim (Managing Director)
Okay. Great. Thank you so much, guys.
Eddie Capel (CEO)
Our pleasure, Yun. Thank you.
Matt Humphries (Senior Director of Investor Relations)
Your next question comes from Mark Zgutowicz from Rosenblatt.
Mark Zgutowicz (Managing Director and Senior Research Analyst)
Good evening. Just hoping to get a perspective on the, I'm calling them, downstream benefits of your accelerated POS and curbside pickup adoption. I'm not sure how you'd characterize it, but I'm just trying to get a sense of where you see that sort of falling into pipeline and whether that might be, if we think about just beyond orders, maybe retained business, maybe additional adoption of Active Omni solutions. And then maybe this is a stretch here, but if it's perhaps giving a slight push to accelerate adoption of your Active Warehouse Management solutions. Thanks.
Eddie Capel (CEO)
Yeah. Thank you, Mark. I wouldn't say it would be a push or a nudge to go in reverse order, a nudge to the adoption of Active Warehouse Management. Those two things are reasonably different. But I think it is safe to say, frankly, as a consumer, we're all beginning to expect BOPUS and curbside as table stakes and price of admission, frankly, in the retail space. Now, advanced BOPUS and curbside is starting to really come to the surface where retailers are looking to offer cross-sell and up-sell opportunities, even in a BOPUS and curbside environment. That requires real sophisticated customer engagement and sophisticated technology systems to be able to make that happen.
So while we have seen an acceleration of e-commerce, I think customer expectations continue to grow, and that's why it's so important that we continue to innovate in that space and maintain our market-leading position.
Mark Zgutowicz (Managing Director and Senior Research Analyst)
Got it. Thank you, Eddie. Appreciate it.
Eddie Capel (CEO)
My pleasure, Mark. Thank you.
Operator (participant)
That was our last question at this time. I will turn the call back over to Eddie Capel for closing comments.
Eddie Capel (CEO)
Okay. Very good, Mark. Well, thank you, everybody, for taking the time to participate in this earnings call. We look forward to crystallizing our 2021 view in about 90 days or so. And of course, it's very premature, but do all have a very happy and safe holiday season, and we'll speak to you again in about 90 days. Thanks.
Operator (participant)
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.