Manhattan Associates Inc (MANH) 2002 Q3 法說會逐字稿

Good afternoon, my name is Julie and I will be your conference facilitator today. I would like to welcome everyone to Manhattan Associates third quarter earnings release call. All lines have been placed on mute to prevent background noise.

There will be a question-and-answer period after the speakers' remarks. If you would like to ask a question during this time, press star and the number one on your key pad. To withdraw, press your pound key.

As a reminder, this call is being recorded today, October 23rd, 2002. I would like to introduce you to Mr. Richard Haddrill, President and CEO of Manhattan Associates. You may begin your conference.

Thank you, Julie. I have Ed Quibell, our CFO, and Pat [INAUDIBLE], our Vice President of Finance. We're pleased to report another outstanding quarter in this environment made tougher by the typical Q3 characteristics of vacations, et cetera.

First, we'll give you a financial report and then I will give you color and discuss the business activity and then we'll open up for questions. Ed.

Thank you, Dick. Good afternoon, everyone. Manhattan experienced another great quarter with excellent results. Each and everyone made an outstanding contribution to our continued success in the difficult markets.

First, we will review the cautionary language. In our statements on this call and during the question-and-answer session, we may make forward-looking statements regarding future financial performance of Manhattan Associates. You're cautioned that any such forward-looking statements do not guarantee future performance and involve risks and uncertainty. And that actual results may differ materially from those contemplated by such forward-looking statements.

I refer you to the documents that Manhattan Associates S-1, and the report on the form 10-K, filed in April of 2002. Those documents contain and identify the important factors that could cause the actual results to differ from those obtained in our projection.

The Safe-Harbor Compliance statements are included as exhibit 1991 to the company's annual report on form 10-K for the year ending December 31st, 2001. Manhattan Associates undertakes no obligation to update or revise statements to change the assumptions, the occurrence of anticipated events for the future of operating effects.

Now, a few highlights from our third quarter ending September 30th, 2002. Core revenues consistent of license fees and services set a new record at 38.4 million dollars. Gross margin percentage increased to 63%. Operating margin percentage increased 21% and achieved the analysts' consensus just at earnings per share of 21 cents per share. Overall, a very good third quarter.

Now let me review the numbers in more detail. Sales of software licenses for the third quarter of 2002 totaled slightly in excess of $10 million. This represents a small decrease that was actually 2% from our second quarter, 2002, and an increase of 19% over third quarter, 2001.

Due to vacationing, quarter 3 is traditionally a difficult quarter magnified by the deliberate decision-making environment, so we are pleased with the $10 million. Services from third quarter, 2002, with a record of 28.4 million. This represents an increase of 1% over services revenue for the second quarter of 2002, and 15% on the third quarter of 2001.

The combination of these two maps institute our core revenues and as mentioned earlier, our core revenues set a new record for slightly greater quarter. We do consider this to be a strategic part of our business with service to our customers, we require a single point of contact for the systems. In this economy, with the results focus, we found some customers shopped also for the hardware.

Our international business increased their revenue contribution to 20% from 17% in the previous quarter. [INAUDIBLE] on in anticipation, the top-line growth that began in June, we executed well the dressing of those later. [ Indiscernible ] Earnings from the third quarter 2002 was $6.3 million, or 21 cents per fully diluted share.

It excludes the amortization of intangible assets, comparing to earnings of 6.6 million and similar 21 cents per diluted share in the second quarter 2002, and an increase of approximately 16% of adjusted net earnings of 5.4 million or 18 cents diluted share in Q3 or 2001.

Research and development expenditure for the third quarter of 2002 was 5.5 million, approximately 13% total revenue as compared to 12% in the second quarter of 2002. The percentage of men's constant, to adjust for revenue bearings, we continue to increase on this in the research and development, a major factor in our ongoing success.

Our long-term goal is to continue to invest in our search and development for 20% of total revenues. Further marketing expenses were 6.9 million or 16% of total revenue for the third quarter of 2002, as compared to 16% in the second quarter of 2002, and 15% in the third quarter of 2001. Although the total spending for this quarter was down from last quarter, there were still a few exceptions due to various sales meetings and training. [ Indiscernible ] And our view is to maintain sales and marketing expenses around 15% of total revenue.

Administrative and general expenses were managed 12% of total revenues. Which is close with the previous number of last year. This is in line of 10 to 12% of total revenue SG&A services. We continue to operate efficiently. We improved our services gross margin percentage to 59% from 58% last quarter, and 55% a year ago.

Our operating income was 8.9 million, or 21% total revenue as compared to 9.1 million or 20% in Q2 of 2002, and 6.6 million or 17% of total revenue in Q3 of 2001.

Our maintenance renewals and productivity remains high, and I commend all of our employs on for their efforts in this tough environment. Other income was slightly down from last quarter, we realized our foreign exchange transaction gains. Our income time tax rates third quarter, 2002, approximated 37.5%, more than the 38% use last quarter, do you to the increase in the mix of our international revenues.

Now, I will address our financial condition at September 30th, 2002. Our cash and short-term investments increased from 4.1 million to 130 million in June 2002. Cash from operations amounted to 9.5 million and used four million dollars under the stock buyback program. During the quarter, we bought back 260,000 shares.

Our debt outstanding stood at 67 days on September 30, 2002, and 63 days on June 30, 2002. Well effected by a large collection, in excess of one million dollars not received until the day after quarter end, still, days outstanding are less than 70 days and well below the industry average.

This statistic is indicative of the overall satisfaction of our customers and accounts receivable. The third revenue decreased by 1900,000 or 6% in the quarter. This is mainly due to maintenance runoff in the quarter and aligned with prior third quarters. Subsequent to quarter end. [ Indiscernible ] Nothing was left in the third quarter of 2002. In the fourth quarter of 2002, we anticipate realizing the gain on the settlement of approximately 2.2 million dollars.

This will improve or earnings per share by 4 to 5 cents per share, as indicated before, this will be shown as a separate line item in our financial statements. During the quarter, we closed an acquisition of our distributor in Australia where we acquired key employees and small account base. The purchase price was less than a quarter of a million.

As mentioned in our press release, we signed a letter of intent to the purchase of logistics.com, a company providing transportation management services for approximately $20 million cash. We will be addressing this further. Before I return to you Dick, I would like to reiterate this was a solid quarter in very difficult times.

All aspects of the business pulled their weight, we will continue to run a tight ship and are well-positioned to capitalize on the anticipated movements in our industry. Thanks for your attention, I return the call to Richard Haddrill.

Thank you, Ed. I would like to provide further details regarding further information for the quarter and give you insight on our business going forward.

We're very pleased with with these results, in light of the challenging technology spending environment. Our team not only met those challenges but does well going forward. My thanks to team Manhattan.

As of September 30th, this team consisted of 862 full time personnel, versus 844 at June 30th, and 789 one year ago, sales and account management personnel were 54 at September 30th, versus 53 at June 30th. They're actively recruiting people today and will continue to look for exceptional talent in all areas of the business.

Some new customers we added during the quarter include Value City Department Stores, Farmicie Operations, Delta Faucet, River Island, a large UK retailer, LEXX auto logistics, a UK-based automotive 3PL company, and up and coming 3PL in Mexico. In tenth quarter end, we closed a large Europe open retailer and Goodman Manufacturing, a large residential-commercial heating and air-conditioning supply company. We have three licensing deals during the quarter over $1 million, and our average deal size was lower than last quarter and lower than last year's average as expected. Due to sales with existing customers, no elephant sized deals closed and the success of Pronto.

Open system license revenues were 44% of total license revenues, slightly above last year's average. International revenues were a record 20% of revenues up from 17% in recent quarters.

Our Europe sales pipe line began strengthening in June, and our Latin-American initiatives are beginning to show results. Further at the end of the quarter, we completed a small acquisition in Australia that Ed referred to.

We do believe our international revenues will continue to increase in Q4. We remain very pleased with our services margin at 59% this quarter above our historical mid-50's range. Our people did good work.

Despite the success, services revenues during the quarter were negative -- negatively impacted by Kmart's decision in late June, to delay further rollout of the products. We have been booked for about $500,000 a month of services to the third quarter when their direction changed in late June, and it took us awhile to get those people redeployed.

Now, with respect to partnerships, we sign a strategic alliance with Peoplesoft and have several other discussions in progress. The JDA partnership announced in January resulted in four deals closed since July 1st with a solid giant pipeline together.

I remain very excited about the continued success of Pronto and Infolink. They comprise 28% of license revenues up from 26% in Q2. Pronto and Infolink license levels continue to build.

A few comments about logistics.com We have signed a letter of intent to purchase the assets from ICG, are completing our due diligence, and expect the transaction to close within the next 30 days. The purchase price is $20 million, and we expect to add another 2, $4 million to costs to integrate the business, bringing the total purchase price into the range of $2 to $24 million.

We expect the transaction to be nondiluted to Q4 and accretive in the year 2003. We expect incremental revenues of 2003, in excess of $10 million from the acquisition. Logistics.com has great customers and employees and three principle products in the transportation arena. Optiyield, Optibuild and Optimanage.

Optiyield represents a decision support and optimization solution for carriers and private fleets. Optibid is a sophisticated tool to help companies manage their companies and transportation RFPs, and Optimanage is a transportation planning and execution solution with functionality for routing, consolidation, track and trace, alerts, and messages of scheduling.

On our review, the transportation companies in the marketplace, we believe that logistics.com is the right fit for Manhattan Associates. We're confident it will be synergistic, provide good growth potential and strategic differentiation for our company.

We will provide further details at the time of closing and finally regarding logistics.com, the overall risk of Manhattan Associates is quite manageable, given the purchase price, and we believe the upside potential could be spent against the 2003 NBI. Before giving our business outlook, I'll try to summarize some of the downs and ups in the quarter; there were very few downs, only 3. First, due to the slow economy in Japan and our emphasis on other relative opportunities, I believe that significant revenue from Japan is not likely in the near term.

Number two, the decision they mentioned by Kmart to delay the rollout for further facilities until after the holidays did have a negative impact our Q3 services by an estimated 500,000 to $1 million. And third, we had actually expected to do better in Q3. We had one $400,000 license deal in Q3 in which a customer phoned us a few days after the quarter end saying they believed they purchased an additional module we hadn't shipped.

So, we ended up booking the whole deal in Q4, and we had two large deals unexpectedly slip late in Q3, one that closed in Q4, and the others -- [ Indiscernible ] Now, there were many ups for the quarter, including, first of all, our overall financial performance, including the record core revenues. Second, our strong international performance, we're back on track now in Europe, and I am optimistic about our initiatives in Latin America. Third, the continued momentum for Pronto and Infolink, and the early success of our offshore development center, employing 23 people in India. We're continuing to ramp the facility.

Then the Kmart resolution that Ed talked about, that will result in a one time game of $2.2 million as a single-line-item in Q4 and reinforced the power of our solutions given the strong endorsement by Kmart in the bankruptcy court.

Number six, smooth transition of CFO to Ed Quibell, who I'm looking forward to working with over the next few years.

Seven, the many positive initiatives we have in place surrounding partnerships and customers and number eight, our outlook for Q4, which I will now discuss.

Now the outlook for future business, let me qualify by saying the current selling and delivery environment continues as we have said for the last seven quarters. There is still discounting pressure on licensing and services, the company still wants to buy smaller projects than a few years ago. There are still many levels of approval acquired and the decision processes are delivered.

Seems like anybody can still mix a deal, and all of this makes it difficult to forecast; however, there are important points I want to re-emphasize concerning Manhattan Associates software company.

First, we're the clear leader in a very fragmented competitive space. Second, we're different from companies like JDA Retech, and that stress put on retailers can be positive for our business as our largest single vertical is companies that supply retailers and have to meet those continuing demands the retailers place on them.

Third, our sales are typically driven by operations people more than I.T. people, and our sales pipelines are generally in response to inquiries versus reps. We have a lower price point, quicker installation and relatively quick and tangible return on investment.

And last, our visibility is typically better than most software companies due to the high percentage of services and maintenance revenues, both at high margins. We have around 70% visibility at the beginning of the quarter regarding that service's line-item. I should, of course, remind you our license revenues are often back and low.

Our range guidance for the fourth quarter for adjusted earnings per share is 20 to 26 cents for share, and if the kmart gain were included, this range would be 24 to 31 cents per share. Or growth strategies are working.

Europe came back on track in Q3 after three soft winters, Latin America looks promising and the U.S. pipeline looks good as well. Our products continue to do well, and our customer and partner strategies are working.

Finally, a few interesting comments about our sales pipe line, which must be qualified by the judgmental and several person input element of interpretation. Our sales pipeline trend are decidedly positive. For example, our current total sales pipeline is up 49% over a year ago, and 18% from last quarter. And, our end-of the quarter pipeline feels it's up a lot, 48% in Q4 over to Q3.

The end quarter pipeline they mentioned doesn't contemplate any elephant-sized deal closings. With that, I would like to turn it over to Julie for questions.

At this time, I would like to remind each. In order to ask a question, press star then the number one on your telephone keypad.

We'll pause for a moment to compile the Q&A roster. Your first question is from Rich Scarsa of Raymond James

Hey, guys, this is Justin Cab in for Rich with Raymond James. First question, I was wondering if you could provide a breakout by industry vertical, or at least retail, the latest segment?

Yeah, Rich, first let me make a comment if we're looking at our pipelines, our pipelines, um, where we have seen, the bigger things in our pipelines was in industrial wholesale and in hi-tech and supply to retail, which is our biggest overall pipeline going forward. In terms of total revenue in the quarter, and you have that breakdown there, how much was retail related and --67% was in four categories, retail related- including grocery?

No, that covers, [INAUDIBLE], retail, consumer goods and electrical consumer.

I think grocery was another 5%, grocery, which is not really retail related but indirectly related to retail.

Okay, how is a competitive environment this quarter compared to, um, let's say last quarter?

We're still seeing the same kind of pressure on pricing and still not seeing any single competitor in more than 15 or 20% of our deals in any quarter, and still pretty much the same names we have seen over the last year.

Okay, my final question, do you have a breakout by tier, you know, tier 1 versus tier 2, versus tier 3 for Q3?

No, we don't. I would say we're feeling good about our continued progress. Our pipeline includes good tier 1 account.

I think a question we have is whether the tier one companies buy what we refer to as elephant-sized deals, where they start off with a tier sized deal and come back and buy more later on, which has been the trend we have seen here in a couple of transactions over the past 12 months where we sold something to a good-sized company and they would come back later within six to 12 months and buy more.

Okay, that's it. Good quarter, guys. Thank you.

Thank you, Rich -- Justin, excuse me.

The next question is from Alan Weinfeld of Fulcom Global Partners

Yes, good quarter. I was curious as to, um, what were some of the skills you gained in the acquisition, internationally in Latin America, and um, what you were doing possibly in Australia?

Well, yes, Alan. First the -- the Australian acquisition, this is a team of people we have worked with over the past 15 months or so who have been doing some implementations of our products there. We have good skill set. A half a dozen customers and a team of people that can implement, as well as we believe, sell in the market.

It's a reasonably-sized market, moved one of our skilled technical people there to help us serve customers in the time zone in the general Asian market as well as Australia, so we think that will be a goodness for us and help us support other customers in Asia.

With respect to Latin America, we hired an executive, I mentioned, about six months ago, who had a lot of experience from Latin America, and since he has joined us, we formed a partnership in Brazil, developed good relationships in Mexico, and have a very good sales pipeline, so we're building our team of Latin, um, Spanish-speaking people here in Atlanta to service the market, and will, over time, be adding personnel and Latin America as well as leveraging the partnerships there. Does did that answer your questions about Latin America and Australia, is that it?

Yes. Could you mention something about the Peoplesoft alliance?

Yeah it's an early stage of alliance, we'll be doing an interface in regards to Peoplesoft and over time we expect to be doing some big marketing and some other activities.

Like a lot of these alliances, we're going to play out over time to see whether it turns out to be positive or not. We have a lot of respect for Peoplsoft, and it's off to a good start.

Let's check in nine months, six months down the road. So far so good.

Dick, this is Jamie Friedman, I just want to ask a follow up if I could. I'm tag teaming with Alan here. Sure. Correct me if I'm wrong, but I believe Logistics had a partnership with a great plains division of Microsoft. If on that there is truth, I was wondering what the positive impact could be for your Pronto initiatives on the Sequel.net, platform.

We're not aware of a partnership between Logistics.com and great plains, um, at this time, and we, you know, halfway through or so, maybe there is a surprise there, but we don't see that as a challenge to us. And if anything, if that did exist, we think it will be stronger for Pronto now if it was helping great planes in the past, which we're not aware of that.

Okay, thank you.

Your next question is from Ed Wolf of Bear Stearns.

Hello, Dick.

Hi, Ed.

A couple of things. First with Logistics.com, is there any debt you're accruing there?

No, just the assets and assuming selected liabilities for things like payroll but no debt and so the total exposure in the purchase price of 22 to 24 million-

I'm guessing 20, you're paying in the closing price in the 2 to 4 is what you're adding additionally, right? Two separate events right,?

That's correct.

How many employees are you assuming?

We're not in position to discuss that at this time until we finish the deal.

Are you maintaining senior management there?

We expect a good team of good people to stay with us with a lot of expertise and that hasn't been finalized but we believe one of the assets we're getting is a good team of people, and we fully hope that a good team of them will stay with us and expect that to happen.

Is there any kind of earn-out or payment or incentive to keep them longer term?

No. There is nothing that we have committed to at this point, and yet we expect to compensate those people fairly like we do our people here at Manhattan and have a low turnover rate like with Manhattan.

Would they move to Atlanta or stay based in Boston?

The majority will stay in Boston.

Okay, um, you talked about kind of a 10 million run rate of revenue for next year, um, what's the debit if there is any, or EBITDA going into that?

A couple of things here. First, we did say we expected a minimum with an excess of 10 million next year, and we expect a revenue of contribution to be in excess of 10 million.

One of the things we will do is close the acquisition, we'll come back to you in the market and give you a much clearer view of our business model for logistics.com.

We think given the employees of Logistics.com just heard about this announcement, really discussing those kind of business plans and details of integration , would not be fair to them and be premature.

I think it's neat. I'll wrap yet up with that. Switching over to the Kmart situation, um, you can talk a little bit -- you lost me a bit in the conversation with second quarter you expected some service revenue that didn't develop. Can you talk more detail about that and what that means going forward?

Yeah, in mid or early June, don't remember the exact date, Kmart made a sudden decision and said we really have to focus on in-store initiatives and, therefore, this rollout we planned for Manhattan, um, there was going to run along across at 500,000 a month through October-November time frame; and on kind of short notice, changed direction on us.

Because we booked out the resources, it didn't cost us a full 500,000 a month for all of Q3, but for the first July and first part of August, we couldn't easily redeploy the resources.

Once we got them all redeployed, our availability got back to a good strong level, but we had a bent on our expectability on that change of direction. As we go into Q4 now, we're not anticipating Kmart will do further rollout until next year, and I think a lot of that will depend on their business strategies out of the season. I'm just giving you a limited amount of information on Kmart, from what we heard from them.

Are you doing any business with Kmart?

They continue to be an active customer, using our product, making payments, their services are extremely low. They call in for support. The good news is the software works well.

We are optimistic, based on example, the public statements they made in the bankruptcy court that the other 14 centers are anxious to get the software. Statements like delivery time went from 21 days to the 2-3 days with Manhattan software. We believe they're going to want to continue to rollout.

They have a lot of other things they're focused on now, and don't think the timeout will come until the January-February time.

I want to talk about the cash flow if we could.

Looks like the cash balance is up about 5 million, quarter over quarter and, um, looks like there is 9 1/2 million of EBITDA from operations or cash flow from operations. Um, you have been generating more free cash than this.

Can I go through the cash flow and what happened here in the quarter, not that anyone should spark about 5 million or free cash in the quarter? You guys have set a high bar for yourselves.

We generated 9 1/2 million from operations, pretty much in line what we have, slightly lower than the previous quarter, and we utilized four million of that to buy back our stock, and it was about a million and a half capital expenditure during the quarter as well. Well just in the normal run of the mill.

Okay, 4 million -- [ Indiscernible ] They missed.

Yeah, there was four million in cash.

Okay, and one last question and I'll turn it over. Dick, you talked about visibility in the fourth quarter and I think the language that you used, um, was something about pipeline that you expect to close in the quarter, was up 49%? What does that mean, that language, exactly?

Well, you know, I think 48% of it was up, the total act of pipeline is up 48% from last year. The sales think they can close on the quarter is up 48% from three months ago, which is strong.

What that means is that is the pipeline the sales reps think is closeable in the quarter, um, compared to what they thought was closeable going into Q3. It's certainly very strong up tick. The quantifying line is you know, sales pipe lines are not nearly as easily accounted as Ed Quibell's cash balance.

A lot of judgment's involved, so, I'm not standing here saying I think our license fees are jumping by 48% in this quarter, but it's a decidedly positive trend over all, pipeline, as well as in-quarter pipeline, and if we're sitting here three nights -- months from now with a similar continued trend, we would be much more bullish. It's a very good sign. We'll see on the quarter plays out, but business, we're very, very busy now and feels good. We're off to a good start on license fees in the quarter, so we're hiring, you know, I've signed probably 45 or 50 recommends to hire people. We're cautiously bullish, which is more positive than we have been the last three, four quarters.

Thank you for the time.

Thank you.

Your next question is from Adam Holt of J.P. Morgan.

Good afternoon and congratulations. The first is a follow-up on your last, um, comment. Is the increase sequentially, seeing some seasonality, to what else do you attribute that kind of increase in the pipeline?

Well, there is a couple of things, Adam, to put in perspective. One, the pipeline is steadily growing and generally speak, our license revenues have been growing as well. Some quarters like the Q2, the uptick, nice in Q1. Q3 was kind of flat, um, because as you say, a little seasonality. I think there is a little seasonality in the Q4.

By the same token, our pipelines have been building, and I think the indicator is that people are sending the signal to us that they have approved budgets or that they're, um, moving projects forward here in Q4 more than Q3.

There was a lack of confidence that our sales force had, and that could have been due to, gee, I have to get six people to sign off. With vacation schedule, I'm not sure I can get that done.

I think that also played a factor and somewhat depressing Q3 compared to Q4. Let's take the other benchmark that is meaningful.

That's the overall act of pipeline went up 18% in three months and it's up 49% from a year ago. Those are other benchmarks that when you put it with the in quarter of pipeline, being up 48%, makes the skill very positive, far from exuberant but generally positive.

You also noted that you have a little visibility on closed deals in the quarter, um, you had a 400,000 license that has been increased and closed in the quarter in addition to another ?

Yeah, we did say we had two large deals that should have surprised us and didn't close late in the quarter. Slipped, one of those is closed and the other remains active.

Then, we have a $400,000 deal, a mid-size deal, right, the customer called us this afternoon and gee, I thought I bought the extra module. The contract didn't say it and the correspondence didn't say it, but rather than argue with the customer, we shipped the module in October which caused us to book the whole deal in October instead of September since you can't really split deals up. And so that $400,000 is also what we have.

And the one large deal that closed, is that a million-dollar plus deal, or would you put that in a category of, of a Cisco or Honda deal?

It's a million-dollar plus deal, and you know, as I said going into Q3, we didn't have elephants we felt would be closing in on in Q3. Right now, there are possibles for Q4, but our forecast, it's not contemplating any over 2 million deals, although there are some possible.

And -- and shifting to the international revenue, would you expect international to remain in sort of the 20% range, um, and to two -- to what do you attribute the recovery in Europe, um, an area that has clearly been, you know, weak for a number of vendors?

Well, a couple of things. One, we began to lay track outside of the UK over a year ago, and we opened our center of excellence in Amsterdam in may. We, you know, opened our office in Germany about four, five months ago, and hired up new head of sales to manage the team in Europe.

We also got our agent relationship worked out about nine months a year ago in France, so I think some of that track we laid over the last 12 months paid off in continental Europe for us. At the same time, from the discussions that we have had with other companies, the retail sector in Europe hasn't been so slow. It's continuing pretty good.

So, that also is a factor and, um, you know, in general the economy in the UK doesn't seem to be as depressed as places like Germany and maybe the U.S. All of those factors combined with better execution on our part.

Frankly, we were not happy with our execution in Europe in the three quarters. We felt we could have done better.

Thank you.

Your next question is from Robin Roberts of Stevens INC.

What is the utilization rate of consultants and how is the policing in the quarter, and do you think, um,going into the fourth quarter, the utilization rate and policing sustained?

Well, you know, Q4 always represents a little challenge on the utilization because of holiday schedules in the possibility that customers don't want to be distracted by projects during the holiday season, but so far our services are backlogged and the visibility is good.

Once again, there have been a few Q4s in the past where customers called us and said you know, I really want to push this off until January.

So far, it looks good, and our availability in Q3 was under 70%, also a couple of points from, um, the prior quarter and operating at a pretty good level despite, what would have been a couple of points higher if Kmart hadn't given us the short notice in June.

Okay, you said that's going to take awhile to redeploy those, um, consultants and so, um, --

That's already done. That was done by say late mid-August, they were fully redeployed. There is no more impact of that.

There is still pressure on pricing in the services, and we have been feeling that for sometime, but our folks continue to work smart and hard and keep the margins good. Of course, our maintenance continues to grow each quarter as well.

Okay. DSO's up four days, so is that anything related to the, um, linearity of the quarter?

A couple of thoughts there. Our maintenance renewal, I should add is over 94%, up a couple of points from our historical average. I think that is a real positive sign in this slow economy that folks are valuing our solution. And I'll turn the other question to you, Ed.

Robin --

yeah.

Sorry. The DSO's. The tradition told her below 70 days and we had an exceptional quarter at the end of June. I think after 67 days, we're very comfortable. As I mentioned in my little talk earlier, there was, um, a really large deposit that didn't make it, which would have put us down about 65, so we very comfortable with that.

Okay.

I think going forward anything in the, you know, 65, 6, seven, eight day range, we're fine with. I mean, four days increase in DSO's is worth $2 million for us. So, for example, the DSO stayed at 63, we would have generated 11 1/2 million cash flow.

There is a good possibility if we can bring the DSO' down in Q4, we will generate additional from operation. We upticked our percentage from international businesses, harder to collect cash international.

Okay, will you comment on the linear of the quarter then?

It was a little back end loaded that, but I would say that can be a little deceiving too. Even though it was back end loaded on the license fees, we had some good deals with the announced winner and given to them through contract. The Q3 was more than our average.

Okay, um, and we talked to your customers about fourth quarter, how likely do you think there is still going to be that I.T. budget flush, what did they talk about last year in regards to the I.T. budget?

You know, I don't feel that I have good insight into that. I can't -- we haven't been able to identify deals that are pure budget flushing, um, nor have we gotten much insight to what budgets are for next year.

One of the positive signs we have seen is we're getting more signals that, um, our projects are approved. Usually, if they're approved, that means they have a real chance to close. They sometimes slip, things get deferred at the last minute. That's one of the reasons why the in-quarter pipeline is up.

We have a number of deals where we have been told by the customer the project's been approved.

Okay, last quarter you mentioned that period and grocery was actually 20% of the revenue, this quarter was 5%, is it right now or different measures?

A lot of it depends on individual license deals. It can depend on where we are with rollout with customers, some take two months and some nine. Our pipe line for food and grocery is good.

We had a great food show in Atlanta with a lot of good prospects. Look for that vertically to continue to grow over time.

Okay, how your progress for partnership talks with Big 5?

Could you say that again, Robin?

What is your progress of your talks about Big 5 for potential partnerships or alliances?

We have good partnerships now with BWC, Gemini, Accenture, Deloitte and Touche -- working relationships.

We're always looking for unique ways to go to market or to strengthen those partnerships, and I think there is a possibility over the next, you know, quarter or two that we might come won more unique ways to go to the market. Right now, they're very good professional relationships.

Okay, -- . [ Indiscernible ]

An additional market or give me too much, I'll give me competitors too much information. There is interesting ways we can do things together with certainly the Big 5.

Okay. Thanks.

Thank you.

Thanks, Robin.

The next question is from Brad Whitt of SWF

Hey, guys. Um, $3 million plus deals this quarter, um, did any of those purchase the product?

Well, we're not in a position to give individual clarification. We say our open -- classification. Our interior pipeline is pretty good. We continue to be pleased with our open-systems progress.

When it comes to individual customers, what we have been find suggest keep Cameron away and talking to them and almost give up a bit of a problem by our customers by disclosing too much information. I think we won't share that. We're pleased with the progress.

Okay, and, um, I may have missed this, but did you give revenue from existing customers versus new customers?

I don't think we did, Ed -- Ed.

New customers, 51. 51% in the existing customer is 49%.

Okay. And, um, did you get by a revenue run rate for Logistics.com, and I'm curious, is that a traditional kind of software business model or subscription model? How much detail you can give us, Dick, at this point.

We're trying to not give type much until we have our final business model completed and can talk about it more detail.

We did say that we expected incremental increase in revenues and excess of $10 million next year from Logistics.com. That's all we're prepared to say at this point.

Any idea what kind of incremental revenues for Q4?

It depends on when it closes.

So no guidance for that.

No. We did say we expect it to be not diluted to the adjusted EPS.

Right. And, um, are you seeing any cannibalization from PkMS for Pronto?

The Pronto business line has taken off for us in Q3. We're happy with the progress of Pronto, although you may recall a couple of quarters ago I was not as happy.

We have good installations now, got the sales approach continuing to refine that, and feel very positive about that. We don't see it as cannibalization but jumping into the tier-3 markets. Look at our strategy and history.

We're trying and I think, successfully move into Tier III with Pronto and then tier 1. Through some of our partnerships and direct selling efforts. So, far we think of that --

Okay, and then, um, and the press release it says that, um, in regards to your guidance, it claims the current general economic environment will improve modestly in Q4. And I'm just curious with your end quarter of pipeline up 48%, um, why does the economy need to improve to get to your guidance?

Probably because we have a chief legal officer, but in addition would tell you this, that um, you know, if our Q4 point line is up like it is, it's a barometer to us that maybe cap spending is starting to uptick, and the proof will be will the deals come enclosed and so far it feels good, but we'll see how the quarter plays out.

I think we're continuing as we have been to be very cautious giving you a wide range again, which we're sorry to do that. We used to give a narrower range.

Just given what has happened with some of the other companies, we have continued to want to be very conservative and how we communicate with the street. So, that's why we put it there and gave you a wide rainfall.

Okay, thank you. That's all I have.

The next question is from Patrick Snell of Robert W. Baird.

Yeah, could you review briefly on the logistics.com, what the potential strategic synergies would be, in terms of your existing customer base and your ability to sell back into it? What verticals to do they seem to be most active in?

First of all, we looked at our own experience with the PMS product that we inquired with Entrippa a couple of years ago.

Just in the last 15 months since the integration, we have had some 92 situations where customers have bought TMS or doing an upgrade of TMS, even though we have a very limited parcel tracking and rate-shopping service.

So we're increasingly seeing the opportunity in our sales pipeline to influence or provide an integrated transportation solution. You look at their customer base, they have some and you can track it on their website.

They have good-sized customers, large consumer goods companies, tier one companies and think that will be an eighteen tray for us with an integrated solution, management solution along with their transportation solution.

If you want to look at the various product lines, the Opti bid is relatively unique, and um, they have great customers there. That tends to be an service that they do to help customers.

And in the Opti manage product, it's more competitive with I-2, [INAUDIBLE] and a broader licensed revenue opportunity to be with PKS. And strategically, we can eliminate concerns that customers have had, that it's small, what is its future, long-term viability. That will be a big plus.

We'll leverage or sales for us, our customer base and have a unique offering that no one has out with their with the product suite of Opti manage, Opti bid, so I think there is a lot of synergy there.

Okay, the follow-on pronto and can you give us the number of clients you did sign?

We're giving less and less detail on those business units. Over time, they're being more integrated with Manhattan. We're tracking the total revenue line and I won't disclose it. We're confident that both business units are profitable in Q3.

But overtime, we're developing more and more functions under the other operating units in the business.

Okay, thank you.

Thank you, Pat.

Your next question is from Peter Coleman of Sound View

Hey, guys.

Hi, Peter.

Just a little more on Logistics.com, if you could talk about how you think -- maybe a little early to talk about this, but sort of how you think you will attack the TMS market. Is it going to be a relatively integrated product, the PKMS sold with the option of the existing sales force?

Do you expect to have separate guides and go after some of the stand alone TMS deals. Also, for Logistics.com, if you could talk about the customers a bit. The last time I remember looking at logistics.com, it had interesting customers.

Are there sectors that enhance for you when you look at your role of customers?

Yeah, a couple of things there. It's premature to say how we're going to go to market, but we believe we'll be selling an integrated offering in many cases and believe we're going to go for the separate stand alone TMS market because we believe that is a good entry wedge to sell more product.

Um, they do have a good customer base, I mean I can read you some of the names of, once again, you can get from their website, but they include companies like airborne express, Georgia-Pacific, Quaker Oats, um, companies like Clorox, um, you know, Colgate,Palmolive, Kraft foods, Fortune brands -- great names there. It will help us in the marketplace as well as in our existing base.

And we think for both, um, for both Opti manage and Opti business, the Opti yield product is about being more stable, we look to it as having strong growth potential

Okay, and also looking at your sort of deal mix, I know we were not expecting any of the larger elephant-sized deals. You did three deals over a million, um, and then you said two large deals slipped.

It seems to me that, um, consistently bumping up the does, one and two, two and 3, is that the trend you're seeing?

Well, yes, if you look at our pipeline, I would say that three months ago there was a good chance to close an elephant or two in Q4.

Now, I think it's less likely to close, you know, two or three, four million license dole in Q4, but I think there is a good chance to close multiple deals over a million and -- and that's fine with us. Once we get a customer, we've done a pretty good job of finding ways to service them well in the future.

Okay, just finally, with regards to Kmart, um, so at this point, you're pretty confident, at some point would be a continued rollout of the solution. Just the order they want to focus on things?

They're purchasing a maintenance and all of that. I think whenever you have a company that's urn the kind of business challenge that they have right now, I wouldn't want to -- I'm not going to budget for them, right?

I'm going to wait until we have further discussions with them, but I think there is a desire on their part to do it. It will be a matter of managing their capital expenditures.

Okay, that's very helpful. Nice acquisition. Thank you, guys.

Thank you, Peter, and Julie we have time for one or two more questions. Maybe two more questions here?

Okay, the next is from in Lavine Showry from McDonald Investments.

Thank you. I have a couple of questions, Dick and Ed. In terms of the pipeline, could you talk about how is the Q4s pipeline structured in terms of small, mid, and large deals, the WMS and non WMS products and different verticals, please.

Well, you know, we're getting into a lot of pipe line discussion here, but I guess when I talk about it, I set my own trap.

In general, the -- a couple of things. Still the strongest single vertical in the pipeline is consumer goods manufacturers and suppliers. That's the biggest.

The segments that have grown the most over the last quarter are Hi-Tech electronics and industrial wholesale. Um, it looks good, the food is pretty good. So we have a lot going on.

Aside from that, it's across the board in terms of small and bigger deals other than, I think it's unlikely we will close a deal over two million. It's possible. A lot of small, midsized, larger deals, um, a good mix geographically. A good pipeline in Latin America, Europe and the U.S.

And for our products, I would say that, um, the pipe line is really broadens the products too. A lot of open-system deals, good type number of I-series deals, it's across the board, is all.

Right. Could you also talk about the cycle, especially how does affect the sweet spot deals?

It's been tough for, you know, six, seven quarters. I don't think that has changed. Still have a lot of people to sign off.

I mean I will say that our history is having to typically sell middle management and then they get approval, compared to other software companies, we might be more used to the process. There have been more levels of approval the last six quarters and philosophy, like anybody feels bad one day they can say no, we're going to push the deal. I don't think that's improved much.

I think they have confined their ability to understand the approval process and helping in our forecasting a little bit. It's still a tough environment to forecast.

I will point the two deals that, really, you know, surprised us they didn't close in Q3. We felt like we had quick communication with the customers.

Okay, great, one final question, Dick, could you talk about the important R&D initiative going into 2003, you know, what kind of enhancements, or [INAUDIBLE].

You know, I would say there are a couple of things we're doing in the Hi-Tech electronics we're doing, and in 3PL from a vertical point of view, and pharmaceutical, we're also working towards a -- compliant initiative that will be very positive, um, doing some things on language support to allow us to continue to expand internationally.

Um, and then I -- one initiative is really a tightly-integrated release program we have gone to now starting with our next release, where we're releasing all of our products on the synchronized release to allow better inoperability, plug and play, but use the customers for our install, something we will be doing going forward

Okay, thank you very much. Good quarter.

Thank you.

Your final question comes from Chris Rowep of SunTrust Robinson Humphrey.

All right, guys, you can tell me, will you capitalize the $2 to $4 million on integration for Logistics.com, will that be in G&A?

One reason I mentioned that, Chris, is because I believe the accounting will be that that will be part of the purchase price, um, and once again, all the costs aren't finalizes but believe they will be part of the purchase police.

As you know today, there is locally to be part of the purchase price that would be considered acquired R, and did, so -- R&D, there could be a one-time charge for purchased R&D.

I'm getting ahead of myself because I we haven't finished this, but we don't want surprise when is we close the deal and say, yes, the purchase price was two million or whatever, and a purchased R& D associated with it, a one-time charge.

Okay. And is the in-quarter pipeline, um, are 100% of those situations in which home has been the last one standing, um, or is it some lower% in which you have been selected and you're waiting to sign?

I wish there were 100%. But no, the in-quarter pipeline is there is a real possibility that the company, you know, has an approved project and can get the dole signed in the quarter. In some cases we have a preferred vendor, some cases we're in contract.

In other cases, it's still very competitive and subject to deals slipping until you get the contract signed.

Great, thanks a lot.

Ladies and gentlemen, we have reached the end of the allotted time for Q& A. Are there any closing remarks?

We want to thank our investors for their continued support and look forward to the rest of Q4. Thank you.

This concludes today's Manhattan Associates call. You may now disconnect.