Manhattan Associates Inc (MANH) 2002 Q4 法說會逐字稿

Good afternoon. My name is Wes, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates fourth-quarter 2002 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 star, 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, February 11th, 2003.

I would like to introduce Mr. Richard Haddrill, president and CEO of Manhattan Associates. Mr. Haddrill, you may begin your conference.

Yes. Good afternoon. With me today is Ed Quibell, our senior vice president and chief financial officer. Also Eric Peters, our senior vice president of marketing strategy and product management will cover a couple of key developments in the recent months in our marketing arena. First, though, Ed is going to give you a financial report on the fourth quarter and the year. I'll give a little color on that. Then we'll turn it over to Eric. I'll finish up with a little bit of our business outlook and then we'll open it up to questions - Ed.

Thank you, Dick. Good afternoon, everyone. I'm pleased to say that the fourth quarter is the 13th consecutive quarter that Manhattan has met or exceeded the analysts consensus adjusted earnings per share. This proves once again that we practice what we preach when it comes to execution.

But first, let me 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 involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

I refer you to the documents that Manhattan Associates files from time to time with the SEC. In particular, our report on Form 10-K for the year ended December 31st, 2001, filed with the SEC on April 1st, 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 10-K 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.

The highlights from our fourth quarter ended December 31st, 2002 were license fees set a new record at $10.6 million. Excluding the Kmart settlement and the in-process R&D charge, we set records for both operating income and adjusted net income of 9.4 million and 7 million, respectively.

We achieved the analysts consensus adjusted earnings per share of 23 cents, a new record.

We generated cash from operations of 12.5 million, and reduced our DSOs by two days to 65 days sales outstanding.

Overall, a very good quarter.

Let me now review the numbers in detail. Sales of software license fees for the fourth quarter of 2002 totaled approximately 10.6 million. As mentioned, this is a record, and is an increase of approximately 5% over the third quarter of 2002 and 17% over the fourth quarter of 2001.

Services revenue amounted to 27.6 million. This represents a disappointing decrease of approximately 3% over third quarter of 2002 and an increase of 8% over the same period last year. The combination of vacations, some client push-outs and delays caused the reduction of the last quarter.

Also, Q4 can be a difficult services period due to our customers' busiest season.

Our hardware revenue was up 17% from the prior quarter, and down slightly from the prior year, where we had a one-time large sale of 7.1 million. As I mentioned before, we do not consider this to be a strategic part of our business, but, rather, a service to our customers who require a single point of contact for their systems.

Our international business continues to be strong and increased their revenue contribution to 23% from 20% last quarter and 15% in the fourth quarter of 2001.

There were two unusual items in the quarter. The U.S. bankruptcy court approved the settlement of Kmart, which allowed us to (inaudible) approximately $2.3 million. We also wrote off 1.5 million of in-process R&D charge relating to the logistics.com acquisition, which closed on December 31st, 2002. No other income or expenses relating to logistics.com were recorded in the quarter.

We have excluded these two items in the analysis of our results for this call.

Adjusted net earnings for the fourth quarter of 2002 were 7 million, or 23 cents per fully diluted share. Adjusted net earnings excludes the amortization of acquisition related intangible assets, the Kmart reversal, and the in-process R&D charge mentioned earlier.

This is an increase of approximately 11% of adjusted base earnings of 6.3 million, or 21 cents in the third quarter, and an increase of approximately 16% over adjusted net earnings of 6.1 million, or 20 cents, in the fourth quarter of 2001.

Our diluted net income per share for the fourth quarter of 2002 amounted to 25 cents before adjusting for the unusual items.

Research and development expenditure of 5.1 million for the fourth quarter of 2002 was approximately 12% of total revenue. This is in line with our goals, as we continue to invest in our future. Sales and marketing expenses were 6.8 million, or 16% of total revenue for the fourth quarter, as compared to 16% in the third quarter of 2002. General and administration expenses, excluding depreciation and amortization expense, were in line with last quarter, and remain at between 8 and 9% of total revenue.

Overall, expenses in Q4 2002 as a comparison to Q3 2002 were positively impacted by a lower estimate of incentive compensation in the quarter.

Even though our services revenue was down for the quarter, our services operations were, once again, extremely efficient. Our services gross margin percentage was 58%, as compared to 59% last quarter and 55% a year ago. Our adjusted operating income of 9.4 million, which equates to an operating margin of 22% of total revenue, is up from the 21% achieved in Q3 of 2002 and higher than the Q4 2001 number which was skewed by the unusual hardware sales.

Other income was up from last quarter due to higher foreign exchange transaction gains. Our income tax rate for the fourth-quarter of 2002 approximated 33.3%, which lowered our overall rate for 2002 to 36.3% as compared to 37% for 2001. Increased international business and R&D credits contributed to this savings.

For the year 2002, adjusted net earnings amounted to 25.8 million, or 85 cents per fully diluted share, representing an impressive increase of 18% over our adjusted net earnings per share for 2001.

I will now address our financial condition at December 31st, 2002.

Our cash and short-term investments at December 31st, 2002, amounted to $122 million, as compared to 130 million at the end of Q3 2002 and 104 million at the end of 2001. Cash from operations during the quarter amounted to 12.5 million, and we used 21.2 million for the purchase of logistics.com. Our days outstanding stood at 65 days at December 31st, 2002, and at 67 days at September 30th, 2002.

We were well below industry average and this clearly shows the overall health of our accounts receivable, and is indicative of our customer satisfaction with Manhattan.

Once again, the whole company executed extremely well in a very difficult quarter. I would like to personally congratulate each and every one of our great employees, and we all look forward to an exciting 2003.

Thanks for your attention and I'll return the call to Dick.

Thank you, Ed.

We're obviously very pleased with these results. There were many positives for the quarter. For example, we successfully closed the logistics.com acquisition, which gives us a broader product offering, expands our customer base, and supplies us with a team of 86 talented employees. The integration of logistics.com has progressed as planned. International revenues increased to 23% of core revenues, up from 15% a year ago. Excuse me. That's 23% of total revenues, up from 15% a year ago. And this reflects our steady progress in becoming more global. Our continental Europe, Asia, and Latin American expansions are going as planned.

Next, the (inaudible) products continue to perform well, and our overall expense controls were good. We added some key new customers during the quarter, including Office Depot, Pearl, which is a drum company, and Eckard (ph), the drug company, Garden Ridge, Nautica (ph), and (inaudible) which is a large U.K. retailer. And Ed mentioned the Kmart resolution, which reinforces the strength of Manhattan's solutions overall.

The only real negative for the fourth quarter was that services revenues were 1 to $2 million lower than I had hoped. As we have cautioned before, our fourth quarter for services can be hard to forecast, due to employee vacations, which are somewhat manageable, and customer factors such as their vacations, shipping busy seasons, and year-end budget constraints, which are not so easily managed by us.

Services margins for the quarter, as Ed said, were very good at 58%. And services have started off as planned for January '03.

We did get 165 product installations completed during 2002. That's more than one installation every other business day of the year. We generated 46.2 million of cash from operations for the year, 12-and-a-half million in the fourth quarter.

We started off the new year with 955 employees, including 86 from logistics.com, so that's a total headcount of 955 is up from 862 as of September 30th, and from 791 at December 31, '01.

Total sales and account management personnel at December 31 '02 totaled 62 and include 8 personnel in that arena which joined us from logistics.com.

We continue to see selected good athletes in most areas of our business at this time. I am very proud of our people who continue to excel for our customers. Our overall employee turnover for the year was a low 10% total, of which only 7-and-a-half percent was voluntary turnover.

I've asked Eric Peters to join us for a few minutes today, as our senior vice president of marketing, strategy, and product management, to make a few comments on some key marketing and partnership developments that he's been working on in recent months that have just come to fruition, as we head into 2003. And I think you'd like to hear about them as we plan the year - Eric.

Thank you, Dick.

During the fourth quarter and leading up to today, we continue to execute on our marketing and growth strategies, focusing our efforts on expanding our reach into the global 2000, growing our application footprint, expanding our technology leadership and supply chain execution, and creating an ecosystem of partners that can enhance the value of Manhattan Associates' solutions. Yesterday we announced a strengthening of our alliance with Siemens (inaudible) AG, the world market share leader in logistics automation. The proposed agreement calls for Manhattan Associates to become Siemens (inaudible) preferred partner for supply chain execution solutions in the Americas. The agreement also calls for Siemens (inaudible) to become the preferred material handling systems partner for Manhattan Associates in the Americas. As part of the agreement, Siemens (inaudible) and Manhattan Associates will work together to develop integrated supply chain solutions. Additionally, Siemens (inaudible) plans to re-brand and market the supply chain solutions with its own name, giving credit to Manhattan Associates as the SCE engine behind this solution.

This is another example of a third-party provider embracing the Manhattan Associates platform.

In the fourth quarter, we began in earnest our work on our RFID or radio frequency identification initiatives. We were the first and to date only supply chain execution company to join the auto ID center, an industry funded research program hosted by MIT and Cambridge University. In January, at the National Retail Federation Show in New York City, we demonstrated a working prototype of our software application utilizing RFID technology. In Chicago yesterday, we unveiled a working application that permit retailers via Infolink to print RFID shipping labels remotely at a supplier's distribution center, thus enabling suppliers to print retail-compliant labels with RFID technology embedded in the labels. In fact, on Monday, we announced the extension of our retail compliance guarantee to include new and emerging standards for RFID for the retail supply chain.

We have had this formal retail compliance guarantee in place since 1998 for the top 100 retailers, and view RFID as an extension of our current compliance guarantee. We have formed a partnership with Symbol (ph) Technologies, Zebra (ph) Printing, Siemens Sematic (ph) and Alien (ph) Technologies to bring practical, justified RFID solutions to the marketplace.

And finally, in the fourth quarter of 2002, we implemented a new program that has been in the planning stages since early summer called SRS, or synchronized release. Synchronized release fundamentally changes the way we develop software. We synchronize the design, development, testing, and release schedules of all of our products, enhanced our testing capabilities, eliminated redundant steps in our development process, pushed more work to India, conducted design review sessions with partners and customers, and architected the product to be more open and extensible. Specific to the architecture, we updated our communications engine to start supporting more open service oriented technologies like web services. This allowed us to announce our independent software vendor or ISV program. This program permits ISVs to have their application certified to the Manhattan Associates' family of products. This program is creating a network of Manhattan Associates connected solutions and expanding the footprint of the Manhattan platform. We believe that this program and all aspects of synchronized release will enhance our value proposition to our customers and prospective customers in the marketplace. The synchronized release is scheduled for Q2 of 2003. These are some of the marketing strategies we are currently pursuing to increase our reach in the marketplace.

I'll now turn it back to Dick.

Thanks, Eric.

Well, looking forward to 2003, you can see that we're very excited about the platform for success that we've built. We are financially sound, with proven products, proven ability to execute in a difficult economy, a proven business model, and exciting new initiatives, some of which were just discussed by Eric. However, the political, economic, and capital spending uncertainties continue to make forecasting difficult. We currently estimate that we will achieve adjusted earnings per share for the company for 2003 in the range of 95 cents to $1.10 per share. At this time, assuming a modest improvement in the economy and in capital spending during the year, we believe that this range is reasonable. The range does not consider any future acquisitions.

We do not plan to provide quarterly guidance, however, we will provide some additional insights which should be helpful to investors to develop a view of our expectations for 2003. First, we expect logistics.com acquisition to add between 15 and 20 million of revenue to our 2003 operations and to contribute between 1 cent and 6 cents per share to adjusted earnings.

We currently have some visibility to approximately $13 million of that revenue to either complete deals that are already signed, expected annual repeat customers and maintenance renewals.

Second, we expect logistics.com related revenues for '03 to be split approximately 40% license and 60% services.

And third, in 2003, we expect some of the following ratios.

We expect services gross margins to be between 55 and 59%. We expect research and development to be between 11 and 14% of total revenues. We expect sales and marketing expenses to be between 14 and 17% of total revenues. General and administrative expense, including depreciation and amortization, to be between 11 and 13% of total revenues. And we expect operating income to be between 19 and 23% total revenues. Income taxes we think will be between 36 and 37% of pretax income. And these above percentages assume that the hardware sales do not vary significantly from 2002.

As we enter the new year, there remains concerns about possible war, the economy, and individual company budget changes. This is reflected in the volatility of our pipelines. Customers continue to favor smaller risk-averse projects. However, we believe that there is a great deal of pent-up buying demand for our solutions. Our overrule sales pipelines remain strong and the quality of our current pipeline appears very good, with product demonstrations and proposal activities up compared to our monthly norms and when compared to last year. And we're off to a good start in 2003, with signed contracts this year already with companies such as BMW, McKesson (ph), and (inaudible), and we are awaiting one final signature for a contract from a large publishing company. Also, logistics.com signed two significant percent complete contracts late in December. These will be recognized as revenue over the next 6 to 12 months. One contract was with the largest retailer, and one was with Sisco, the food services company.

As we enter the new year, we are better positioned than ever to lead supply chain. Our product suite, customer base, global footprint, and partnerships continue to expand. Through low turnover, our employees gain more experience and continue to execute very well as a team. And I hope that, our investors, are as proud of these employees as I am.

With that, I'd like to open it up to questions -- Wes?

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1, on your telephone keypad. We'll pause for a moment to compile the q&a roster.

Your first question comes from Alan Weinfield (ph) of Fulcrum Global Partners.

Congratulations, guys. Could you talk a little bit about the BMW transaction and what was the competitive nature there, if it was SAP in Germany, or who were some of the private competitors who were kind of nipping at your heels and how did you end up delivering?

Alan, as you know, we've been building our business on the continent over the last year, although we've had customers on the continent for some time, our direct presence with offices in Germany and Amsterdam has really in the last 12 months and those efforts are starting to pay off. It is our practice to not discuss individual details of individual deals for individual customers nor to discuss individual competitors. I will tell you it was a competitive transaction, and through a very rigorous competitive process that was conducted by BMW as well as an outside consultancy firm.

Great. Can you talk about some of the diverse fix efforts you've made in pharmacy, healthcare, and technology and maybe some of the pipeline you have going into 2003? You gave us some of those pipeline indicators on the last quarterly call.

Yeah. A couple of things on the pipeline, in terms of industry trends. You know, consumer goods and retail continue to be large components, you know, in Q3 and 4, for example. Both of those industry groups would have been in the 30 to 35% of our license revenues.

Our pipeline reflects still very strong in consumer goods, a little bit of less strength, relative strength, in retail, and some pickup in healthcare, industrial wholesale, high tech, and the food industry, so that's kind of the shift that we see in our pipelines, looking out forward.

Our overall pipelines do look good and our overall level of business activity is good, and we'll see what happens with the war and the economy, but overall, we've got a lot going on right now.

your next question comes from Adam Holt (ph) of JP Morgan.

Good afternoon. A follow-up on the -- on the deals you've signed thus far in the first quarter. Understanding that you won't give particular deal dynamics for a particular customer, can you give us a sense for collectively how much visibility these deals give you into the first quarter? In other words, how much revenue could they potentially be?

Well, you know, once again, because there's a couple, I think we can give you maybe one sound bite here. If you look at Q4, we had three deals over a million dollars, which is kind of customer -- usually it's 1 to 3 deals we get in a quarter over a million dollars. We would say that of the deals we've signed in the quarter, to date, one has a license fee over a million dollars.

Okay. And as you -

And let me also add that if you factor in the -- the other deals from logistics.com, that number would be higher.

Okay.

Those are going to be spread over a longer period of time.

And then just a follow-on on the sequential trends. Would you expect there to be some catchup on the services side for, you know, activity that got pushed out into the first quarter? And what kind of sequential trend would you expect to see on the license side?

Well, we're not giving any quarterly guidance. With respect to deals, services that pushed out, I think a lot of that will depend upon how companies clarify budgets. Our experience in Q4 was that we had a lot of volatility in our deal flow overall. In other words, we had a lot of deals sort of come out of nowhere in the last 60 days of the year and close. We had other deals that were in the pipeline in October that we thought were going to close by December that didn't. Some of them closed in January and some of them are still very active.

Same thing seems to be kind of true on services.

So our interpretation of that -- and albeit we're a fairly small company -- is that there's still a lot of kind of budget uncertainty out there, where companies kind of want to do projects, but because of the uncertain environment, it's put on the gas one day, put their foot on the brakes the next day. So I think -- I wish I could answer the question more clearly. I think it depends on the budget clarification, although as I did say, our January was -- on services was as planned.

Okay. And again, I'm not trying to box you into Q1 guidance but is there -- on the logistics.com side, how much seasonality is there in that business over the year and what would that, you know -- how would we sort of generally expect to allocate, you know, that revenue base throughout the year?

Well, there generally has not been seasonality of any significance to logistics.com, and, you know, the good news with logistics.com is we have a couple of nice contracts signed that we're very busy on right now. And yet I think in general, we expect both Manhattan and logistics.com operations to improve during the course of the year, as we also expect some modest improvement in the economy during the year, and we continue to build out our geographic footprint, we continue to get their sales force more integrated with us. You know, the good news is we've got some real work that we're doing right now and so the back end part of logistics.com would be less -- we'd have less confidence over and yet we would expect growth.

Great. And just one final question. Help me understand the tax rate. The tax rate dipped down in this quarter from the last several quarters, but you expect it to go back up in 2003. Is that the result, primarily, of one too-time R&D credits?

Yeah. The majority -- excuse me. The majority of it was related to R&D credits which brought the overall tax rate down by about a percent from the previous year, but there was also the benefit of some international profits which we never had which lowered our overall tax rate as well in the fourth quarter.

Going forward, I'm expecting the tax rates to be somewhere between 36 and 37%.

Great. Thanks for your time.

your next question comes from Ed Wolfe (ph) of Bear Stearns.

Hi, Dick.

Hi, Ed.

Last quarter, on the -- on the conference call you talked about an in deal pipeline that was up tremendously, both quarter over quarter and year over year, and yet when you look at the revenue quarter over quarter and year over year, you know, compared to everybody else, it's fantastic, but compared to what you thought your in-deal pipeline looked like, it didn't all pan out, obviously, this quarter. What's your thoughts on, you know, what you learned from that? Did some of that get pushed out? Is that a number that -- you know, is it kind of a -- how do we think about the in-deal pipeline and your enthusiasm last quarter versus where we are now?

Yeah. And good question. I would say that first of all, we have implemented a new system in the last 60 days, so we don't have good comparability. Second, I would say based on the questions we got from my comments on the last call, I felt two things. One, that we maybe -- maybe people over-interpreted that. In other words, you know, it is salesmen's input that goes into the pipeline, so I think we've decided it's probably not a good metric to continue to use, even once we get comparability from the new system.

But I would say one of the things we did see in Q4 was a lot of volatility in the pipeline. I referred to it earlier in the prior question, but we saw some 40% of the license deals, approximately, we closed in the quarter were not even in our October pipeline, but yet they came out of nowhere and closed, and yet that obviously tells you we had a lot of business that was in the pipeline that got deferred due to some of these uncertainties that I also referred to.

So we continue to have a very strong pipeline, but at the same time, the volatility of the pipeline could remain great as long as there's this uncertainty out here, and yet with some clarity of the uncertainty, there seems to be a great deal of demand.

So I think the -- we're going to be very cautious on what we talk about with the pipeline because it is such a judgmental indicator coming from salesmen and so I think all we can say is it's a good strong pipeline.

Okay. And I think you said in your remarks, Dick, that there is about a million-and-a-half of service revenue that you could quantify that got pushed or didn't close that you expected in the fourth quarter, which is a tricky quarter. Is that a million-and-a-half that you expect to make up in the incrementally in the first quarter or you don't know?

Don't know. I mean, it's -- it's, again, like the prior question. I think it just depends on when companies get budget clarity. We're off to a reasonable start here in January, but not all those projects have been re-booked just yet.

Okay. Just changing gears for a second, in the last couple of days there's been a lawsuit filed by a competitor. Seems a little species from where I sit, but, you know, just assuming the worst-case scenario, is there any insurance coverage that you have both in terms of if there is ultimately a judgment and in terms of accruing legal fees or anything like that for legal fees?

Well, like any good-sized company, we do have plenty of insurance, but I will tell you that -- and it was just filed yesterday. We haven't had a chance to review the complaint in detail. The employees referred to there joined us over a year ago, and, you know, I think if we hired all the employees that wanted to join us from EXE, we'd have our halls overflowing but we certainly haven't hired all that many from them, and I think it's a very without merit lawsuit.

But that said, you know, officially we're not commenting on it. We got to get our lawyers to look at it, but if we see anything that concerns us, we'll certainly get that out to the market as soon as we do.

And from a financial perspective, though, are you -- is there any accruing of legal fees or, you know, anything that's out -- that could be outside of the guidance you gave in terms of ranges of percent of revenue, one-off for this or do you just see this as a non-event at this point?

I mean, at this point, anybody can sue anybody in America with $13 and a typewriter and my view is, at this point, we don't see a need to accrue anything for that or any other litigation at this point.

Okay. And can you give a little sense -- more color on a breakdown of product outside of the WMS core product? Can you talk about Infolink and the lower-tier WMS product, perhaps, as well?

Ed, you want to take that one?

Yeah. I think the -- the main area was between open systems and (inaudible) series and about, you know, 58% or close to 60%, I think it is, of our revenue came from open systems, which gives us an indication, I think.

And then I -- and if you want to know the newer products, Ed, we're right at 28 to 30% of license revenues came from the newer products. We're not giving the individual details on each individual one, but in general, if you want to know what the optimization suite, Pronto and Infolink contributed, between 28 and 30% of license revenues and then as Ed said 58 to 60% of licensed revenues were open system to balance (inaudible).

Is it fair to say that none of the three million dollar plus deals you alluded to were Infolink?

Yeah. That's safe to say. Although they can be components of those deals. Sometimes companies will buy products -- a combination of products at the same time.

Okay. Thanks a lot for the time, guys.

Thanks, Ed.

Your next question comes from Robin Roberts (ph) of Stephens, Incorporated.

Hi. On logistics.com, how much revenue did it contribute during the fourth quarter?

Nothing.

Zero.

Okay. And have you decided to -- regarding the pricing structure of logistics.com or is that going to be software or subscription, and how do you plan to support existing logistics.com contracts?

Well, we certainly are honoring all of their contracts that they have. The pricing structure, we are continuing their basic pricing structure but we're also offering the -- more companies the opportunity to buy license, but if they want a subscription, we also will offer that. So we would expect, compared to their history, which has not been made public, however, that we would have more, you know, up-front license deals than they have had, but we also expect to continue to promote the subscription model as well.

Okay. And -

And those deals that have a lot of, you know, uniqueness for our customer would be recognized on a percent complete basis as well.

Okay. On the subscription deals, are those going to be recognized in the license fee line or the service fee line?

Most likely in the license fee line. As we go into the first quarter, we'll have a look at that but that's where I expect it to be.

Okay. The -- Ed, you mentioned that there is lower than expected incentive compensation in the fourth quarter, which drives R&D and sales and marketing down, in terms of dollars and as a percentage of revenue. I'm just curious, your revenue is increasing. Why is the incentive compensation going down?

Well, as a percentage of revenue, it wasn't driven down at all. I was talking more or less in the absolute dollars. I think we were pretty consistent on the percentage side. But, you know, we accrue our incentive, but with our downturn in our services revenue in the fourth quarter, we found that they -- we didn't need as much as we thought we would.

Okay. And the customers were pushed out the implementation service in your fourth quarter because of budget constraints, have they come back and restarted those projects?

Many of them have not, Robin. And we don't know all the reasons why a company will sometimes defer a project. It could be budget constraints, it could be -- which often happens and has happened to us in prior Q4's -- did not happen last Q4 but has happened in prior Q4's where customers will see, gee, we're busy, we don't have our resources on our side of the project and therefore we can't make them available until some point in the next year.

So some of those projects have been rescheduled and some have yet to be rescheduled until they can clarify their budgets.

Okay. When you look at your (inaudible) these days, what percentage of those RPFQs request open systems, and after you have gone through the vendor selection process, what percentage of those people who originally had requested open systems decided to go with I-series just for the features and functionalities?

Well, the -- in the pipeline, there is a higher percentage of open-system deals than I-series deals. Very few companies change their direction during the sales process. A few have changed both ways. But it's -- it's pretty uncommon but it happens and sometimes they'll switch from I series to open and sometimes from open to I series based on their specific needs or their longer term strategic direction.

Okay. How does the (inaudible) open system compare last year to the year before?

The percentage of open systems for the -- for the year 2002 was 48% open and 52% I-series and in the fourth quarter, it was about 58% open systems and about 42% I-series, something like that. So a little bit of a switch in the fourth quarter compared to the year.

Okay. And -

And this is what we said. We expected a slow but steady trend towards more open systems and that's been panning out, if you've tracked our calls over the last couple of years. It's slow and steady.

Okay. Now you have to support the open systems, the Pronto and also I-series. At what point do you think that it's time to sunset any of the products and -- or if you do support all of them, are there any need to add more service and support personnel?

Gee, you know, we actually get very good leverage in our R&D development by leveraging functionality skill sets across platforms. The same thing is true in certain components of our services group. We have no plans to sunset any of those three products at this time.

Okay. And at one point you talk about some deal activity in the government sector. Any progress on closing some deals in that sector?

None closed. Some progress. You know, we've got, oh, 6 to 12 deals in government, and, you know, we -- we think there's a decent possibility for one or two in this quarter, but, you know, it's still a new industry for us, but I think we feel like we're making adequate progress.

Okay. Thank you.

Thank you.

Your next question comes from Richard F. Scocozza (ph) of Raymond James.

Hi, guys. Thanks. Good quarter. A couple of questions. I don't want to hog up the call here, but I guess the first thing is relative to market demand, what you're seeing in the warehouse management space versus the transportation management space.

Well, Rich, one of the things that we're pretty excited about is this RFID initiative which, as Eric alluded to in his comments, we think can be a catalyst for companies to accelerate getting rid of legacy systems or competitive systems that are older, because they're going to need to do something in the next two or three years in the RFID arena. This, we hope will help prioritize warehouse management over other IP spends and we certainly have seen a lot of interest and actions in the partnerships we've formed to date in that arena.

That said, you know, the TMS ROI is very strong and it certainly has piqued the interest of our customer base, now that -- now that we have the logistics.com acquisition. Overall, I mean we clearly are going to see in this next 6 to 12 months, more revenue coming out of warehouse management than TMS, but we do see TMS as having the opportunity to grow faster for us over the next couple of years than warehouse management.

We're also seeing plenty of interest in the Infolink product, and I think as Ed Wolfe alluded to earlier, our bigger challenge is just scaling the deal size up because the benefits are great, the case studies are great, we're just struggling a little bit with just how to best sell it.

How -- how do you look at the -- I mean, are you guys -- do you have a program in place to sell TMS? I mean, you -- you know, you have 850, 900 customers. To sell TMS into those customers -- is that something that is strategic for you right now?

Yeah, absolutely. We -- we did have an education day for our partners on the TMS product suite, which was well-received by our partners, so they can take the message out and we've been contacting our customers through our account management program, and a number of them have expressed interest. And then we also have our momentum users group meeting coming up in may where we'll have some major education sessions on it. So we clearly see one of the advantages in that acquisition is to be able to -- the customers that have confidence in us, I think would prefer to buy an integrated suite from us.

In addition, when we're in competitive situations, having an integrated offering, WMS and TMS, has proven to be very interesting and very strong for us in the marketplace.

Was there any TMS in the quarter from a revenue standpoint?

Well, you know, our historical TMS business excluding logistics.com, I think we did over a million dollars of license revenue in that alone.

Well, what if you just limit it to logistics.com?

We did not record anything because we closed the deal on December 31. So we will only begin recording revenues and expenses for logistics.com starting January 1st.

Fair enough. And I guess the only other question I have relates to the competitive landscape. There's been a lot of talk in the market about how you guys have been doing in that -- you know, in that market, and, you know, there's -- there -- there have been some -- some talk about a high jump in Provia (ph) jumping up, and competing with you kind of as a low end of the market.

I'm just curious what your thoughts are about, you know, if the competitive landscape has changed and if it has, how it has and if, you know, there's something that you need to do to deal with that.

Well, you know, we see no one competitor in more than 15 to 20% of our deals in any one quarter. That said, I mean, you know, we respect all of our competitors and on any given Sunday, they can win the game, you know. So we can get outsold. They might have a better fit for a particular customer.

Now, we lost two deals in the quarter that were meaningful in size where we were selected as the preferred company to partner with, with the preferred product suite, but we couldn't come to business terms and conditions. And -

Is that -- was that one Reebok?

Well, we don't talk about -- and each companies that don't select us, we don't talk about them.

Okay.

But I would say that, you know, if we had managed those perfectly well, we could have won one or both of those, perhaps. But at the same time, we're pretty committed to not risking our shareowner value and our principles either if any particular customer or prospect is unreasonable in their demands just because they've been burnt by another vendor and, you know, as you know, we've really had no litigation over our installations and we've had a great track record.

So if -- if the demands are reasonable, we try to honor them, and if they're not, we're not willing to compromise that, and whether it's pricing or certain business conditions, some of our competitors are willing to take those on.

So in summary, we respect all the competitors. We haven't seen anybody, you know, like I say, that's crept up to more than 20% of our competition in deals in any quarter, and yet we keep an eye on all of them.

Okay. So I guess the last question that I have is the 95 to 110 guidance is a little bit -- is a little bit large. What -- what are you seeing in the market that makes you put that guidance in the market, and, I mean, is there anything that we should know that is giving you less confidence to put that wide range in or is it more of an economy-based thing?

Well, you know, tapes from Osama bin Laden don't help any but I would say that, you know, if you look at the analysts range, you guys are out there anywhere from 93 to $1.11 so we've tightened it up from that but to give you an example, let's say business conditions stayed poor for the year, and we were only able to replicate last year's revenue and last year's expenses. Except for our maintenance renewals continued at their historical renewal rate. Well, that alone would add about 14 cents a share to our cash earnings, right?

So-- and I'm not saying we're not running our business that way. We're adding people and we're investing, because we don't believe that's going to happen b, but, you know, if we had -- if that scenario played out, and we had to, you know, reduce our expenses and get back to that, okay, we would have lost a little expense here in the first couple months here, but we could get back and have a pretty good year. And so that that kind of get us to the low end of the range, right? On the high end of the range, or who knows, possibly beyond, we've got initiatives like RFID, the possibility of clearing up all this uncertainty politically and economically to some extent, and we've got Infolink traction that's possible, continued geographic expansion on the continent, our partnership in Japan, got some deals surfacing in Australia now, some activity in Singapore and Latin America, so we've got a lot of potential for upside and yet I think the caution is overall political uncertainty and economic uncertainty that just causes us to be in our naturally cautious selves. We like doing what we say we're going to do.

Okay. Can you break out the traditional TKMS from Infolink from anything that you're seeing in the -- in the TMS space on a license basis?

Well, just back to our previous sound bite, somewhere between 28 and 30% of license revenues this quarter came from non-TKMS newer products. We don't break those down specifically for competitive reasons but that would include, you know, the optimization suite, Infolink, Pronto, and our historical TMS, not logistics.com.

Do you -- you said 28 or 20?

28 -- between 28 and 30 percent of license revenues. I can get the exact number here. Ed, maybe you can look at -

It's 28.

I think it's 28%.

Yep.

And do you see Provia and High Jump (ph) more on the Pronto side than you would see them on the high-end PKMS side? Is that a reasonable statement?

Yeah. I mean I think that's generally true with High Jump. You know, Provia has been a competitor for a long time in a variety of different markets. I mean, we -- you know, we see a lot of competition still from Optum (ph), EXE, Red Prairie (ph), LIS (ph), but, yeah, I think High Jump is particularly targeted to smaller companies, but I think they've got one or two big customers as well.

Can you comment at all on the Reebok deal as well as the Ikea deal that have been rumored that you guys lost in the quarter?

We don't comment on individual customers, Rich, so we'll -- we'll be happy to pick up another question or two later on, but maybe we ought to turn it over to someone else to have a chance.

Yeah. Fair enough. I've been monopolizing it enough so let's pass it on.

Good questions, though. We hate -- we don't mean to shut you down but let's see if there's any others -

Your next question comes from Peter Coleman (ph) of Soundview Technology Group.

Hey, guys.

I guess just sort of drafting off of some of those questions, can you talk at all about the pricing environment as it relates on the services side? I think we've talked about it in the past some of the instances of fixed-price contracts. Are you seeing any more or less of that in the fourth quarter and any changes as you move into the first part of the year?

Well, you know, in general it's been a tough environment for a couple of years. Between discounting and other pressures from customers. I think the business terms and conditions in general have not gotten any easier. If anything, in the last 6 to 9 months, they might be even tougher where customers just seem to want satisfaction guarantee almost. So we continue to see demands for that. I mean, usually customers understand how difficult it is to fixed priest these kind of engagements, although we -- at times, when we can adequately box the opportunity, we'll do that. But usually they're willing to let us do a CRP first, if necessary, or a mini CRP, to give a more accurate quote or do a fixed fee, so I would say the majority of our business, a great majority, is not mixed fee but we do it occasionally and I would say overall business conditions remain tough, perhaps even tougher than a year ago.

Okay. Is there -- can you characterize -- I mean it seems to me if we look at the market, I mean you guys continue to grow quite well in this tough time. I mean, the market remains pretty highly fragmented. It doesn't necessarily seem though that, you know, now that you guys have sort of become the clear leader that you're seeing a big shift in customers wanting to move away from a lot of the small guys. It sort of seems like, you know, the guys that have certain functionality, whether it's footwear or whatever else, sort of seem to do the same deals they've always done. Are you seeing any shifts in that regard, and I guess what I'm trying to get at is, what does it take to get Manhattan to consolidate the marketplace a bit more?

Well, you know, we really are grinding it out pretty successfully quarter after quarter, year after year of customer satisfaction and it doesn't mean somebody is going to tear out a system that they've invested a lot of time in. It's kind of sticky software, and -- but that said, when they come up for renewals, we are -- and the market's been around enough now that we are starting to see opportunities to replace competitors' systems that have been in five to seven years and I think we're going to see more of that. And as I mentioned earlier, I think the RFID initiative provides an additional incentive for people to really take a look at this execution systems.

I also think things like TMS and our collaboration Infolink product that, you know, will allow them to print RFID labels remotely and get better control of their suppliers, all those kind of things that we're doing to be a good partner and build out the product suite are going to continue to provide incentives for companies to come to Manhattan, but I don't think it's going to be overnight. It's going to be steady, just as it's been.

From a consolidation point of view, we still tend to see, you know, limited value. Not saying we wouldn't do it, but limited value in buying direct competitors, just because over time, it's going to come our way perhaps anyway.

Okay. And then I guess with regards to TMS, I think if we look back a little ways, you'd made some comments when you'd first got the Pronto product going that the uptake on that was a bit slower than you'd expected originally. Have you put anything different in place as it relates to logistics.com in getting that to, you know, ramp at a -- you know, at a nicer rate than maybe you'd expected in the -- or maybe that you experienced in the past?

Well, you know, if you recall in the last call we expected logistics.com to contribute a minimum of $10 million in revenue. We're now saying 15 to 20, so obviously the last couple, three months, we've gotten more bullish on it. And we do believe that -- a couple of things. Number one, we've eliminated one concern that people had in buying their solution, which was financial stability. So we've eliminated that. Number two, we have a big customer base, and we're integrating their products with ours. So I think there will be a lot more synergy and ability to sell into our customer base and to win deals by having the integrated suite that will really ramp this much quicker, whereas Pronto was, for us, attacking a whole new market, which is, you know, smaller companies that heretofore couldn't afford such a system, and Pronto is going fine. I mean the business unit is profitable and doing well.

Okay. Great. Thanks a lot. Nice talking with you.

Thank you.

Your next question comes from Brad Whitt (ph) of Southwest Securities.

Yeah. Okay. Let's see. Can you tell me the software revenue from new customers, Ed? That's a metric you normally give out, I think. I may have missed it.

Yeah. For the -- in the fourth quarter, it was approximately 65%.

Okay. And the revenue from the retail -- or (inaudible) retail vertical?

Well, we've been looking at it. Pure retail is kind of mid-30s and then consumer goods is also mid-30s, so between the two of them, you're looking at 60-odd -- 65%.

65. Okay. And I'm just curious. What -- the increase in the international revenue, how much is that as attributed to strength in international business as opposed to weakness -- you know, lesser than expected revenues in North America?

Well, our plan has been to continue to grow international over the next three years to the mid-high 30s percent of business, so we would expect this almost steady march you've seen to go back four years. I think international was 5%, then it went to 10, and then to 15-ish, 17%, something like that, last year. And this year it finished out at 20, with the fourth quarter being 23. So it's a pretty methodical expansion that's going as planned.

Okay. And Ed, could you just go over the components of other income again? That was a little higher than we anticipated.

Yeah. It was basically just -- the majority of that is interest, but there was some foreign exchange gains of about $375,000. Which was the main component in that. The rest was interest.

So 335 in foreign exchange?

375.

Is that something you expect every quarter or -

375.

Okay.

That all depends on what happens to the dollar, naturally.

Okay. And then did you buy back any stock this quarter?

No. No, none at all.

Okay. And maybe, Dick, if you can comment on you talked about the two -- the two competitive situations where you were selected and then ended up not getting the business. Can you comment just in general on closure rates, you know, how well you think your sales force is doing, you know -- you know, you mentioned the in-quarter pipeline was up 48% but it didn't really show up in the software number this quarter, so is that -- you know, where are your closure rates compared to where you'd like to see them.

Okay. There's two kind of questions implied in that which is our competitive win rate, which remains very good. And I mentioned those two sizable deals because we were disappointed. We had been selected and then couldn't agree to the business terms, which is kind of unusual. Usually we're able to get there, once we've been selected on the business terms.

So on the competitive win rate, it remains good. Closure rate, okay, partly affected by those two deals. Also affected by this volatility, where we had probably a higher percentage of deals -- and this is intuitive but a higher percentage of deals slipped than we really would have expected when we talked in October. And at the same time, we saw some pent-up demand that was there where people could get budgets approved, where deals got either upsized or out of nowhere and got closed in a 60-day period, so those were -- I don't know how you can say that in closure rate. That was very positive and happened very fast. So in general, I think we just continue to see a lot of this choppiness over the economy and budget uncertainty, but still a lot of business activity, and as I said, here in January, very strong level of demos and site visits going on, compared to January of last year, compared to our monthly average last year.

So it feels good, but whether people will sign contracts still -- it's still a choppy environment out there.

Okay. And do you expect to have any 10% or more revenue contributors in Q1?

Not at this time. I mean, historically that's been pretty rare for us. I think, you know -

I guess I should say that over two -- I think you had like back in the June quarter, two elephant deals. Do you expect any elephant deals this quarter?

In the first quarter?

Right.

We are always hopeful, but I -- in our -- kind of our forecast, we're not at this point counting on any sort of big, big deal. But there are some out there that are big, and that could -- the deals that might look like they're going to be a million dollars that could get bigger as the deal progresses and the customer sees the benefit of buying a broader suite. So there's that possibility. But we're not counting on that right now.

Okay. And then I guess final question would be: could you talk about the competitive landscape for logistics.com, who you expect to compete against and what would be maybe the top two or three differentiators, you know, how you're going to win the business?

Yeah. The -- you know, we're going to see competitively G-Log (ph), Manugistics (ph), I-2 in the space. We'll also see other carriers. It depends on the unique needs of the company or other vendors . And I think that we have a very strong offering for in-country transportation and have to build out a little bit more the global multi-modal capabilities over the next year. Strength-wise will be our architecture and our integration, and then the one weakness would be whether we have enough of the international capabilities today. But that's coming soon.

Okay. Thanks a lot.

Yep.

Your next question comes from Paul Rodriguez (ph) of Specter Detwiler (ph).

Yeah, hi, a couple of questions. Could you talk first about -- I don't want to read into this, but you have an emphasis, I guess, more towards open systems, as you talk about your percentage of revenue. Is there any reason for that? I know that IBM is attempting to overhaul the whole I series division but I was wondering if you can comment as to why you were particular business and the emphasis behind open systems.

No. We have a lot of belief in the I-series product as well. It's a great product for us, continues to have a lot of demand for it, so we see a lot of legs to it. We just, over time, between the Pronto and the (inaudible) product expect that given it spending is (inaudible) faster in open systems than I-series, that we'll continue to see that growth in our product suite as than we have been, but it's been slow and steady increase in open systems compared to I-series and it will vary by quarter. I mean, you know, you could have one quarter where I-series will jump ahead again but I think over time, we're going to see a slow steady shift towards open systems and we've been seeing that.

Regarding Q1, I -- you're not giving any guidance. That's my understanding?

That's correct.

Okay. With the kind of visibility you have in your model, is there any particular -- I just want to understand the reason behind that. And then as a follow-up, regarding kind of the -- the -- I guess you would classify, you know, the -- the services revenue and you talked about, you know, being a little under your expectations, how did that kind of play out in the quarter? Did you kind of see that coming in the last part of the quarter? Can you just help us out with that?

Yeah. And let me address the second question first.

On the services, we -- it hit us about the second week in November. We started to -- to see the fall-off. And so it was -- and this has happened to us, and we've warned -- you know, listen to all our calls. We've warned you that Q4 is harder to project on services. Last year, we had a lot less of this fallout. The customers are on short notice, either they find they're too busy, holidays are coming up, vacations of their employees, whatever it is, they give us notice on their projects and so our services forecast started to fall (inaudible) jobs got cancelled and when they get cancelled on short notice, it's harder to redeploy the people.

On the guidance issue, I mean there's lots of reasons for it. I mean this is their corporate governance, right? Many companies are not now giving guidance or they're been giving less guidance. We've been widening our quarterly guidance to are where it was pretty wide I think about $.07 in the last couple of quarters so that it was questionable whether it's that meaningful or not. And we have a very good track record of consistent performance and if you combine it with the feedback we've given today on the call, we think it gives investors a reasonable view of our business, and, you know, lastly I'd say that a few prospective customers from time to time have abused the quarter-end pressure and this gives us just, you know, a little more opportunity to not let that happen, if need be.

Just the last question. On the hardware revenue side, can you -- you gave that number, I think, as a percentage decline. Can you give that number again, and was that a -- just so I understand, that was a sequential number?

No. The actual hardware revenue for the quarter was up about 17% sequentially, but it was down 56% from the last quarter of last year.

Okay. Yeah, that's -

Because we had that huge 7.1 million deal in the fourth quarter of 2001.

Okay. Just -- yeah, just wanted to get that.

Lastly, can you talk about kind of sales headcount hiring? What your goals are, in terms of percentage heads or -- and is it going to be in both Pronto and PKMS, or is it going to be PKMS or what have you?

Well, we currently have 62 sales and account management personnel, and we are looking for, you know, good talent, international expansion, and other areas. We do have adequate capacity, however, at 62, to have a very good first six months here, so it's -- it's not an urgent need. There are a couple of pockets here and there, and we are looking for good people, but we don't need to ramp it to make some pretty good numbers here over the next six months.

Okay. Great. Thanks a lot.

Your next question comes from Chuck Thomas (ph) of Dreyfuss (ph) Corporation.

And operator, this may have to be the last one, so we'll wrap up after this. Chuck?

Hi. Thank you. A couple quick questions on average deal size. Maybe some color on deals between a quarter million and 1 million, the number in this quarter versus last quarter, and then some more on the timing of RFID and, you know, how important can that become and what will it take for that to become increasingly more important? Thanks.

Well, you know, we've cautioned people not to read too much into the average deal size. Our average deal size in the quarter was up over last quarter, and over our average for the year. So the fourth quarter was higher. But once again, that -- over the long term, we think that that average deal size is likely to continue to decline a little bit as we move into Pronto, optimization suite, PMS, and Infolink, more deals, but in Q4 it was up. With the respect to RFID, I think I'll let Eric kind of give his view on that, since he's here.

We believe that RFID is going to be a catalyst for companies to probably trade out some of their old and aging legacy systems in the coming years. An analysis we did shows there's about 16,000 warehouses in the U.S., with more than a hundred thousand square feet and we've got 21,000 warehouses out there with more than 50 employees. So it told us there's a lot of legacy and installed systems out there, and we think that RFID can be the catalyst to get people to upgrade to -- well, to either move out their legacy system or the catalyst to upgrade our client base. And also as a driver of Infolink, the product we demonstrated in Chicago yesterday, showed that info link today can print RFID labels remotely. The difficult thing is trying to put a revenue figure to that. I mean, I think what we're trying to do is build the foundation so that as RFID grows, we are the player in this space.

Any characterization of companies that have expressed interest in this to the point that they're willing to do test deployments?

Well, we have one pilot project we're working on now. We have a number of customers and prospects coming here in a week-and-a-half to have a symposium on the subject, so there is definitely a lot of interest by big companies. You might have seen a press announcement by Gillette recently where their 500 million RFID tags they're ordering. As the cost comes down, that's going to be the key driver and that's one of the reasons it's getting more interest now. The cost is starting to come down.

And what has been the change in the price point, and how much further do you think they have to come down to really, you know -- to recognize this catalyst?

Well, the goal from the auto ID center is the 5-cent tag, which is what everybody is trying to drive towards. That's probably a couple -- two or three years off, although the Gillette buy helps that.

We're looking at as we talked to customers around not -- we're looking at it within the four walls of the distribution center and then extending it across the supply chain with Infolink. Can we get it to an economic point where we can get a business justification around it, and it seems with the customer interest, that we probably can. We don't have to get down to 5 cents to justify the thing.

Thank you.

I think we're going to have to wrap up a very interactive session. We thank you for your interest, and we look forward to continuing to provide you good results going forward. Thank you.

That concludes the Manhattan Associates fourth-quarter 2002 earnings conference call. You may now disconnect.