Welcome to day two of Citi's Global TMT Conference. I'm joined by the all-star lineup from Manhattan. We have Eric, Linda, Sanjeev. Welcome.
Thank you.
Maybe just to start, for anyone newer to Manhattan, if you could please frame where the company is today, the journey you all have been on, how you're positioning from here.
Yeah. Manhattan has been in the supply chain space for more than 30 years. Started out building software and services back in the custom bit days and in the on-prem days, and about a dozen years ago, recreated itself as a cloud company. Today, everything we sell is a cloud-based SaaS. We're the leader in that space. Gartner and Forrester rate us a leader for 18 years straight, leader in warehouse and also a leader in transportation and order management and point of sale. We recently launched our cloud supply chain planning product as well. Our focus has been on consistent growth in the cloud. We recently launched our AI products in Q1, and we've had very quick adoption of those products.
We announced by the end of Q2, already 10% of our install base were using our AI products, either in pilot or in subscription.
Great. Supply chain unification has been a theme for Manhattan for some time. Maybe if you could talk about what it means when customers can connect warehouses, stores, transportation, planning, all into a single platform. What does that unlock for them operationally that's maybe difficult for competitors to replicate?
Yeah. So, like Eric said, we've been in the business for about 30 years. In the supply chain space for over the last 30 years, people have built and bought software in silos. When we get this opportunity 12 years back to reimagine, we not only looked at the technology and how should we do it, we also looked at the functional footprint and how should we really deliver the functionality. So we questioned, should software be built in these silos, right? What are the advantages you can get when you don't build in silos? So we imagined building a supply chain commerce platform versus a TMS, a WMS, an OMS, or POS. Right. I think the way to think of it is sometimes when you're building these silos, you get locally optimized solutions.
If you have to really, truly get a global optimization, it's very, very hard when you build software in those little silos of their own. So that's the biggest advantage we really see, is the ability that we can look across. If we think about supply chain, there are four or five dimensions: labor, space, inventory, transportation, customer sat. Typically, softwares have been built to solve one or two of those individual optimizations. To really solve the global optimization, you have to look at all five dimensions at the same time. The only way to really do this is to build a holistic platform which thinks about it in that space. So we build the software that way. People still buy in those silos to a large part, and we're trying to change that behavior to some extent.
When we get to the higher-up, they can look at these silos across and say, "Okay, I can get a better optimization." That's the biggest benefit we see. I'll give you one example. Concretely, in just TMS and WMS, if you think about it, you get an order down, and typically it would go to a TMS, which would do the planning, and it'll come down to the WMS, and WMS will reject 3%, 4% of it, saying it don't have inventory. So now your truck is leaving sub-optimized because it couldn't figure out what to do. When you have a unified solution, the same order will look at both inventory when we do the truck planning, and we know exactly what's there, so we can plan those things properly, and you have a lot better optimized trucks getting out. That's one example. Look at OMS, POS.
People have been talking about providing the single face to the customer and building it in two or three different pillars. You got your payments and taxes and pricing, everything duplicated, triplicated between those systems. A customer buys in POS, a call center cannot answer the question because it's a different system. You think of it as a unified, now you can truly provide customer in the single face. No matter which channel you buy from, there is one order, there is one payment, there is one pricing, there is one promotion. Those are the core benefits we see from a unified thing, and it really came back because we had an opportunity to redo this 12 years back.
Great. Eric, you talked about the initial uptake of your new agentic products. I want to spend some time there. Maybe you can just talk about that progress of what the journey has been like for customers going from those initial pilots into deployment, and where are you seeing the strongest adoption, strongest use cases?
Yeah. Maybe I'll start with our approach to AI in general, which is somewhat unique because with most cloud companies and SaaS companies that you talk to, they start the conversation around, all right, first you've got to move all your data to a data lake, and then you've got to do data indexing, and then we've got to worry about data security and latency and duplication, and where's the system of record? On and on with all these things. Then finally, maybe you get to a pilot in some number of months. Versus us, because when we built this platform, going back a dozen years ago, and we've stuck to this model of true microservices, all API driven, we are truly a versionless software.
We can run our AI agents directly on the platform, which means the AI agents are using the same APIs that a human user would use. You do not need a data warehouse. You do not have data latency or duplication or any of those other problems that come with so many of these AI deployments out there. That also allows us to move much faster. Again, versionless software. When a customer decides they want to do an AI pilot, we turn on the agents, and they are available to use the same day. Again, because we are versionless, the agents are actually effective that day. All of our base agents can handle the same routines for all of our customers. In the pilot, you also have access to our Manhattan Agent Foundry, which allows you to modify any of those base agents.
If you have done things in your system with extensions, or you have things that are unique, you can modify those base agents, or finally, you can build agents from scratch. All of this happens in a 90-day pilot, so at the end of that pilot, our forward-deployed engineering teams are helping build the business case and prove the value and the ROI of the agents so that they can justify the subscription. Based on that model, we have had 100% conversion from pilot to subscription. We have not had a single customer that has gone through a pilot and said, "Hey, it is interesting, thank you, but I am going to go in a different direction." All of them have continued with us.
That was your update as of Q2. This is still true today, the batting 1000.
That is right.
Great. Just in terms of that mix of first-party agents versus the custom-built agents, how are you seeing that trend?
It's about 50/50 now. I'd say, when you look at customers that are really doing some things that are unique and getting great value out of the agents, it's typically a combination of base agents with some custom agents, and it's agents working together. If you look at the total number of agents, when we first launched in Q1, we had about 17 base agents available. That number has now grown to roughly 50 base agents because as we're working with customers and identifying more opportunities to build agents, in a lot of those cases, we say, "Hey, this would apply to a lot of customers.
Let's just make it a base agent." Our customers are happy with that because when we make it a base agent, they know that we're going to continue to update it and continue to create more value for them, as opposed to a custom agent that then becomes kind of their responsibility to continue to update and find more value within those agents.
Interesting. At the Momentum Conference back in May, my sense was that the leading-edge customers on the agentic adoption were somewhere in the ballpark of five to six agents in production, maybe more in the pipeline, starting to think about how do we scale this up, think about orchestration. Maybe if we could zoom in on that cohort, where has that leading-edge customer gotten to today, a few months later?
Yeah. You're right. At our Momentum Conference in May, we had a handful of customers on stage talking about some of their early successes with our agents, and it was, for the most part, a single-digit number of agents they were using at that time. That has definitely grown. I'd say on average, our customers that are using our agents are in the double-digit range, and some of them starting to get in the 20s and 30s of agents.
Yeah. The other thing is our customers, as they deploy, they go from one warehouse to two warehouses to four warehouses. Initially, when they started deploying, even the three or four or five agents they had was in a single warehouse, and now they're doing chain-wide deployments. That's another area of growth from just overall agent use.
In that type of a scenario, maybe you could talk through the implications on the pricing model, because you have this model where you have the 90-day pilot. It moves into a subscription. Whenever a customer maybe goes from having a specific agent in a specific warehouse to maybe many agents across many warehouses, talk us through the financial implications.
The way we've built our pricing model is, again, we wanted to focus on being easy to understand, easy to use, and fast to deploy. We have four tiers, and the tiers are all a percent uplift of their base subscription. All four of those tiers are based on volume of AI usage. We've had a mix. Some customers will come in and say, "I'll start at the lowest tier, and as my AI usage grows, I'll just step up to more tiers." We've had other customers that have started at the highest tier. "I see the value through the pilot, and I want to deploy it as fast as possible and leverage this." Either way works. But back to we've got base agents and you can modify base agents and we've got custom agents.
We don't care which agents you're using or how many agents you're using. You've got full access to the foundry to build, modify, and use as many agents as you want. All that we really care about is which tier that you're within. And we measure the usage of the total amount of agents that you're using to figure out which tier that you belong in.
Got it. Maybe Linda, we can bring you in here. Just talk us through the contracting and how these agentic products layer into the financial model. If we think about contribution to RPO, ramp timelines, maybe the gross margin characteristics.
Yeah. Typically, on the pilots, those aren't going to be an RPO because they're just a short-term duration. But then once the customer elects to move to a subscription or buys a subscription outright, that's going to be an immediate uplift to both revenue and to RPO, because typically they're going to buy that for the remainder of their subscription term. If it was a brand-new customer buying AI right away, if they have a ramp in their contract, then that AI, since it's priced as a percentage of the subscription, as Eric mentioned, then that will ramp as their overall subscription ramps. But other than that, pretty similar across the different customers. On the margin perspective, we've priced this to be at the same margins as the rest of our cloud revenue, so pretty consistent margins there.
Got it. Last earnings call, you talked us through the editions plans, kind of a shift in terms of how you're pricing, maybe not on the agentic side, but just the platform more broadly. Can you explain maybe what led to that change? What kind of customer problem is that solving? What does that bring to the organization?
Yeah. We're really excited about this announcement. I think maybe one of the biggest strategic changes that we've made since we went to the cloud. When you think about editions, historically, Manhattan has been very well known for solving the biggest, most complex problems. And we're a leader in all of these spaces because we can do things that our competitors can't do. But we also have priced our product to handle the biggest, most complex problems. And the reality is, there are customers in other tiers that don't have the biggest and most complex problems to solve. What we wanted to do is create these editions where a customer could come into the Manhattan platform where they are today. And it's not different products, it's all the same product, but it's which features and functionality you have access to.
Think of it as a ladder. At the Essentials edition, you're getting access to the things that are essential for a smaller, growing company, and then that grows up to Enterprise, and then ultimately Enterprise Premier. And whether you join at Essentials or Enterprise, as your business grows and you take on more complexity, you don't have to re-platform, you don't have to redeploy, you just simply move up to the next pricing tier and configure that functionality. It allows us to add customers onto the platform, wherever they are today. It also unlocks a lot of opportunity at some of our largest customers today. You think about some of the largest 3PLs in the world, where we've got literally hundreds of Manhattan Active Warehouse sites deployed.
A lot of these big 3PLs also have less complex sites, where they weren't going to deploy Manhattan Active Warehouse because it didn't make sense from a cost standpoint. And in fact, a lot of those run our older on-prem software in those less complex sites. Now they've got the ability to look at Enterprise or even Essentials for those sites and get all of their warehouses running Manhattan Active Warehouse and take advantage of the AI and all of the automation, and all of the things that we bring to the market across their entire footprint of sites.
Got it. So it's priced, these Essentials would be adopted on a site-by-site basis, potentially.
It can be. Yep.
I see. It seems like on the one hand, there is a potential expansion opportunity here with some of your existing. It also seems like there is implications on the conversion side. Maybe you could talk about that. New logos as well. Maybe if you could just talk about some of these, like what it unlocks in terms of conversions and new logos.
Yeah. Both are big opportunities. New logos, obviously, because it allows us to compete in parts of the market where maybe customers would think, "Hey, I know Manhattan is the leader, but maybe they are too expensive, too complex for us." And now that is no longer the case. We can compete everywhere. But conversion is a good one that you brought up. Over the past year, we announced last July a dedicated conversion team. And today, about 25% of our maintenance-paying on-prem customers have either moved to the cloud or started that conversion to the cloud. So that means we have got still a massive opportunity to convert our own on-prem customers to the cloud.
And in that process, over the past year, where we have talked to literally hundreds of customers, we have recognized that some of our customers that have became on-prem customers over the past couple of decades, had no intention of going to Active Warehouse because they are customers that Enterprise Premier is just too big and complex for them. So we recognized that we needed on-ramps for all of those on-prem customers, and now we have that. So every one of our on-prem customers has a place that they can go in Active Warehouse and Active Transportation, and all of our Manhattan Active Platform products. So that really changes, I think the opportunity around conversions and will help us accelerate the timeline of converting those customers.
Got it. When we talk to customers and partners, one of the other maybe stumbling blocks in terms of why some of these customers are not converting faster is just the cost and complexity of that process. It seems like that's an area you've spent a lot of focus. If you could just talk us through how much improvement you've made there. How would you frame what a timeline for a conversion is like today versus maybe a year ago?
Yeah. When you think about some of these customers that have been running on-prem products for decades, typically customers would, somewhere in the range of every five to eight years, maybe 10 years, would do an upgrade of an on-prem product. Those upgrade processes typically would be often referred to as open heart surgery, just very complex, risky to the business, expensive, often ran long. These are things that maybe customers started out with, we want to upgrade every five years, but sometimes that dragged out to a longer term than that because they were just avoiding this complexity. A lot of these customers have that image in their head when they think about moving to the cloud. As part of our conversion program, we've gone to them and said, "That's not the case." We've built automation around this.
With our Solution Design Studio, we can take natural language design documents and turn them into a configured system in the cloud. With all that, we're willing to take the risk. We're willing to go out and offer you a fixed price and a fixed timeline conversion. It's a significantly different conversation, different timeline, different price point than what they had in their mind. That alone is unlocking a lot of customers that kind of say, "Oh, well, in that case, let's have this conversation." Because the difference between what they have today in terms of features and functionalities on-prem versus what they could have on the cloud has never been bigger. It's growing faster than ever, right?
With AI and all of the things that we're adding, new features coming into the cloud product every quarter at a faster pace than they ever have before.
Got it. You talked about the team dedicated conversions. My understanding is there's also a team dedicated to the renewal side. I would love to spend a little time there. I think that's an opportunity that seems quite compelling. Maybe you could talk about as the renewal book has started to build, what have been some of the learnings from some of those deals, and how maybe a renewal today would compare to one before you had this team in place and these new processes?
Yeah, that's another one. We announced the dedicated renewal team last July, so we've had now a year to really build on that and get it in place. The idea there was, as we see the number of renewals growing over time, when we've relied on our account management teams to perform those renewals, they might have a very limited volume of renewals that they're doing in a given year, as an example. So now they're working with this dedicated renewals team. The account management team brings the knowledge from that account, then the dedicated renewal team brings the experience of the multiple renewals that they're doing every month, and really learning about how to maximize the price uplift, how to maximize the opportunity around cross-sell. Based on the products that this customer is running, what are the natural cross-sell opportunities?
Really take learnings from one deal to the next, and maximize the opportunity for price expansion and product expansion at the time of renewal with a big focus on GRR and NRR. We've seen a good, strong uptick and improvement in that space. So that's an area that we continue to be excited about as the renewal opportunity continues to get bigger and bigger.
Got it. Maybe on the new logo side, I think we touched a little bit on how editions maybe unlock some new markets there. I think that's been an area that's been relatively strong over the last year. When you think about going forward, how would you stack rank where you see the most opportunity going forward? I think down market, maybe expansion into some new verticals. Maybe there's international side leaning on some of your partner investments. Where does your mind go?
Yeah. New logo is still a massive opportunity for us. We continue to take business from our competitors at a very fast clip. I talk about that five-year renewal cycle that everybody's on. Our competitors' customers are on that renewal cycle also, and when they come up for renewal, they are re-competing and they are talking to us, and we're winning those at a very fast clip. We talk about a competitive win rate against our top competitors at 70%+ that's held for years now, and that continues to be strong. If you look at the past six quarters, we've got roughly 50% of our new cloud bookings came from new logos. We always talk about thirds. Historically, over time, about 1/3 comes from new logos, 1/3 comes from conversions, and 1/3 comes from cross-sell and up-sell.
We do see over time that probably thirds is the place that we'll get back to. Not because new logo gets smaller, it's because we have invested in those conversions and invested in that cross-sell, up-sell opportunity so that we can perform at that same high level that we're performing in new logo. I think in Q2 that we just announced, you really started to see that come to fruition, where we had 40% of our bookings in Q2 come from conversions. We're seeing really strong showings across the board, and that happened while new logo held strong, right? Overall, it was a record bookings quarter. We're seeing the volume of deals across all deal types continue to grow.
Great. Just on that new logo and go-to-market side in general, you guys had been investing some resources with the high win rates. It just makes sense that the more deals you can be in, the better. Can you just talk us through how that process has been in terms of adding more resources? Do you feel like you're towards the end of that journey and the productivity you've seen from those investments?
Yeah. I announced a 1.5 years Ago that we would invest in sales and marketing, and we've continually invested every quarter since then. The goal was always, let's grow at a pace that we can consume, because we really like our sales culture. We really like the efficiency that our sales team creates, so we don't want to break that. We absolutely want to expand it. Again, to your point, with 70%+ win rates, we want more at-bats, right? We want to be competing for more deals. The expansion that we've done across our sales and marketing team, as well as the investment and maturation of our partner ecosystem. I mentioned in our Q2 call that our partner-sourced deals were up 4x in the first half of this year over the first half of last year.
We're seeing more and more opportunity come through the partner ecosystem. Then add to that what we just announced with editions, so that we've got the ability to meet our customers where they are. Really, I think 1.5 years ago when I joined, our business was more aligned to going after the big whales and closing the biggest, most complex deals in the market, and we didn't have as much focus on the smaller deals in the market. Now, across our sales environment, across our partner environment, across the editions, we are truly set up to go after both. That really is a big unlock of cloud revenue growth as well.
One of the things that I always talk about is when you close, say, a $50 million whale out there in the market, it might take two, three, four years to get that deal to the full revenue ramp. Whereas if you close 50 $1 million deals, every one of those could get to their full revenue ramp in year one. So that creates a whole lot faster cloud revenue growth. Now really for the first time, we're set up to do both.
Interesting. You referenced the partner ecosystem. It seems like that's also been an area where you spent a lot of time in terms of developing. Maybe you could talk about how that ecosystem has changed. How do you think about the rules of engagement, how that's shifted between where your services team comes in versus what you would hand off to partners?
Yeah. The good news on our services partner ecosystem, when I got here a year and a half ago, we had the right partners. We had Accenture and Deloitte and Capgemini, and all the big global SIs that you would want. We had a lot of more strategic partners that are more boutique and many that are former Manhattan people that have started their own companies that are purely focused on Manhattan. So we had the right array of partners, but we weren't really working with them as partners. Too many times they were following us, looking for opportunities behind the business that we sold. So, a year ago we kind of reset the expectations and said, "We expect you to treat us and work with us the same way that they work with other large cloud SaaS companies," right?
We are going to value them based on the pipeline they bring, we are going to rate them based on their CSAT with our customers and how many certified professionals do they have by product, and how many successful deployments do they have by product. When they bring us opportunities, we are not going to compete with them for services. We are going to help them win that business. We really reset the expectations, and we are seeing partners lean in in a big way and really invest in terms of the number of people in their business, and the number of certified individuals, and the number of deals they are bringing us. All of that has led to a larger expansion of the total pie of services revenue. Our services business is growing because we are selling more deals.
All of the services business that we are doing, we are doing it faster and cheaper than we could do it a year ago. But we are doing more deals, and our partners are doing more deals. We have got partners that are happy with their growth, and we are happy with our growth.
Interesting. I think that is quite contrary to maybe the common investor perception that as partners are successful, this is sort of like a zero-sum game that you must be giving a larger amount of business to them, but it seems like the idea is let us grow together.
Yeah, it is quite the opposite of that. I think the easiest way to look at it is, as I mentioned, 4x improvement year-over-year in number of deals that partners brought us. Those deals that they are bringing us, we were never going to see any services revenue. We were not in those deals. That is just net new pipeline and net new revenue in the business.
Got it. A few minutes left. If there are any questions in the audience, happy to take them. Okay. A few maybe kind of AI topical things I wanted to touch on. Open source models have been a big subject. It seems like the gap between them has kind of fluctuated, ebbed and flowed. Sanjeev, you could talk about, is that something that you guys leverage within the product set today? How do you think about rolling that into the roadmap?
We are not using right now any open-weight models. But we are obviously looking at all of these things, both from a cost perspective, and we do use a slew of models across. We are on GCP, and we use them a lot. So we use a lot of models, and GP does give you a variety of models you can use, not just from Google, but from other vendors, too. So we use a set of models, and we will look into open-weight models when it makes sense.
Got it. Linda, you have given obviously the guide for this year. I think a lot of people think about Manhattan as, in many ways, a fairly predictable business. Can you just help us think through kind of maybe a more medium-term framework? You do not necessarily have to put numbers around it, but just think in terms of durability of cloud growth and the margin progression from here. How should we think about that beyond 2026?
Yeah, sure. I mean, as we have stated on our earnings calls, our overarching objectives are to continue to drive double-digit top-line revenue growth, as well as that top quartile operating margin as compared to other SaaS companies. We definitely are focused on margin expansion and so forth. I guess just as one example, if we think back a year ago, we were talking about 20% cloud growth, and I think there were concerns as to whether we could really do that. If we take a look at the first half of the year, we did that and then some. So I think we feel good about that 20% growth in cloud. And then also on the services side, I think we still feel good about that low single-digit services revenue growth as well.
Great. We have about a minute left. Maybe Eric, if you could leave us with just some final closing thoughts, like what gets you most excited about this business for the next three to five years?
Yeah. I think what we're really excited about is the opportunity to continue to accelerate that cloud growth. In the second half of this year, for the first time, our cloud revenue will surpass our services revenue. Clearly our cloud revenue is a higher margin, so that just creates the opportunity for not only a different pace of growth, but also more margin expansion. I think we're in a really unique position in a market that's growing double digit on its own. We're taking business from our competitors and growing at an even faster rate than that, and I think we've got a sales team that's found a new gear, firing on all cylinders, and we're excited about the future.
Great. We'll leave it there. Thank you everyone for joining. Thank you.
Thanks.