Manhattan Associates' (MANH) CEO Eddie Capel on Q4 2016 Results - Earnings Call Transcript

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Manhattan Associates, Inc. (NASDAQ:MANH) Q4 2016 Earnings Conference Call January 31, 2017 4:30 PM ET

Executives

Eddie Capel - CEO

Dennis Story - CFO

Analysts

Terry Tillman - Raymond James

Matt Pfau - William Blair

Mark Schappel - Benchmark

Operator

Good afternoon. My name is Angel and I will be your conference facilitator today. At this time, I would like to welcome everyone to Manhattan Associates Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] After the speaker's remark there will be a question-and-answer period. [Operator Instruction] As a reminder, ladies and gentlemen, this call is being recorded today, January 31st, 2017.

I would now like to introduce Dennis Story, CFO of Manhattan Associates. Dennis, you may begin your conference.

Dennis Story

Thank you, Angel and good afternoon everyone. Welcome to Manhattan Associates 2016 fourth quarter earnings call. I will review our cautionary language and then turn the call over to Eddie Capel, our CEO.

During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or 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 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 the reconciliation schedules in our Form 8-K we submitted to the SEC earlier today and on our Web site at manh.com.

Now, I will turn the call over to Eddie.

Eddie Capel

Good afternoon everyone. 2016 was a very successful year for Manhattan Associates. Despite some persistent global micro sluggishness and the recent services, revenue headwinds we strengthened our company significantly in 2016 and we improved our market leadership position. We posted solid fourth quarter and full year financial results marking a fifth consecutive year of record revenue, operating profit, earnings per share and operating cash flow performance.

Importantly, we exited 2016 with strong second half license momentum, as well as solid demand for omni-channel, store and distribution management solutions. Our associates also continue to execute very well and maintain a strong commitment to providing our customers with a very high level of expert service.

Q4 total revenue increased 4% over the same period last year to $148 million and adjusted earnings per share increased 18% to $0.46. Full year 2016 total revenue was 605 million, increasing 9% and adjusted earnings per share were $1.87, increasing 23%. At a combination of continued revenue growth in the face of stressed retail markets and FX headwinds, but along with prudent expense discipline led to our record performance.

Our Q4 software license revenue was 22.1 million, up 8% over 2015, and we closed seven $1 million plus license deals in the quarter. Two of which were with new customers, six of the deals were U.S. based and one was in Europe. Our large deal activity continues to be driven by a healthy mix of platform based warehouse management, transformation and omni-channel initiatives both in the U.S. and our international markets.

Our deal activity also spanned some diverse industries including industrial, wholesale, distribution, wine and spirits, specialty retail, department stores and third party logistics. So, for the year we closed 18 $1 million plus deals. Five of these deals were with new customers and 13 with existing. In 11 of the 18 deals we competed head-to-head against very strong competition. And we were very pleased with that second half license performance. We exited 2016 with solid momentum, and we're off to an early solid start in 2017 giving us cause for cautious optimism in these fairly turbulent times.

Fundamentally, we're winning with compelling differentiation through organic product innovation, domain expertise and customer focus. We saw wins across retail, manufacturing and wholesale in a variety of product categories and geographies. We not only expanded our solution set with our Tier 1, Tier 2 customer base, but we also continue to add to our net new customer base with a number of leading global brands.

Our sales team executed very well and our competitive win rates remained strong. Win rates for the quarter and full year were about 75%, winning head-to-head sales cycles against our major competitors. And for the quarter 30% of our licensed revenue came from new customers representing approximately 35% of total licensed revenue on a full year basis.

As we discussed in our Q3 call we did continue to see significant revenue pressure on our U.S. and European services businesses as some customers delayed or slowed major project implementations and upgrades. So, we posted Q4 consulting revenue growth of 4% year-over-year with America's growth at 6% and EMEA down 18%.

Our current market outlook assumes that market pressure is similar to those we experienced in Q3 and Q4 will continue into the first half of 2017, with some recovery in the latter half of the year. The silver lining for this cloud is that our license pipeline entering 2017 looks solid and our competitive win rates remain strong. So, given this solid license performance we expect services revenue growth will follow over time, and Dennis will provide more details on this in his financial update.

As we already stated our license pipeline is solid entering the year, customer satisfaction is good, our competitive position remains strong and we continue to be the leading innovator in core supply chain, retail store operations and point of sale commerce solutions.

Now, 2017 is a pivotal investment year for Manhattan, our 2017 plans include approximately $9 million in incremental strategic investment to deliver new, next generation multi-channel retail selling solutions into our core markets. And as a result, 2017 earnings per share will be reflective of these strategic investments, which represent about $0.08 of EPS.

We’re bullish on the market opportunity ahead of us, and continue to place significant energy and investment into developing and advancing the world's leading suite of supply chain commerce solutions to extend our market leadership in 2017 and beyond.

So I'll provide a little more color in my business update following Dennis review of our financial results.

Dennis Story

Thanks, Eddie. I will review our financial performance, and finish with our 2017 guidance. So as Eddie noted we delivered Q4 total revenue of $147.6 million, increasing 4% over 2015. Adjusting for currency headwinds total revenue grew 5.4% and that’s organic growth. By region, Americas grew 5%, APAC increased 3% and Europe decline 2% compared to Q4 of last year. Full year total revenue was $604.6 million increasing 9% over 2015, full year by region Americas grew 11%, APAC increased by 13% and Europe decline 5%.

Q4 adjusted earnings per share was $0.46, up 18% over 2015 and our GAAP diluted earnings per share was a record $0.42, increasing 17%. Full year adjusted GAAP and adjusted EPS both grew 23%, year-over-year with $1.72 in GAAP EPS and $1.87 in adjusted EPS. 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.

So license revenue for the quarter totaled $22.1 million, up 8% over prior year. And full year license revenue was $85 million, increasing 8% over 2015. We continue to experience solid activity in our target markets and the demand environment remains quite positive. We finished the year out strong, closing 12 of our 18 $1 million plus deals in the second half, leading to total license growth of 11% versus 2015.

For 2017 our goal is to achieve a 5% to 6% license growth rate verses 2016, our growth forecast includes the 2% haircut for negative FX impact and a 3% reduction for a modern transition from traditional, on premise software revenue recognition to cloud base subscription revenue. While the recurring revenue metrics are not material at this stage, customer demand certainly is increasing and we expect transaction growth in 2017. Finally, as we've always disclosed our license performance continues to depend heavily on the number of relative value of large deals we close in any quarter.

Q4 services revenue grew 5% totaling $111.9 million over 2015. For the year services revenue growth was 9% totaling $467.3 million. The combination of some consulting services revenue pressure and negative affects impact continued in Q4, resulting in lower than expected services growth. As a reminder, total services revenue includes both consulting and maintenance.

Q4 consulting revenue grew 4% to $77.1 million and full year revenue grew 9%, totaling 333.4 million. 2016 was the tale of two haves with 15% revenue growth in the first half and 4% growth in the second half. Our growth headwinds were in the Americas and Europe, largely attributed to three factors. One, select customers extending implementations and upgrades. Two, the tail-off of large multi-year implementations going live in the second half driven by stronger services efficiency. And three, the strong FX headwinds I mentioned earlier.

In the Americas theater, first half growth was 18% and second half was 7% and in Europe first half growth was 3% and second half growth was down 16%. For the year, we increased our global services headcount by another 5% or about 90 heads. With a challenging demand outlook entering 2017, our Q1 2017 hiring plan is to add about 80 more new associates globally as we balance demand with capacity and we're off to a good start with 38 new hires in January.

Turning to Q4 2016 maintenance revenue, we posted $34.8 million, growing 7% over Q4 2015. And full year maintenance revenue grew 8% to $133.8 million. Solid license performance cash collections and retention rates of 90 plus percent contributed to year-over-year growth. We recognized maintenance renewal revenue on a cash basis, so timing of cash collections can cause inter-period revenue lumpiness from quarter-to-quarter.

On the service margin side, consolidated margins for the quarter were 58.1% compared to 59.2% in Q3 2016, and 57.1% in Q4 2015 world class. Consistent with prior years Q4 margins were down sequentially from Q3 2016 due to the retail busy season and the addition of about 60 new billable professional services associates in Q3 and Q4. 2016 full year service margins were 58.6% versus 57.5% in 2015.

So for 2017, we expect services headwinds to startle into the first half of 2017. Thus, we are estimating full year total services revenue growth in the 2% to 4% range. We expect 2017 to be the inverse to 2016 with first half revenue down 1 to 3 percentage points against tough 2016 comps and second half up 7% to 9% against weaker 2016 comps.

We are forecasting Q1 2017, growth to be down 3% to 4% and Q2 down 2% to up 1%. Maintenance growth is included in these growth rates, which we estimate quarterly and annual growth at about 6%. In summary, with our strong second half 2016 license growth and solid pipeline entering 2017, we expect services revenue growth to improve in the second half.

On the 2017, services margin outlook. We are estimating margins to be in the 58.3% to 58.5% for full year. For Q1 2017, we expect services margins to be in the 53.3% to 53.8% range. We expect Q2 and Q3 services margins to increase as billability and utilization ramp on first half and then drop off again in Q4 due to the usual holiday seasonality.

That cover services, turning to operating income. We delivered record Q4 operating income of $49.7 million growing 15% over 2015 with operating margin of 33.7%. Our full year operating income was also a record of $210.7 million increasing 19% with operating margin of 34.8%, up 310 basis points versus 2015. Our operating leverage was driven by ongoing revenue growth and disciplined expense management with very strong quality of earnings.

Entering 2017, we are targeting operating income to grow approximately 1% landing in the range of $210 million to $240 million [ph] with an operating margin profile ranging in the 33.7% to 33.9% range. Our margin profile includes $9 million in incremental strategic investment that Eddie mentioned representing about a 150 basis points of margin and $0.08 of earnings per share.

Excluding the strategic investment, our underline core business is margin accretive with an operating margin of 35.3% versus 2016. From a quarterly perspective, we expect Q1 operating margin to be about 28.6% driven by our outlook in Q1 services revenue and our traditional beginning of the year salary and headcount increases from Q4 and Q1 hires. For the balance of the year Q2 and Q3 margins will be about the same -- in the same range of 35.5% to 36% while Q4 will be in the 34.5% range with traditional retail seasonality.

So that covers the operating results. Regarding income taxes, our adjusted effective income tax rate for 2016 was 36.6% consistent with 2015's effective rate of 36.5%. For the 2017 adjusted effective tax rate, our best estimate at this stage is 36.5%, subject to the mix of U.S. to foreign taxable income and U.S. federal state and foreign tax legislation changes. New accounting rules related to taxed associated with vesting restricted stock will lower our 2017 estimated GAAP effective tax rate to 35.6%.

Turning to cash, for the quarter cash flow from operations totaled $37.8 million bringing our full year cash flow from operations to a record $139.3 million, representing our seventh consecutive year of record operating cash flow and a 16% increase over 2015's $120.2 million. Our Q4 DSOs were 63 days versus 60 days in Q3 2016, and 63 days in Q4 2015. Capital expenditures totaled $6.8 million in 2016, for 2017 we are estimating CapEx in the range of $9 million to $10 million.

Our balance sheet liquidity continues to be excellent, closing the year with $96 million in cash and investments, compared to a $111 million in Q3 2016, and $129 million in Q4 2015. In Q4 we increased our share buyback to $50 million, we continue to carry zero debt while self-funding our investments and innovation, growth and share buybacks from operating cash flows.

Regarding capital structure, we reduced our common shares outstanding 3% in 2016, buying back 2.8 million shares totaling a $158 million. With our Q4 repurchase activity, last week our Board approved raising the repurchase authority limit to a total of $50 million. Our 2017 diluted share forecast is 71.1 million shares for the quarters and full year, consistent with prior years our diluted share estimate and EPS guidance does not assume any common stock repurchases in 2017.

So, that closes the chapter on a strong 2016 year. Turning to 2017 guidance, thematically [ph] I would like to summarize our 2017 guidance as follows. One, we expect the competitive landscape to be about the same. We remain cautious regarding global macro and retail market challenges. Our target markets and new addressable market opportunities continue to represent significant long term growth opportunity for Manhattan.

Despite services headwinds our business fundamentals supported -- our supporting growth, remains strong. 2017 is an incremental strategic investment year to build the franchise with moderate transition into the cloud subscription revenue model and finally we continue to subscribe to under-promise and over-deliver.

For 2017 total revenue, current guidance is to grow 3% to 5%, delivering 622 million to 632 million in total revenue. This factors in near term services headwinds and about $10 million or approximately 2% in negative currency headwinds given recent global volatility. Overall, we expect our full year total revenue split to be about 48% first half, 52% second half. For license revenue, we're modeling a 49%-51% split, first to second half, with a seasonal pattern of Q1 and Q3 license revenue lower than Q2 and Q4.

As I mentioned earlier we are expecting a moderate transition from traditional un-prem license revenue to cloud based subscription revenue. For services, as usual Q4 revenue will be down sequentially from Q3 due to the retail holiday busy season. And from a revenue mix perspective we believe 2017 hardware and bill travel will grow about 7.5% over 2016, and will represent about 9% of total revenue.

For 2017 adjusted diluted earnings per share, our guidance range is a $1.89 to $1.93 representing 1% to 3% growth over 2016 adjusted EPS of a $1.87. This guidance includes $0.02 of negative FX impact. In addition, this includes $0.08 planned strategic investments, most of which will occur in the second half of 2017.

As mentioned in the operating discussion with our Q1 services revenue outlook combined with traditional beginning of the year global salary increases and first quarter headcount additions we expect Q1, 2017 EPS to decline sequentially by about $0.08 to $0.09 versus Q4, 2016 with a year-over-year decline of 9% to 12% versus Q1, 2016 given a strong comp.

We expect EPS to have a first half, second half spread of about 46% to 54%. And for 2017 GAAP diluted earnings per share, we expect to deliver a $1.74 to a $1.78, representing 1% to 3% growth over 2016 GAAP EPS of $1.72. The $0.15 full year EPS difference between GAAP and non-GAAP diluted EPS is the net impact of equity based compensation.

And that covers my financial update and guidance and I'll turn the call back to Eddie.

Eddie Capel

Well, thanks Dennis. Before I get into the quarter detail, 2016 was a very successful year for Manhattan Associates on many fronts. We delivered record financial results, revenue operating profit EPS and cash flow. We continued to take market share and expand our addressable market. Our competitive position grew stronger, we remained the leading technology innovator in supply chain commerce.

We focused on our customers and continue to improve customer satisfaction. Our domain expertise is growing as we continue to attract and retain the most talented supply chain professionals. And despite macro and secular headwinds, we're existing 2016 stronger than we entered, and we’re excited about our prospects for 2017 and beyond.

We were quite active in 2016 investing and growing our business, delivering new innovations such as the development and market launch of our fully integrated omni-channel point of sales and client telling solution. Driving market awareness of our retail and point of sale capabilities and working hard to earn greater mind share.

As we entered 2017, we’re aggressively investing in innovation and market awareness to position Manhattan for the next wave of retail multi-channel selling solutions. As I discussed at the beginning of the call, we recognized seven large deals in the quarter, three in retail, two in wholesale, one in third party logistics and one in industrial. Two of the seven deals with new customers for Manhattan and we're driven by strategic technology modernization programs.

In Q4 our license fee mix was weighted at about 55%-45% split between our warehouse management and our other solutions, with a meaningful portion of both WMS and non-WMS license and service revenue related to omni-channel programs. We also closed the largest store inventory and fulfillment deal to date, which was encouraging. The retail, consumer goods, food and beverage and third party logistic verticals were as strongest as license fee contributed, making up more than half of our Q4 license revenue.

Q4 software license win with new customers that have permitted us to share their names include Autozone, Blokker, China Logistics, Kurt Geiger, Milan Supply Chain Solutions, Sonae and

The Warehouse Limited. Q4 expanding relationships with existing customers included Alidi, Alloga, Aramark Uniform, Cdiscount, Cotton On, DICK’S Sporting Goods, Federal-Mogul, Genco, Hastings Deering, Hibbett Sports, Hot Topic, Northern Safety, Olympus, Papa John’s, Ryder Integrated Logistics, Shaw Industries, The Honest Company, Tommy Bahama, Uniform Advantage, United Natural Foods, UPS Supply Chain, US Foods and Vitamin Shoppe.

Now despite significant headwinds, our professional services business around the world performed very well, posting record revenue results with Q4 revenue up 4% and 2016 full year growing 9% over 2015. And our global services team continue to receive high marks for our customer satisfaction and they were busy with 79 system go-lives [ph] in Q4, and we had a total of about 330 go-lives in 2016 full year. And we expect to add about 140 more associates in 2017 balancing capacity with demand of course. We continue to be the leading innovator in supply chain technology.

So for the year we increased our R&D spend to nearly $55 million and closed out the year with 680 dedicated R&D associates. At the core of our success is our strategy to be serial investors in forward thinking innovation. We continue to invest at a rapid pace to expand our addressable market and deliver market leading differentiated capabilities to our customers, with our supply chain commerce platform based suite of solutions.

As I mentioned in my opening comments, our 2017 plans call for increased strategic investment, mainly in R&D beyond our core supply chain solutions. Developing the industry's leading multi-channel retail store platform with POS and client telling capabilities focused on the consumer.

And 2016, was another great year of progress across that product portfolio, and I'd like to spend just a little bit of time today providing some insights though into one or two things that we are working on that we're going to be excited to unveil in the first half of 2017. Now as a reminder, we organize our product development teams into three collections of applications. Omni-channel, supply chain and inventory optimization and by organizing the teams this way we're able to design end-to-end process flow support spanning multiple Manhattan applications.

Now on the technology front, we have made great progress too in the last couple of years. Helping our customers transition our applications either into public cloud environments like AWS and Azure or into their own private clouds. And you've heard us talk for a while now about how the majority of our TMS deals are now cloud based. But on a more frequent basis we're also hearing our customers ask us to run OMS, EEM [ph] and our WMS applications of premise as well.

We anticipate we'll see this trend accelerate. Cloud computing is particularly well suited to help our customers manage their spikiness endemic to omni-channel commerce, the computing power required to successfully process orders and shipments during peak holiday times can often flex beyond 10 times the average daily computing power needed. And cloud deployments also allow our customers to stay current in the past pace of innovation at Manhattan Associates.

Now in almost all cases our applications have been ready and able to run in cloud environments for many years. And our ongoing R&D investments over the years have ensured a technologically modern application infrastructure and one that can fairly easily be deployed in environments like [Indiscernible], The Oracle cloud and Azure. That said, our R&D teams have been working hard to enhance the portability and scalability of our applications to the most popular public cloud infrastructures.

Now turning from technical to functional innovation, I can give you a brief glimpse into just a couple of innovation tracks that we've been actively working on release a little bit later this year.

First of all, we'll turn to a topic that I mentioned a few times in the past, it's the new normal of distributed order fulfillment. As retail peak season numbers start to roll in, I think it's safe to say that the upward trend in digital selling and the downward trend in traditional bricks and mortar continues to abound [ph] and our retail customers endeavor to adapt their businesses to these shifting customer behaviors.

Now I’ll return to the topic of how we're planning to help our customers recast their bricks and mortar businesses later. But for now, I’ll focus on the business lift in digital or the omni-channel sectors.

Simply put, there are three very distinct market forces that are significantly increasing the complexity of operating an omni-channel business today. One, channel proliferation. Two, fulfillment location proliferation. And three, fulfillment mode proliferation. We help our customers manage this complexity today in our market leading OMS, and as a means to shift from enablement to full optimization, we have designed a next generation capability that we're calling Adaptive Network Fulfillment.

And this generation of algorithm helps our customers seamlessly blend logistics cost, merchandize profitability, operational considerations and all kinds of other factors to generate order level fulfillment plans that consider the holistic needs of the business. And this capability is built right into the heart of our OMS. And our customers can start simple and increase the sophistication of the output overtime.

Now in short, we believe that capability like Adaptive Network Fulfillment will become really table stakes for any omni-channel commerce business in this increasingly competitive space. And finally, on the product front, a quick glimpse into what's ahead within our warehouse management solution.

Similarly, to my commentary on omni-channel, we're seeing substantial changes in the way that large direct-to-consumer fulfillment distribution centers are being designed. While automation is on the rise, these large-scale warehouses also use hundreds of workers per shift to process merchandize through the facility.

Now in order to maximize the effectiveness of both the capital and labor assets in the building, we are building a fully wave-less processing capability within the core of our WMS. And we call this new capability Order Streaming. And Order Streaming is designed to maximize the effectiveness of our customer's multi-million dollar investments in robotics and automation along with the human resources.

So as we've said before, the core of our success is our strategy to be a serial investor in innovation, to expand our adjustable market and deliver market leading differentiating capabilities to our customers.

Now turning to our global associates. We ended Q4 with about 3,025 employees around the globe, that's up 3% over prior year and 95% of our headcount growth was in our professional services group to support topline growth and customer satisfaction.

We finished the quarter with 64 people in sales and sales management, and with 58 quota carrying sales reps, that's down 60 from last quarter. Our intension is to continue to be opportunistic and add about a half dozen additional talented sales professionals to the company in 2017.

So let me close our prepared remarks with a brief summery. We are very pleased with our 2016 performance and we remain focused on our customers. We remain focused on getting them commerce ready. As we turn our sights to 2017 and while the global macro-economic conditions certainly give us reason to be somewhat cautious, we are very optimistic about our future and remain focused on our customers.

Omni-channel retail commerce and supply chain complexity in our target markets continues to increase, it's all driven by digitalization in ecommerce which is fueling multi-year investment cycles for customers and Manhattan associates. Ultimately our relative competitive position continues to be strong. We continue to invest in innovation to extend our addressable market.

The world's most talented supply chain employees, the best software solutions and great market momentum give us belief that we're very well positioned for 2017 and beyond.

And with that Angel, we'd now be happy to take any questions.

Question-and-Answer Session

Operator

Certainly [Operator Instructions] Your first question comes from the line of Terry Tillman with Raymond James, your line is open.

Terry Tillman

Eddie, the first question is, you talked about well, it was good to see the license strength in the fourth quarter continued from what was on 3Q, but you've made a comment kind of in passing talking about some early positive signs in the first quarter. Is there anything you can say about what you're seeing on the license business as we're in January and headed through the first quarter? Are you -- is that related to large deals that have closed or things that slipped out of 4Q that have closed? Give us a little bit more color on, when you used, I think the word optimism.

Eddie Capel

So, not too many details at this very early point in the quarter Terry but as you know -- actually we had a terrific year in all of 2016, but particularly Q3 and Q4 were encouraging, and the pipeline in the early part of 2017 feels as strong as it was in Q3, and Q4. So, we're certainly encouraged about where we are. A little too early in the quarter be talking about any specifics, but certainly positive momentum and we're encouraged.

Terry Tillman

Got it. And I guess 2017 a year where there is evolution here in the new product and important new products, retail selling platform, could you maybe reconcile as you guys come to market with that and then the headlines around brick-and-mortar challenges, is there any issues in terms of -- as you're launching that product, will the market be receptive as these brick-and-mortar entities maybe looking at downsizing their brick-and-mortar footprint. How do you sell into that kind of environment where perception wise it looks tough?

Eddie Capel

It's a traffic question. I mean there is certainly is some downsizing of bricks-and-mortar assets for sure, we're seeing that in the news on a pretty frequent basis here. But -- as well as some of that downsizing going on, this is clearly a reinvention of the retail footprint. What used to be purely a cash-and-carry selling environment has now transitioned to or is transitioning to those retail stores being everything from boutique, to a gallery, to a distribution center, to a customer service center and the solutions that have traditionally been at the center of retail stores no longer provide the necessary tools that store associates need.

So we certainly think there is a place for the next generation of retail store solutions, in fact, we think that the current solutions really are ripe for replacement, not on a quarter-by-quarter basis, but over the next several years. Now we just came off of the National Retail Federation conference in New York, where certainly we were spending a lot of time with our customers, with prospects, sharing with them our vision for the next generation of retail store solutions and got terrific feedback. So we're quite encouraged by the market momentum.

Terry Tillman

Got it and I just Dennis, you gave a lot of color, so I appreciate all the color as it relates to the quarter itself than the outlook commentary. One thing I'm curious about, it looks -- so you're looking at 5% to 6% license growth, there are 2 point FX headwinds. So it looks like the license growth would be a moderate acceleration from what you all guided to in 2016 originally.

Now the other thing that seems like kind of a newer dynamic is the potential of impact or headwinds around subscription revenue or the shift to subscription. Is that related to some of your existing or preexisting SKUs or is that related to the potential selling of this new set of products you launch later this year? Thank you.

Dennis Story

Great question Terry, it relates to our existing SKUs. So namely, the big one would be transportation and the shift there. So we're definitely seeing traction there, but as Eddie mentioned and I believe I mentioned, customers are starting to look for the recurring revenue model in other products as well.

Operator

Your next question is coming from the line of Matt Pfau with William Blair. Your line is open.

Matt Pfau

First just wanted to know if we can get a little bit more clarity on, I guess, the expectations in terms of what's changed between when you gave your initial outlook in 2017 last quarter, and then versus now in relation to the delayed deals. Was there further delays or cancelations, may be just some insight as to what sort of changed between the two quarters?

Eddie Capel

Yes, Matt sure, Eddie here. So just to be clear these are not really deals per say, and they're certainly not deals they have been canceled. These are focused around services implementations that have any combination of being paused, delayed somewhat, slowed down just largely I think is, not exclusively, but largely as the retailers and retail environment, retrench and formulate their strategies going into the balance of 2017. So these are services programs, not deal cancelations and things that have been lost to competitors.

Dennis Story

Sure, when we liked at the services pipeline, year-over-year growth without putting handicap on it, it's certainly solid compared to last year Matt, the challenge is just predicting the timing of when some of these retailers are going to re-launch on some of their programs.

Matt Pfau

Sure. I guess to that point Dennis, is there anything that you guys, I guess, learned from this experience that can be applied down the road to maybe make that a bit more predictable. As you think about how retailers are going to consume, especially some of the newer maybe more complex solutions that you are selling them?

Dennis Story

I would say, we're all -- we are very much into visibility and pipeline in capacity management and it's a great question, we're doubling back-down and trying to look at metrics and it's early to predict any long-term trends that's why we were pretty aggressive with our guidance from a conservatism point of view.

Matt Pfau

Got it. And just wanted to touch on the cloud or that move to subscription, a bit. I guess in terms of -- it sounds like right now the primary demands with TMS but potentially some other components down the road. So I guess number one, is this something you think can eventually be applied to all of your business or are there certain parts of your business that you don’t sort of foresee moving to the subscription model.

And then, I guess also in that sense, as customers move to subscription products. What does, besides the obvious transition headwind there from the revenue perspective, is there anything else as we think about the lifetime value, that customer or profitability that changes as they move to the subscription model for you?

Eddie Capel

Let's see, so first of all Matt, in terms of the products that are best suited to a subscription base model and there are certainly some that are more attuned than others. I think overtime and to some extent depending upon the Tier of customer, they all have the opportunity to move to a subscription base model. If I were putting sort of essentially a sequence of likely priority, certainly TMS would be top of the list.

We've seen that, we've talked about that, with our extended enterprise management probably number two, probably order management and number three and then we saw its tail-off to warehouse management and inventory optimization that would be sort of the sequence that I would see.

And then from a -- what we would or how we would categorize Tier of customer, you tend to see the smaller closer to SMB type customers adopting a cloud and subscription model first, with particularly the Tier 1 and Tier 2 guys wanting to run our solutions in the cloud, but not on a subscription model.

And then with regard to the second question, I think the opportunity for lifetime value of a customer in a subscription based world versus a traditional kind of on-prem license world, it goes up. Many of the things frankly are equal, but as we are rolling in to that subscription cost, all of the infrastructure cost and so forth than it increases the potential lifetime value of the customer.

Matt Pfau

Got it, that's helpful. Thanks for taking my questions guys. That's it from me.

Operator

Your final question comes from the line of Mark Schappel with Benchmark. Your line is open.

Mark Schappel

Starting with your services business stalling as a result of these delayed projects, why hire up at this stage?

Eddie Capel

Well, just to be clear, I am not sure I would categorize it as a staling Mark. We still are -- we still grew in Q4, we still are projecting growth for 2017. So it's not exactly a stalling of the business but it is a temporary deceleration of growth. Not a stalling of the business.

So we still have solid customer demand, number one. Number two, as you've seen we've had strong license performance throughout 2016, but particularly in a second half of the year and that will pull through strong services revenue with it. Customers don’t buy license revenue -- licensed products not to implement them.

So we still got pretty strong demand, just not quite as strong as it was in the last couple or three years. So that has driven us to a position where we still need to hire, to fulfill customer demand and drive revenue and so forth. Not quite a stalled situation.

Dennis Story

So Mark, as in mentioned the pipeline is up and we've got a long, long track record of being able to manage our capacity very well in a good track record. And I think that bores out in the margin profile that I laid out for 2017 with a range of 58.3% to 58.5%, that’s really just about in line with the 58.6% that we did in 2016 and its still world class.

So if we weren’t managing our capacity appropriately, you would see much more drag on the margin profile of the company in and off itself. So we seek the bottom, we hope tap on wood the bottom is Q1 and then the trajectory starts to move back up. Unfortunately, from a timing point of view we're just straddling the back half of 2016 and the first half of 2017 in our current outlook. And the challenge is more just timing of when the reacceleration starts because of the one uncontrollable for us is, when the customer is going to pull the trigger.

Mark Schappel

Okay, great thank you and then finally, Eddie, with respect to the new cloud product, I believe it was call the Adaptive Network Fulfillment, when do you expect to have something NGA there?

Eddie Capel

So that’s shortly in the first half, Mark, will be in the next couple of three or four weeks, but for sure in the first half of 2017. And at the absolute latest, if you are able to join us at our Customer Conference in early May, you'll certainly get the opportunity to hear about it in detail there.

Mark Schappel

Okay, great thank you.

Operator

There are no further questions at this time. I’ll turn the call back to the presenters.

Eddie Capel

Terrific, well thank you Angel. And thank you everybody for taking the time to join us in our Q4 earnings call this afternoon. As we have said we are very pleased that 2016 results cautiously optimistic about 2017 and we'll forward to reporting on Q1 in about 90 days from now. Thank you.

Operator

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

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