Manhattan Associates Inc (MANH) 2002 Q2 法說會逐字稿

Good afternoon! My name is [April] and I will be your conference facilitator for today. At this time I would like to welcome everyone to the Manhattan Associates second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press * and then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. As a reminder, ladies and gentlemen, this call is being recorded today, July 25th 2002. I would now like to introduce Mr. Richard Haddrill, President and CEO of Manhattan Associates. Mr. Haddrill, you may begin your conference.

Thank you [April], and welcome everyone. We have another exciting quarter to announce. I have with me Tom Williams, our Chief Financial Officer. Tom will give you a report on the financials and then I will add some color and discuss the current state of business activity. Tom, let me turn it over to you.

Thanks Dick, and good afternoon everyone. We are here to report another great quarter with record results. Our ability to execute on our business plans has been outstanding. We are not totally amazed at our success for the many reasons we will mention on this call, but we clearly stand out in today's environment. One of our larger shareholders described our company as the lone tree in a burning forest. You have our assurances that we are working hard and smart to ensure Manhattan is and will continue to be insulated from the flames. Now for our first quarter of business, let us review the cautionary language. In our statements during this call and during the question and answer session, we may make forward-looking statements regarding future events or the future financial performance of Manhattan Associates. You are cautioned that any such forward-looking statements are not guarantees of future performance and involves risk and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements. I will refer you to the document that Manhattan Associates files from time to time with the SEC, in particular the Form S1 registration statement filed in February 1998 and the report on Form 10K filed in April 2002.

These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections. Additional factors are set forth in Safe Harbor Compliance statement for forward-looking statements included as Exhibit 99.1 to the company's annual report on Form 10K for the year ended December 31st 2001. Manhattan Associates undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in future operating results. Now we will review our financial results for the second quarter and into June 30th 2002. Sales in software licenses for the second quarter of 2002 were a record $10.2 million. This represents an increase of approximately 9% over both the first quarter of 2002 and the second quarter of last year. Services revenues for the second quarter of 2002 were a record $28.2 million. This represents an increase of approximately 7% over services revenue for the first quarter this year and 18% of services revenue for the second quarter of last year. As repeated many times, we refer to sales of software licenses and related implementation support, consultative services, as our core business drivers. Since sales of software and services were quarterly records, revenue from our core business drivers is a record as well totalling $38.4 million for the second quarter of this year. Our international operations accounted for 16% of revenue from our core business drivers in Q2. The percentage is down from 17% in Q1 of this year. This reflects the overall softness in software purchasing in Europe that we talked about in the last couple of quarters.

We are seeing signs of improvement in the form of pipeline growth, which Dick will address in a few minutes. Adjusted net earnings for the second quarter of 2002 were a record $6.6 million or $0.21 per fully diluted share. Adjusted net earnings exclude amortization of acquisition-related intangible assets. This represents an increase of 17% over adjusted net earnings of $5.6 million or $0.18 per fully diluted share in Q2 of last year and an increase of approximately 13% over adjusted net earnings of $5.8 million or $0.19 per fully diluted share in the first quarter of this year. Research and Development expenses for the second quarter ended June 30th 2002 were $5.4 million or approximately 12% of total revenues as compared to $4.7 million or 13% of total revenues for the second quarter of last year. We continue to increase our investments in research and development. However, our research and development efforts should be managed over the longer term within a range of 11-12% of total revenues. Sales and marketing expenses were $7 million or approximately 16% of total revenues for the second quarter of this year as compared to $5.8 million or approximately 14% of total revenues for the first quarter of this year and $5.5 million or approximately 15% of total revenues for the second quarter of last year. The increase in sales and marketing expenses is principally attributable to an expansion of our international marketing programs including hiring and other activities in new geographic BREAK IN AUDIO, the additional expense of our April user conference, and accelerated incentive compensation associated with a few [overquoted] sales representatives.

Sales and marketing expenses as a percentage of total revenues should approximate 15% over the longer term...15% of total revenues that is. General and Administrative expenses were $5.3 million or approximately 12% of total revenues for the second quarter. Although the dollar was up modestly, the percentage is similar to last quarter and the same quarter of last year. G&A expenses should approximate a range of 11-12% of total revenues in the foreseeable future. Now for a few comments regarding our efficiency and profitability. Our gross margin for the second quarter of 2002 improved approximately 160 basis points over the first quarter of this year, from 58.9% to 60.5%. This improvement is due to an approximately 200 basis point increase in the gross margins on services during Q2 as a result of a general improvement of pricing for services. Operating income for the second quarter was a record $9.1 million or 20.1% of total revenues. Adjusted operating income which excludes amortization of acquisition-related intangible assets was a record $9.6 million or approximately 21.3% of total revenues as compared to $9.1 million or approximately 21.6% of total revenues last quarter. I believe we have done a great job of allocating our resources today. Head count and overall expenses are all up, but our margins have held relatively steady with our revenue growth. I would like to share two final items of note relative to our financial performance in Q2. Other income was positively impacted as compared to recent quarters, but foreign exchange transaction gained and the elimination of interest expense on the $5.25 million [note] payable that we prepaid in early April. The second point is our income tax rate for the second quarter of 2002 approximated 38%.

This is higher than 2001 due to a change in our estimates of the sourcing of our income in 2002. More income will be received domestically than internationally on a relative basis as compared to last year. Now let us talk about our financial condition as of June 30th. Our balance sheet as of June 30th reflects cash and short-term investments of $125.9 million. This represents an increase in cash and short-term investments of approximately $12 million since March 31st. This increase includes the repayment in full of the $5.25 million [note] payable from our acquisition of [Ventrapo]. Cash flow from operations in the second quarter was a quarterly record at approximately $16.6 million. Day sales outstanding as of June 30th stood at 63 days, down from 65 days on March 31st. This decline is indicative of the general satisfaction of our customers, reflect the stellar [collection] efforts of our staff, and the overall health of our accounts receivable. Our account managers, customer services personnel, and collection teams have done a great job. Now let me wrap up with a few comments. We are extremely proud of what we have accomplished as a business during the first half of 2002, particularly in consideration of this tough business climate. It is hard to deny the lone tree in a burning forest analogy that I mentioned at the start of my commentary. However, I believe we have the wherewithal to weather the flames. This includes sizable financial [INAUDIBLE] to the best people in the industry, our successful track record of solid execution, the best products on the market, a compelling multi-faceted value proposition for our customers, and a burning desire to win.

Thanks for your attention and I will return the call back to Dick.

Thank you, Tom. I would like to provide little further details regarding our operations for the quarter as well as give you some insights into how we see current business conditions. We are obviously very pleased with the results especially in light of this challenging technology spending environment. I would begin by comments by reiterating Tom's compliments about our great people. Our team continues to get stronger through training, good on-the-job experience, and selective hiring, thus further driving our industry leadership position. As of June 30th this Manhattan Associates team consisted of 844 whole-time personnel versus 824 on March 31st and 755 one year ago. Direct sales and account management personnel are 55 today, the same number as of March 31st and up 4 from December 31st. We will continue to look for exceptional talent in all areas of the business including sales. Some new contracts during the quarter included a large UK retailer, [Argos], and another UK car parts and bicycle company, [Halperds], Cambridge University Press, [Concourse], American [Honda], and the Cisco Corporation [food] distribution company. Since the end of the quarter we have signed [Carpshoes, Casual Mail, Delta Faucet], and [McGregor], the sporting goods company. We had two license fee deals over $1 million during the quarter, both of these over $2 million. Our average deal size was slightly higher than last year's average. Open systems license revenues were approximately 43% of total license revenues, the same as last year's average. As Tom mentioned, our core international revenues were 16% of core revenues, down 1% from last quarter.

Despite the continued soft economy in Europe during the quarter, our services revenues there were strong and we are finally seeing an uptake in our European sales pipeline which began about two months ago. I should note that our sales pipeline in the Americas remain very strong. During the quarter we had a whopping 43 customer [go lives] and a significant number of [go lives] are now in progress as well. This reflects the continued ongoing return on investment proposition for our products even in a tight capital spending environment. Despite this large number of [go lives], we treat each customer with special attention and customer satisfaction levels remain very good as evidenced by over 50% of our license revenues this quarter coming from existing customers buying more products. We remain very pleased with our services margin at 58% this quarter slightly above our historical mid-50s range. And as Tom mentioned, it was helped by pricing which really is due to the mix of personnel more than our ability to raise prices in the market place. We continue to refine our alliances and partnerships in this tough environment to maximize the benefits to our customers. Our relationships with system integrators remain strong and we are enthusiastic about the [JA] partnership where we have over 25 joint selling engagements in place now. We expect to benefit from this partnership in the second half of the year. We are having productive discussions with partners to prioritize existing alliances and develop some exciting new ones. In an environment where our competitors are slashing R&D budgets, I am very pleased with our R&D effectiveness and efficiency.

By intelligent spending on both pure R&D plus customer-funded initiatives, we are continuing to make great strides in both technology and functionality across all product lines. Our India development center officially opened this month and this will help us further manage our R&D expense in the future. I remain very excited about the continued success of the [optimization] suite of products and [INAUDIBLE]. These newer products comprise 24% of our Q2 license revenues. Product and [INAUDIBLE] business units are running near breakeven and the pipelines for these products continue to build. We are fully committed to the success of these exciting products. Some points I would like to make about current business conditions. First, the current selling and delivery environment continues as we have said for the last six quarters. There is still no growing competitive threat from any company and our [INAUDIBLE] position we believe continues to strengthen. We are still able to maintain some price premium over the competition in most cases. There is still pressure for discounting on both licenses and services. Customers in many cases still want to buy smaller projects and there are still many levels of approvals required where any one person it seems like in the sales prospect has the opportunity to mix a deal and decision processes are delivered. All this still makes forecasting very difficult. Second, I would like to point out that we are different from retail ERP companies. For example, our total retail-related revenues for Q2 were 65%, down from the prior quarter and down from the second quarter of last year and our license revenues in Q2, a leading indicator, were lower yet. In addition, supply to retail is a major part of our retail-related businesses. These companies are put under more stress from increased compliance demands and chargebacks from their customers in this slow economy driving needs for our products.

Finally, we have a focussed supply chain execution solution with a typically lower price point than many overall IT projects in retail. We are sponsored by operations and we have a very cost-driven [ROI]. The third point I would like to make on business conditions is that compared to most areas of technology, we are different. For example, our sales pipelines are generally in response to inquiries versus [cold] calls by representatives. Our sales are driven by operations people at the prospect and approvals have always been needed in our history. So we are somewhat used to that. In many times, our projects are not part of the [CIO's] budget. We have a lower price point and a quicker [install] in many IT budgets and we have a very tangible cost-driven ROI proposition. Compared to most tech companies, our visibility is better due to our high percentages of services and maintenance, both at high margin. We have good visibility here typically going into a quarter 60-80% of services and maintenance we will have a good field for. I should note our license revenues are often backend-loaded. I believe we are a more disciplined company regarding our customer orientation, our costs, our investing, and our cash flow practices we instituted some years ago before this technology spending downturn, evidenced again by our ISO certification. Now regarding guidance. Our range of guidance for the third quarter for adjusted earnings per share is $0.18-0.24 per fully diluted share. This range includes the following considerations. On the positive side our sales pipelines going into the second half of the year are very strong and continue to grow. Our growth strategies remain sound and they are working for us. And moving into tier I size company into tier III size companies, we are expanding the product offering, we are expanding the geographically and we continue to have a very positive win rate and gained ground against the competition.

On the cautious side, the impact of Q3 customer vacation schedules and the current [deliberate] decision making environment could create challenges. Consequently, the range of guidance is wider than we normally had given. Now the current consensus estimate of adjusted fully diluted earnings per share for the company for 2002, the entire year is $0.87 a share. We believe that this is a reasonable estimate plus or minus $0.05. We are not giving guidance for 2003 at this time but do expect long-term growth for Manhattan in excess of the growth of our market space. In closing I would like to share with you why I am at this time most excited about our future. First, we have emerged as the clear leader in the supply chain space with a rock solid foundation of people, products, processes, and customers. We continue to have success and we will continue to gain ground on others in this very tough supply chain execution space, the space in which no other company has been successful. Second, we have more strategic opportunities than ever before and a team to take advantage of them. Third, we have just begun to scratch the surface of this market. We estimate that only about 1% of all of the divisions of the Fortune 500 have our products and in most cases, there is additional potential on those divisions. Fourth, we continue to expand into new geographies up into tier I size companies, down into tier III companies, and in the optimization and collaboration areas. Fifth, our sales pipelines continue to increase and broaden as to products and size of customers. Although there are many qualitative factors to evaluate in a pipeline our current sales pipeline is up over 30% from a year ago and up 18% from the beginning of this year. And finally, we now have what I will call a perfect storm of opportunities - the opportunity created by the strong business need for packaged supply chain execution solutions driven by global sourcing, increased customer and consumer demand, shorter product life cycles, and the cost and ineffectiveness of developing and maintaining custom systems in supply chain execution, the opportunity as the leader and only proven and continuously improving company in this tough space, the opportunity to expand into other areas of supply chain, and the opportunity to increase our lead due to the slow economy where the strong get stronger.

This is the perfect storm of opportunity for Manhattan Associates and I wish that you could feel the energy of our people, energy that most companies are not feeling today as we pursue this fantastic opportunity. With that I would like to open this to any questions you might have.

At this time I would like to remind everyone, in order to ask a question, please press * and the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of [Jamie Friedman]. You may ask your question at this time.

[JAMIE FRIEDMAN]: Congratulations guys on a great quarter. First, I was just curious if you can tell us the number of Pronto customers and how many were added in the quarter?

For competitive reasons, we have decided not to give details at this time on individual customers and products for Pronto and infolink. We will be disclosing as we did that 24% of license revenues came from the newer products so that you can track that growth. You have heard me say...I don't know...two or six months ago that I was concerned about our progress with Pronto. I am very very pleased with the progress of both Pronto and infolink over the last three months.

[JAMIE FRIEDMAN]: Can you talk about some of the management changes that you have made with some new people going to Europe? How do you see that affecting the organization both in the US and internationally?

Yes. Ed Quibell, our Vice-President, who joined us about nine months ago has a strong international background and he is going to be moving to Europe to be managing director of Europe working for Jeff Baum, our Senior Vice-President of International Operations. This will allow Jeff Baum to help out in Asia as well as be more involved as we expand in continental Europe and at the same time we have hired an experienced sales director for Europe, [INAUDIBLE] who has a lot of experience in supply chain execution to help us as we expand in the continent. We now have a pretty sizable sales and support organization in Europe, not just the UK, and managing that opportunity is becoming an increasing challenge but also an increasing opportunity for us. And we have got more going in Asia now. The last executive change mentioned in the press release is we hired [Graham Minic] who was previously with [Symbol] Technologies working in Latin America and he has brought to us a great deal of contacts in Latin America and consequently our sales pipeline there very robust at this time.

[JAMIE FRIEDMAN]: Also the 25 joint [selling] agreements you have with JDA, are there any of that you have closed? I think JDA mentioned one or two.

JDA was able to close one in the partnership. Our piece of that deal is - we hope for Q3 - is still out there and we do have as I say 25 in the pipeline and we would expect to close a couple this quarter and may be more than a couple. But we are very pleased with how it is progressing. There is a real fit there culturally, there is a good fit there from a product synergy and from a customer base. So I think we are going to see some real positive revenue momentum over the next three to six months from that partnership and I think JDA as well.

[JAMIE FRIEDMAN]: Thanks a lot, good luck.

Thank you.

Your next question comes from the line of [Peter Coleman].

[PETER COLEMAN]: Hey guys! Good job. Dick, could you talk a little bit about the services revenues? I think it is pretty surprising that we keep hearing about service pricing from other competitors and what is happening with [DSOs] and you guys have done a good job in holding the margins up there in pricing.

Well, I would say that when we first compliment our services people, one of the things we have been able to do is provide a good growth environment [INAUDIBLE] over there has been very low, much lower than historical norms at services companies. That really is a benefit for our customers and allows us to be efficient in the installations and therefore be able to get a good margin for the work. So even though there is pressure on pricing coming from the services market place, our people are very well trained, experts in our products. Our product quality initiatives have also helped us to have less and less non-billable time due to bug fixes and things like that that our competitors often have and other software companies have. So I would say it is more due to the focus of our good training of our people and retention of people as wells as the quality initiatives in the product that are allowing us to keep those margins strong in this tough environment. We believe we can maintain them in the mid-to-high 50s as we go forward.

[PETER COLEMAN]: Okay. Also on the optimization and the collaboration products, and I am unsure if you dealt with this deep or not, are you able to tell us within that 24-25%, how much was more optimization versus the newer collaborative product? Maybe, also comment on...I know you think you have been having a check sitting on your door for some of the $7 million deal there...I wondered how the progress was at reaching that.

Well, the first question I will not answer for competitive reasons, but the check is still on my door, [Peter], and it applies to analysts as well.

[PETER COLEMAN]: Okay, good. This market has been a little tough and then just a last quick question; there is a lot of talk in the market place with regard to the ERPs and ERPs versus the suite versus the best of breed. I am wondering are you incrementally seeing any more SAP or...I guess Oracle has a WMS solution...are you seeing any more of those focussed than you had in the past?

You know, there has been periods of noise about that back, I think in 1999 and then about a year ago when in general IT spending started to slow a bit. You saw the ERP companies talk a lot about supply chain. In general, in our experience at Manhattan over the last six months have been that the ERPs with respect to supply chain execution have in fact fallen further behind that the noise is just noise. These real development dollars are not being spent in supply chain execution [INAUDIBLE] space. That said, we take them seriously, we keep an eye on them. I would not say that we do not believe there is a theoretical threat there down the road and occasionally we do lose business to ERPs; they would win it on [INAUDIBLE] for free or the integrated [versus] best-of-breed. But in general, the value proposition of our products is very strong and we are feeling more confident that in the tier I market in particular, we are going to be able to crack the ERP code there and to crack the main competitive [INAUDIBLE] which is custom systems in tier I.

[PETER COLEMAN]: Okay, great. I will let it go. Thanks a lot, guys.

Thank you.

Your next question comes from the line of [Adam Holte].

[ADAM HOLTE]: Good afternoon! This is Adam Holte with J P Morgan. My first question relates to a comment that you made about your average deal size increasing year over year. I was wondering if you could tell us what that average deal size is and how that compared to the first quarter?

[Adam], we do not disclose average deal size other than general trends. The second quarter was higher than the first quarter and was higher than the average of last year. Although I will add some comments we have been talking about over the last six or nine months or so is with the Pronto and infolink initiatives we do expect average deal size over the long term to perhaps not go up because we are going to be doing more bigger deals and more smaller deals. So I think in Q2 it was nice to see the higher deal size, but I would guess that the next couple of quarters might not average as high as Q2 and we will not view that as a bad thing.

[ADAM HOLTE]: Great. The question about the guidance heading into the back half of the year, you noted in the press release that your assumptions were that there will be a mild increase in capital expenditure and loosening of IT spending. Can you give a little more color on your thinking about your guidance as we head into the back half of the year and what the underlying assumptions are?

Yes and a little bit more anyway. First, I would say we normally would want at this point in the year to have a tighter range. I think I have explained why it is a little bit wider range. Frankly the [INAUDIBLE] are going up around us from other companies and even though our business feels good and pipelines feel good, we just want to be cautious and in Q3...reasons I mentioned...very deliberate decision-making processes have been in place now for a year. Q3 was our vacation schedule where there is the possibility that [INAUDIBLE] enough people together and get deals closed. We have got a little bit wider range for Q3 as well as for the year. Our guidance previous to this call was $0.83-$0.93 of fully diluted adjusted earnings per share. So now it is $0.82-$0.92 at the beginning of the year and even as of April we had expected a modest improvement in the economy. I think this status would indicate there has been a moderate improvement in the economy but not in capital spending. So we are assuming that there will be a modest improvement for balance of the year. Our sales pipeline would indicate that surveys we have read would indicate that text spending would be slightly better in the second half of the year so I think that is built into our assumptions that there will be a slight improvement. Now that is consistent once again with our belief at the beginning of the year and yet we have not had to lower our guidance by a penny because at least till six months it has not happened.

[ADAM HOLTE]: Okay, great. Then just one final question: in terms of the competitive landscape we have heard obviously a number of difficulties coming from the competitive landscape. You talked a little bit about the ERP vendors, could you give us a little more insight into what else you are seeing in the competitive landscape from some of the more traditional competitors? Thanks very much.

Sure and certainly with ERP companies, they do compete, they typically compete on price, they compete on the integration and the customer control issue and where our strength is with operating people, it is with solving pain points, strong ROI, quicker install...all the kind of things that are great for our best-to-breed proven track record, keeping in mind too this is a very tough space. I still cannot find a company that has been consistently profitable in supply chain execution except Manhattan Associates. So the ERPs when they dabble in it they get stunned a little bit when they don't have real domain-competent people. From other competitors I just will repeat that although we take then seriously and in any given deal we can lose to a competitor - we can get outsold or for a particular application their product may have a little bit better functional fit because they have developed a similar version of the product for a similar company once before - and so we cannot lose to any competitor in any given deal. So we do take all of our competitors seriously. The good news is we just don't seem to see any one competitor gaining ground or gaining strong mind share at this point and yet we keep an eye on all.

[ADAM HOLTE]: Great, thanks for your help.

Your next question comes from the line of Ed Wolfe.

Why don't we start...I got a couple of questions for you if that is all right. The Other Income you mentioned and I didn't hear all your reasons. Some of the reasons up I am guessing is that the debt was paid down. Can you give us a sense going forward of what that is going to look like?

Yeah. What I did say on the call or in the commentary was that we have some foreign exchange gains in the quarter whereas last quarter we had some foreign exchange losses. We have also eliminated the interest on the note payable to [Ventrapo] because we pay that [INAUDIBLE] that was a loss of about a $100,000 worth interest expense. So basically what [INAUDIBLE] would be foreign exchange transaction gains or losses depending on how the dollar is doing and then interest earnings on the short-term investments that we have and I think that everybody can do a quick market check, come of with an interest rate and probably come up with a pretty reasonable approximation of what that number should be going forward.

What was the foreign exchange gain in the quarter?

We did not disclose it - a couple of $100,000.

Okay. Sales and marketing as a percentage of revenue is 15.5%. I thought you said you are going to bring that back towards 15%, but historically it has been a little bit below that. Can you talk about that a bit?

Yeah. For the quarter certainly Q2 has some higher marketing expenses traditionally for us. There is more [INAUDIBLE] activities. We do have our user conference. We have done some hiring to strengthen our staff. We brought in Eric Peters and some other things along that line to get a setup for the rest of the years [INAUDIBLE] business. And then finally we have a few [over-quoted] sales representatives who were in some accelerated positions in their commission plan. So that increased the commission expense for the quarter. As we go forward, assuming those representatives continue to do well you might see a little better uptake there which we will be happy with that as well. But in general, I think you [INAUDIBLE] user conference to get...[some of our hiring] plans are underway, trade show activities should be more normalized for the rest of the year. So that is how we are going to see it moving back down - toward the 15%.

Okay. The tax rate of 38%, which was a little higher than normal, should come back down to 37%?

Well, what we are anticipating is that we have brought it up to 38%. We are anticipating that tax rate for the year should be about 37.5% and that is based of where we are forecasting the sourcing of our income for the remainder of the year. Last year we had just based of our growth and things like that. We had more income internationally than what we will have this year which ultimately will increase our tax rate by half a point over the course of the year.

[As a percentage [INAUDIBLE]]

Percentage wise, that is right. So what we are doing is we have 38% this quarter, 37% last quarter, to get to 37.5% next [three quarters] you should see it at 37.5%

Okay, and just some bigger picture, thanks. Dick, on the last conference call you had either said...I think you said explicitly that to get to the guidance, software license should be up sequentially throughout the year. Do you still feel that way going forward or is there less visibility on that as we look out?

Well, I don't think that's what I said a quarter ago. I think I said that we are giving guidance only on adjusted earnings per share, and over the long-term though would do expect license revenues to grow and over the long-term we do expect license revenues to grow at faster rate than our other components of revenues for a lot of reasons we have discussed - user partnerships, international expansion etc. But that said we are not giving any guidance - quarter-to-quarter - on that.

Okay, and if you just took a step back right now and was watching what was going on in the stock market and some of your competitors' [reports], if you just looked at where you are and you are in a vacuum today versus six months ago, would you say the pipeline feels better that it did six months or worse? Are people closing deals at a rate that is different versus six months ago - that is better, worse, or the same?

You know, I think a couple of things feel better. One is that the pipeline is broader, and secondly as we had two more quarters of experience in closing and evaluating the pipeline in a tough environment, which I think our sales force just gets better all the time and it being able to manage the decision process within the customer, to read the customer, to evaluate and put it in the pipeline in the right category, and make the right call on it. So I think in that regard we are more experienced in that regard. Then we also have a broader pipeline in terms of the products and the geographies. We have seen Europe pick up again now, which had been concerning for about three quarters...that our Europe pipelines were flat and not a lot of activity there. So all said, I think I feel good, feel better; I know I feel better. Now the one question I can't tell us is that our [close] rate is going to improve or not. At this point I think in our guidance we are not assuming much improvement in [close] rates all. We are more assuming that the pipelines will continue to build and [close] rates will be similar.

Were [close] rates in June and July similar to where they had been the last five or six months?

Yeah. I mean, in fact we are up to a good start in this quarter, probably better than we would normally expect.

Thanks a lot for the time. I appreciate [INAUDIBLE].

Thank you.

The next question comes from the line of [Chris Rowen].

[CHRIS ROWEN]: Hi guys, great quarter. Did you have any - what you would characterize as enterprise deals -this quarter?

We had at least one deal that I don't think that customer is going to buy any more [fulfillment] from us or any more optimization [INAUDIBLE]. Now there are some boundaries around it but there are big enough that I think it is going to take them multiple years to deploy. They could buy some collaboration and they could buy some more of our new products that we might acquire [or] develop and I am confident they are going to be a happy customer, but I don't see us driving big additional dollars out of them in the next 12 months. So I guess if you call that one enterprise-wide deal from how you would look it.

[CHRIS ROWEN]: Okay, and that may have answered my second question, which is, on the $2 million deals how long of a [tail] of services revenue will they have?

That depends a lot on the customers. Some customers after four or five installations will substantially take it over on their own and others will rely on us. [INAUDIBLE] both of these larger deals this quarter look like there will be heavy involvement from Manhattan [over their] release the next 18 months.

[CHRIS ROWEN]: Okay, and then on the service margins...when you are bidding those projects are they zeroing in on what your hourly rate is? Are your billing them on time and materials or are you able to say, you know, 'we will implement it for a couple of $100,000', and then Manhattan gets to keep the excess profits if you get in vast.

Pretty much we do it on a time and materials basis. We typically do that because customers [often] going into the project don't know exactly how many things they are going to change in terms of their business processes and that can evolve. So we find it is in their best interest and ours to structure the arrangement that way.

[CHRIS ROWEN]: Okay, so I guess how does having faster implementers help your margins in that scenario?

Well, because we are able to [INAUDIBLE] it is an hourly billing rate to get a fair hourly rate for that person, right? You are [billing] experienced people that have, may be, three years of experience that have a higher billing rate now whereas couple of years ago when we had a stronger pyramid model, today we have a little bit more of a funnel model because we have able to retain good people. We are billing people fewer hours but higher billing rates with experienced people and everybody wins in that model. But one of the big challenges for any services organization is the typical 25% turnover per year that they have causes the constant stress on customers of very junior people and too many of them are engagements. We are in a very fortunate position right now to have much more of a funnel organization with less of a pyramid meaning the customer gets a truly strong team on every engagement.

[CHRIS ROWEN]: Right, okay. Thanks a lot.

Your next question comes from the line of [Bryan Brew].

[BRYAN BREW]: Thanks, congrats on the quarter. Can you give us a sense of how absolute license deals closed for Q2?

No, we don't disclose that because then it gives the average deal size and we find it sometimes in a competitive situation that it is better not to have that.

[BRYAN BREW]: Okay. Is it fair to assume those two deals comprised over 50% of the license revenue in Q2?

Well, I think the one parameter we gave [for] the average deal size was up slightly from the average of last year. If you go back to Q4 of last year we had two deals over $2 million as well. So it is a kind of bounced around in terms of the composition of deals whether it is driven more by big deals or smaller deals. Looking in our pipeline, we do have more of these Q1 deals in the pipeline and yet we have got in the very near term pipeline a lot of mid--sized deals what a $500,000-to-$1.2 million kind of license deals. So in Q1 it was made up of more midsize deals. So it varies quarter by quarter and I really would think we would be misleading people if we gave any particular trend other than to say that the pipeline is broadening with respect to both bigger deals and smaller deals. So the [pronto] on the smaller end and our moving into tier one with [PTMS] and the entire suite is also going well.

[BRYAN BREW]: Dick, you had mentioned that some of the R&D had moved India. Can you give us a sense what percent of R&D would you would expect for the next year to be allocated to India and what would be the associated cost savings through that engagements?

Well, I think... may be the best way to look at it would be Tom's guidance to say that our target is to get R&D into the 11%, may be as high as the current 12%. We got a lot of exciting R&D initiatives. R&D had been running up around 13% of revenues. We believe we can get it down to 11%...certainly below 12%, may be as low as the 11% by effectively using India development. Our target there over the next 12 months could be as many as 50 people. So the cost savings if you assume overhead and everything is about anywhere from 60-65%, may be 70% per person. You can draw the conclusion that it could save us a couple of $2-3 million a year from now on R&D.

[BRYAN BREW]: And just one last more thematic question: we have talked to Cisco and [Target] and their plans are to build more distribution centers than they currently even have built today over the next two years. What are you seeing in terms of [INAUDIBLE]...it seems like those specific data points would suggest further [wind at your] back?

I sit down and talk to customers. I have tried to ask to them, 'what is driving your decision?' I would say that the two biggest ones are global sourcing where getting more and more goods from overseas the long lead times that they have to deal with, the added transportation cost make the management of that process very important, meaning that they might have to have larger distribution centers here or they might have to have more collaboration. We also see that the customer demands...the number one driver of productivity based on McKinsey and MIT study the number one driver of productivity the last half of the 90s was WalMart - putting all putting all their demands on their suppliers. That continues and in a slow economy it continues at an even more rapid rate including imposing charge backs. So those are just two...everything - shorter product life cycles; return to management is a big issue. Our business drivers and the proliferation of products, you can now buy Coke, Diet Coke, Caffeine-Free Coke, Vanilla Coke, Cherry Coke and managing that shelf space, for example, in a grocery store has become a huge issue and the whole supply chain behind it. So those are the business drivers and the construction of warehouses is an [INAUDIBLE]. Some of our customers are able to reduce their number of warehouses by using our products and others will do a hub-and-spoke kind of solution. There are of lot of different solutions based on building warehouses or consolidating warehouses, both played to our strength. If you are consolidating, you need our products; if you are going to open new warehouses, you need our products.

[BRYAN BREW]: Great, thanks.

The next question comes from the line of [Patrick Snell].

[PATRICK SNELL]: I had a couple of questions, first on the services side. To what extent have you guys modified your strategy at all with working with consulting and implementation partners, may be choosing to consolidate some of the partners in the low-end and thus helping to drive your services revenue there? Then also, what is your plan at tier I level in terms of bringing in the larger [INAUDIBLE] and to what extent are you going to share in those services? That will be the first question.

Well, the management of the systems integrator partnerships is an ongoing and case-by-case situation. First of all, our primary driver is customer satisfaction. So out of the blocks we have confidence in what we can do and our knowledge of our products. We will give more services to systems integrators as they become more trained in our solutions and if they have more impact on customer decision-making. So it is a judgment call on a case-by-case basis based on the systems integrator and the customer in the prospect. So it is not an easy answer. As we more into tier I we do expect to have the higher percentage of the total project services done by systems integrators. But that usually means because tier I has more business process reengineering and you are cutting across global organizations that the projects themselves are bigger for us as well. So even though we have given up a higher percentage of the services we are still driving more services and usually with a little bit less pressure on billing rates. So we are in discussions with several other [big fives] to strengthen those relationships beyond where they have been, but nothing to announce anytime in the next few weeks. But I hope we can get some better momentum there as we now successfully moved into tier I and has some good references there.

[PATRICK SNELL]: Okay, and then as you look at your pipeline, can you give us little color as to may be how that composition has shifted potentially, both in terms of product areas as well as the likely license-to-service mix.

Well, we do still expect this gradual trend of licenses growing faster than services. Part of the reason is the quality initiative that I talked about, part of it is the product mix issues I have talked about, and part of it is the [INAUDIBLE] issues you raised about how we work with systems integrators. But that we believe will be a slow and steady increase of licenses to services.

[PATRICK SNELL]: Then on the product side, do you expect infolink and optimization to continue to grow as a percent or given the tier I growth that that historical trajectory upward might flatten out a little bit?

No, I still believe that we are going to continue to see optimization and collaboration grow at a fast rate than fulfillment. The collaboration product continues to get great success. We have done a few bigger optimization deals as well and we see the opportunity do more enterprise-wide optimization deals. So I think that percentage will continue to grow.

[PATRICK SNELL]: Okay and last question on the acquisition front: is it still your intention that there is very high likelihood that you will close one to two deals in the second half of this year?

Well, I would say we are looking. We definitely see lots of opportunity to leverage our core competency and help our customers by broadening the products. So I do believe it is likely, but then again to get married you need two consenting people you got to make the financials work and make the integration work. So I would say we would like to do that, we think can do that and we certainly don't expect to do anything that will either [bet the ranch] or cause significant [delusion] without significant upside.

[PATRICK SNELL]: Okay, thanks a lot.

Thank you.

Your next question comes from the line of [Paul Rodrigues].

[PAUL RODRIGUES]: Hi, good afternoon. Just a couple of questions; first, I wanted to go back to the issue regarding the ERP vendors. My understanding is that SAP has a release later that has been delayed for some time and that it is probably another several months off. But they have specific technology that indicates that what they are saying is that there is a level-playing field against you. I was wondering if you can comment on that. Second, can you just kind of discuss the US retail market versus overseas, their buying patterns? What are you guys doing differently that is making you successful and some of the others not? Thanks.

With respect to SAP we never want to take SAP for granted - very successful company, lot of customer control. We have either lost a deal or two to SAP or they have promised something in the future and the customer decided at least to defer the decision waiting for a year or two until SAP has something. We just haven't really seen anything yet that causes us concern other than the talk. When you have got that much customer control there are bound to a few cases where you could get a company to delay a decision and hope you will get something. Our belief is that they will have a win and if they released something they will have challenges with it, something that truly does compete with us. When and if they do, they will have challenges with it because so many others have. We just haven't seen anything that we really consider competitive today from SAP. In response to your retail question, I don't know enough about how other people run their business. I would say that...going back to comments I made earlier, our price point tends to be lower than many big retail system projects, our installation period shorter, our ROI is pretty tangible pretty cost savings-driven. So it is not promises and hopes as much, and we have got a proven tract record. We are being driven by [INAUDIBLE] people; typically they have some pain that they have to solve. So it is not the white board strategic kind of buying that some retail system buying is. With respect to the US and Europe, where we have significant other business, I don't know whether I could draw any significant differentiators between how they buy. In general, I think Europeans buy a little more cautiously and a little more 'bite what they can chew' in the next three months as supposed to buy over what they are going to use over the next two years, but that is just a general observation. So our average deal size in Europe tends to be bit smaller.

[PAUL RODRIGUES]: This is a followup. Don't the retailers in the US tend to be bigger - mega retailers? How do you think you guys fit into that sweet spot of the bigger retailer versus the more midsize?

Yeah, and in general warehouses in the US tend on an average to be bigger. But then again labor costs in Europe are higher and our products do have a lot of labor savings. We see the same dynamic in Japan; [INAUDIBLE] with high labor costs. With respect to the big retailers here and big warehouses and the high level of complexity that clearly plays into our tier I strategy, we have had good success over the last year to year and a half and moving into some tier I retailing [food] accounts and we think that is going to be continue to be a good area for us.

[PAUL RODRIGUES]: Great. Okay, thanks a lot.

Thank you.

The next question comes from line of [Fred Wallet].

[FRED WALLET]: I guess I would like to get a little more detail on your services pricing...it seems to improve; that is one. I guess two, I am just wondering if from a vertical perspective...from an industry perspective if you could just describe how...looking through business versus three months ago, are you refocussing or focussing any harder on any particular verticals? Do you have any...[INAUDIBLE] opinion now versus three months ago, let us say, in terms of what is going to work for you optimization collaboration, Pronto versus PkMS etc.

Couple of questions there. On the verticals I would say that there are a couple of things we mentioned three months ago that we were seeing some uptake in the wholesale industrial sectors as well as in [INAUDIBLE] and I think that has continued and was reflected in Q2 and is continuing. In the healthcare vertical we have just passed an audit by one of our healthcare customers that allows us to be more compliant with their ISO demands that are pretty stringent in healthcare. So that is the positive, probably a long-term positive, as supposed to anything near-term that is going to happen from that. Then in the high-tech sectors [INAUDIBLE] up which we are not seen much yet in the pipeline, but a little bit. We have developed some functionality that should allow us to be very strong in hi-tech when that sector starts to come back. Then switching over to the products side, I still remain very bullish on collaboration. We are seeing that pipeline grow nicely. We are seeing huge value propositions there. I believe over the next 12 months we will have the ability to...we are rolling out some fantastic functionality in infolink over the next four or five weeks here. We will be able to garner more value for the product and get some higher pricing for it as well. I am very excited about that. For Pronto product, the pipelines are very good, lots of activity in the tier III market. There is still a lot of caution on pulling the trigger for those companies and the slow economy, but I think we are doing a better job of sorting out real prospects. We have also just signed a customer that is a pretty good size company that is going to use Pronto because they have little bit less [INAUDIBLE] facilities, and we have always felt that Pronto could play well in bigger companies that have a combination of complex and simple facilities - something we haven't yet had. So in general, I guess I am feeling pretty good about all the products.

[FRED WALLET]: Okay, [INAUDIBLE] first question on services, thank you. I missed out on pricing and [INAUDIBLE] happening there.

Well, I don't know what much more [INAUDIBLE], but there still is pressure because most systems integrator companies and most consultancy companies now are offering discounts. Some customers are asking for those discounts from us and the deficiency of our people is usually very well justified for our billing rates because we don't have a lot of wasted time on unnecessary project management time. So we have been able to do a good job in maintaining margins. We have also asked our people over the last 12 months to work a little bit harder and bill a few more hours, in other words take a little bit less training and manage their vacation time carefully and they have come through on that front. So a combination of training and experienced people and more [ability] of the people have allowed to maintain good margins in a market when pricing is a little bit tough.

[FRED WALLET]: Thanks a lot. I appreciate it.

The next question comes from line of [Robin Robert].

Operator, we will take one more question after Robin, if there is one.

[ROBIN ROBERT]: Hi, this is Robin. I apologize. I have been jumping between calls. If you have answered those questions let me know and I will go to the next one. On the Pronto and also infolink products what is the profitability there? When are they breaking even?

They are both approximately breakeven as they were last quarter, and over time we would expect those separate business units to be rolled into the total company. They were separate business units during the early phases, but sometime in the next six to twelve months it is likely that both of those could be rolled into [INAUDIBLE] company.

[ROBIN ROBERT]: Okay. What is the progress of your Japanese sales office? Also last quarter you have some new team in Australia as well. Do you have any new deals coming from Australia this quarter as well?

Well, we have a couple of deals in the pipeline from Australia. I don't think we closed any this quarter, but we have gotten a couple of deals from Australia over the past 12 months. The actual small acquisition we are doing in Australia should and better close in the next 30 days. It has been dragging out for a couple of minor reasons. We are going to get it closed. But it is not hurting business now because the team that is there is working very well with us. So we expect a couple of more deals from Australia, but not the huge contributor over the next six months. Japan: it is hard to say whether it will get revenue from Japan in the next three to six months or not. It is a slow market to break into. Alan Dabbiere, our Chairman is there. We have a cost run rate there that is about a $150,000-200,000 a quarter. It is a long-term investment. But we are optimistic, but I would not comment. It is a possible upside but I would not say it is going [to be in our] forecast for the balance of the year.

[ROBIN ROBERT]: What is the status of your buyback program?

Still in effect. I think... September 11th...we put it in place for a year. We did not use it this quarter but thought about it, and then got a little crazy there, but haven't used it still or have...I don't know [some] 7-8 million of [INAUDIBLE] if we wanted to use it... about 9 [million] is still available.

[ROBIN ROBERT]: Okay, and are you still planning to do one or two acquisitions by the yearend?

We would like to.

[ROBIN ROBERT]: And in this quarter...service revenue...how much is contributed by the upgrading after you released PkMS 2002 version?

That is not really a factor because customers will choose their own time to do upgrades and it is not usually a rush at the time we do an upgrade and we do new a release and we do a new release every seven to ten months. So that really was not the fact.

[ROBIN ROBERT]: Okay. Thank you.

Thank you. It is time for one more.

[April], are we done? [April], are you there?

We will close up the call. We seemed to have lost our operator. We thank you very much for your attention and your interest in Manhattan Associates and I look forward for your continued support.

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