Manhattan Associates Inc (MANH) 2003 Q1 法說會逐字稿

Good afternoon. My name is Tamara, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Manhattan Associates first quarter 2003 earning 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, April 22, 2003. I would now like to introduce Mr. Richard Haddrill, president and CEO of Manhattan Associates. Mr. Haddrill, you may begin your conference.

Thank you, Tamara, and welcome to our first quarter earnings call. On the call with me today are Alan Dabbiere, our founder and chairman; and Ed Quibell, our senior vice president and chief financial officer. Before we get into a discussion of the quarterly operations and our outlook, I did want to turn it over to Alan to discuss his recent decision.

Thanks, Dick. It is with both excitement and sadness that I am announcing that I am resigning as chairman and leaving the board of directors for personal reasons. As many of you know, I got married about a year ago, and I'm pleased to say my wife is five months pregnant. So I'm leaving the board simply to focus on and to spend time with my family.

I've been involved with Manhattan Associates for 13 great years, and my current role -- I just can't turn off. I think about the company 24 hours a day, and it's just now time for a break. As I leave, the company is clearly the industry leader, and I'm confident this management team will continue to perform. The company is in great hands, and I believe the most exciting time of the company is still to come.

We've added a great new board member in Paul Goodwin, CFO from CSX. He has excellent industry knowledge, and he comes to us with lots of experience, high energy, and is a high-profile person from a well-respected company. John Huntz will be taking over as chairman. John has been on the board since 1999 and having in independent chairman with his experience is a positive move for the company.

I'll continue to be Manhattan Associates' biggest advocate and will be available to the board and to the company as needed. I have many friends here and have no intention of competing in any way. I've been a major shareholder of the company and will continue to be prudent in dealing with my holdings as I currently have about 13% of the company's stock and plan to remain a long-term significant shareholder.

I look forward to continuing to support the company and working in a limited role to help the company be successful while, at the same time, being able to focus on my wife, my upcoming new baby, and my growing family. With that, I'd like to turn the call back over to Dick.

Well, thank you, Alan, and first let me thank you personally for the support that you and the board have provided to me during the last three and a half years and on behalf of all of our constituents, our customers, shareholders, employees, and partners, I really want to thank you for your founders vision, your entrepreneurial drive, and your significant contributions to our success for the last 13 years. I think we all wish you and Ashley the best life has to offer as you build your family, and we all appreciate your professionalism, assistance with some important handoff matters in the months ahead.

So thanks again, and we'll talk more about that together down the road.

Now, as Alan exits the call, I'd like to turn our attention to the first quarter and the future. Ed Quibell, our CFO, will give the financial report, and I will follow with some operational insights and the current state of business, and then we'll follow up with questions. Ed?

Thank you, Dick. Good afternoon, everybody. The first quarter of 2003 saw some tumultuous happenings in our world, especially in the last weeks of the quarter. This had ramifications for most companies as borne out by the reported results. Although our license fees were lower than our expectations, I am pleased to report that, in the circumstances, we had a very good quarter.

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 financial future 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 31, 2002, filed with the SEC on March 31, 2003. 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 31, 2002. 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 first quarter ended March 31, 2003, were -- total revenues set a new record at 46.1m. We had record services revenue of 30.2m with margins of 58%. The logistics.com acquisition met our expectations. We generated cash from operations of 8.3m with our cash balance at quarter-end reaching $128.5m. A disappointment in the quarter was that license fees did not meet our expectations with the resulting effect on our earnings. Overall, we performed admirably in a very tough environment.

Let me now review the numbers in more detail. Software license fees and hosting fees for the first quarter of 2003 totaled approximately 10.2m. This is approximately 4% lower than the fourth quarter of 2002 and an increase of 8% over the first quarter of 2002. Services revenue came back strongly and amounted to 30.2m. This represents an excellent increase of 10% over the fourth quarter of 2002 and an increase of 15% over the same period last year. Our services business continues to be strong, and we are excited about the changes taking place in this area.

Our hardware revenue was up 10% from the prior quarter and down 10% from the prior year. As I have 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 continued to be strong and achieved a revenue contribution of 21% for the quarter. This compares to 23% last quarter and 17% in the first quarter of 2002. There were no unusual items in the quarter.

Adjusted net earnings for the first quarter of 2003 were $5m, or 17 cents per fully diluted share. Adjusted net earnings excludes the amortization of acquisition-related intangible assets. This is in line with the range provided in our press release of April 7, 2003. The result is a decrease of approximately 28% from adjusted net earnings of 7m, or 23 cents per fully diluted share in the fourth quarter of 2002 and a decrease of approximately 14% from adjusted net earnings of 5.8m, or 19 cents per fully diluted share in Q1 of 2002.

Overall, our expenses increased mainly through the acquisition of Logistics.com, which closed at the end of the previous quarter. Research and development expenditure of 6.8m for the first quarter of 2003 was approximately 15% of total revenue. This is higher than our long-term goals, and the increase included approximately 1.3m relating to Logistics.com. We will continue to invest in our future and expect this percentage to gradually get back to our targeted 12 to 13% of total revenue.

Sales and marketing expenses were 7.6m, or 16% of total revenue for the first quarter of 2003. This is in line with the 16% of last quarter. General and administrative expenses, excluding depreciation and amortization expense, were in line with last quarter and remain at approximately 8% of total revenue.

Our services operations continue to operate extremely efficiently. Our services gross margin percentage was 58%, which is consistent with last quarter and up from 56% a year ago. Our operating income of 6.5m, which equates to an operating margin of 14% of total revenue is down from 22% achieved in Q4 2002 and 20% achieved in Q1 of 2002. This reduction relates directly to the loan and expected license fees and the increased expenses detailed earlier.

Other income for the quarter amounted to $557,000 and was down from last quarter due to lower foreign exchange transaction gains. Our income tax rate for the first quarter of 2003 was 35.3% as compared to 36.3% for 2002.

I will now address our financial condition at March 31, 2003. Our cash and short-term investments at March 31, 2003, amounted to dollars, 128.5m as compared to 121.9m at the end of Q4 2002, and 113.9m at the end of Q1 2002. Cash from operations during the quarter amounted to $8.3m after settling year-end accruals and annual bonuses from last year.

Deferred revenue increased by approximately 5.3m in the quarter. This increase related to our normal seasonal maintenance renewals and cash collected for projects not yet completed.

Our day sales outstanding stood at 71 days at March 31, 2003, as compared to 69 days, excluding the K-Mart recovery last quarter. This increase was due mainly to the growth I our international business. We remain well below industry average and near our target of 70 days.

Manhattan continues to show resilience and growth in a tough environment. The teamwork in the company is exceptional, and we are well positioned to capitalize on any turnaround in the macro economy. But in any event, we will continue to execute.

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

Thank you, Ed. Now I'd like to provide further details regarding our operations for the quarter and the current state of business.

We are very pleased with these first quarter results in light of the economic and geopolitical conditions during the quarter. There were many positives for the quarter. For example, our services business rebounded after a weak Q4, and we welcomed some key new customers during the quarter, including Dell Computer, a real leader in supply chain thinking; BMW and Gulf States Toyota, which complement other recent wins in the automotive sector; McKesson, the pharmaceutical company; Hastings in music distribution; Coleman Cable; and, in France, Panalpina, a 3PL.

Those of you that have followed us for the last few years know that our key growth strategies are product line expansion, geographic expansion, quality, industry diversification, expansion into tier 1 and tier 3 size companies, and developing strong partnerships in our marketplace. I am very pleased with our progress on these strategies during the first quarter.

Regarding the expansion of our product lines, open system license revenues represented 86% of Q1 license revenues above our historical norms of 40 to 60%, and the InfoLink product, our trading partner management business sector, had another solid quarter, which included a go-live with 200 supplier partners and benchmarking it over 1,000 suppliers.

Regarding transportation management, or TMS, the Logistics.com integration is complete and, as Ed said, the TMS performance met our expectations for the first quarter.

Now, regarding geographic expansion -- international headcount is at 195 personnel at March 31 versus 157 people at December 31 and 106 people one year ago. International represented 22% of our core revenues above last year's first quarter, which was 18% of core revenues.

Some key revenues we generated in Germany and France will help our long-term position in those newer markets, and we're beginning to see more leads in Asia, although relatively small by comparison to our business opportunity in Europe and the U.S.

Now, regarding quality -- I am very pleased with the success of our Bangalore, India, offshore development center. We now have 63 personnel in Bangalore, including three seasoned Manhattan managers who have moved to India. And our synchronized product release is on target for next month and represents a major quality benefit to our customers and our selling opportunities.

Regarding vertical industry expansion -- key wins in the automotive and industrial sector include BMW and Gulf States Toyota, as I mentioned, and the Dell win, which replaces a competitor, is a key win for high tech and electronics. McKesson is a solid win in life science, and overall the retail and consumer goods manufacturer segments made up about 56% of our total revenues this quarter, somewhat less than our historical norms, which have been in the 60 to 75% range.

Now, regarding our expansion efforts to serve the tier 1 and tier 3 size companies -- clearly, the addition of BMW and Dell indicate our continued expansion into tier 1. Our new strategic selling approach with our broad product sweep and key partnerships has generated some excellent consultative meetings with large companies, which should contribute to future revenues. And our Pronto product had its best quarter yet, indicating steady progress with smaller companies and with a Microsoft platform.

Finally, regarding our partnership strategy, yesterday we signed an agreement to pursue joint business development activities with Accenture. We are working together on a good joint pipeline, and we currently have several teaming projects with Accenture. And our partnership with Siemens, the largest material-handling equipment company in the world, was announced in February and now has good momentum with both parties acting collaboratively.

We also signed the PeopleSoft alliance in Q1, where we are their go-to-market solution for what they refer to as "Level 3 and Level 4" opportunities for complex fulfillment. And we continue to make progress with other partners such as IBM and Microsoft, and we certified JDA and See Beyond under our new ISV program. By any measure, this was an excellent quarter for progress on our strategies.

We continue to build a strong team of people. We are very pleased to have Paul Goodwin, vice chairman of CSX joining our board of directors. With excellent Fortune 500 company experience in logistics, I am counting on his independent advice and counsel to help guide us through our future. And our new board chairman, John Huntz, has a broad business background, is an expert in corporate governance, and someone that I have known as a leader in the Atlanta business community for 20 years.

As recently announced, we have done some management reorganizing at Manhattan Associates over the last 30 days with expanded responsibilities for Ramesh Srinivasan and Bruce Eicher. These changes will result in further improved customer service as well as efficiencies in our business.

Our total personnel at March 31 was 1,007, up 48 people from December 31 and reflects our continued confidence and investment in building our business. Sales and account management personnel were 62 at March 31, the same number as December 31.

As we look forward to the balance of 2003, there remains uncertainty, which continues to make forecasting difficult. Although we did not give guidance for the first quarter, we did not perform to our own expectations, principally due to the lower level of license fees that Ed referred to. We believe this was related to economic and geopolitical uncertainty and, since our last conference call, many economists have lowered their forecasts for economic growth. Consequently, we currently estimate that we will achieve adjusted earnings per share for our company for 2003 between 87 cents and $1.01 per fully diluted share. This range assumes a modest improvement in the economy and capital spending and does not assume any future acquisitions.

As we look forward, our level of business activity is very strong with all of our new business indicators -- inquiries, proposals, and RFPs, demos and site visits -- all up during the last quarter compared to the prior quarter and compared to a year ago. Our total sales pipeline is also at record levels. Now I caution that these are general barometers from our sales personnel systems and subject to judgments but nevertheless these are positive indicators.

And we are off to a good start in our Q2 -- really, our best start ever with over 2 million license fees closed in the quarter and another approximately $2m to $3m in percent complete projects that we expect to deliver during the quarter. We remain both enthusiastic about our business outlook and yet appropriately cautious due to this environment.

With that, I'd like to open up to questions. Tamara?

If you wish to ask a question please press star then the number 1 on your telephone keypad. Your first question comes from James Friedman, Fulcrum.

Thank you. So a couple of housekeeping details. It looks like the service revenue had a nice recovery from the Q4 levels. If you could furnish us with a couple of the operating metrics, for example, the hourly billable rate or, if that's too detailed, maybe comments about billability or engage time or utilization.

Yes, sure. Jamie, I'm just trying to get my billability --

It pretty much came out in the high 60s, Jamie. We don't give hourly rates, but billability --

It's 66%, actually.

Okay, that's billability.

It's just kind of in our target range in the high 60s. We'd like to see it in the low 70s but we're pretty much in the high 60s.

Can you remind us again what that was in the Q4?

It was 64% in Q4.

Great. You added, I think, or changed the language of one of your revenue line items where previously it was software and now it's software and hosting fees. For a primitive mind like mine, can you help me to understand what that means -- hosting fees?

When we acquired Logistics.com, they did have some ASP customers, and we continued supporting them. So there is an element of hosting fees in that item. It's about $840,000 for the quarter, but we just felt that we needed to describe it as that to be correct.

Okay, and then in that regard, can you give us a rough estimate of Logistics' contribution in the quarter?

You know, we have integrated Logistics.com totally into our company, and we're not breaking it out as a separate unit. Suffice it to say that we were very pleased with Logistics.com and mid to high expectations, but as we look at the whole business, it becomes very, very difficult to allocate costs across the different businesses as it's fully integrated. So we won't be breaking that out.

Okay, and the last question -- you seem to have some important success outside of the retail and consumer vertical, particularly BMW and Dell. Can you remind us again when it was last, if ever, that non-retail was as much as 56% of the company's revenue? Do you happen to remember that?

Well, to be clear, the 56% of total revenues was the combination of retail and consumer goods manufacturers, which each were around 27 to 29% each. They totaled 56%. So since I've been here, I think, you know, eight, 10 quarters, I think that 44% would represent the highest percentage of non-retail business that we've had.

Now, our pipelines, looking forward, you know, range in the 50 to 60% for those two segments again but that, once again, is somewhat less than our historical norm. So we are seeing some pretty good diversity and we expect to make continued progress on it, although it will vary, quarter by quarter.

Thank you.

Your next question comes from [Brent Bill] of Prudential.

Thanks. Dick, you had alluded to Dell's major competitive win. Obviously, a great label account for you guys. Can you give us a sense of what their implementation plan -- what they're going to be using, and any further light on the competitive loss there?

You know, first of all, we do not disclose details on individual accounts. Suffice it to say that Dell did buy a broad product line, and we do expect them to deploy multiple products and over the next six to 12 months we expect to be active with Dell on that deployment and, once again, we don't comment on individual competitors, either, but Dell did have a previous supply chain execution company's product installed, and we were able to convince them of the benefit of Manhattan's product. So that's about all we can really say about that, although we're very pleased to have them as a customer.

If you look at license revenues, they've been pretty flat over the last four quarters -- better than many other software vendors. What is going to cause more of a breakout on the license side -- is any upcoming product releases that you think will help fuel that? Or is it just general economy?

Well, I think it's mostly the economy -- people buying smaller projects rather than bigger rollouts and taking it more piecemeal, and we do continue to believe there is this pent-up demand reflected in our pipelines and the level of tire-kicking we're seeing. So I think it's certainly clearing up the geopolitical situation didn't hurt anything, and we're hopeful that if the economy improves that it will see people not only doing bigger projects but projects moving through the pipeline quicker.

Now, on the product side, we're building out some great functionality at Logistics.com and the transportation management sector that we think will provide some real competitive strength for us as we enter the second half of this year. And we're also doing our synchronized product release that we're rolling out in May that we believe will provide a great cost as well as quality imperative for our customers to make a broad product value proposition so that they will be interested in buying more products from us at the same time.

And then, lastly, I'll just say we continue to have this steady progress in trading partner management. We do believe there's a lot of interest in this area, customers are getting more educated about working with their trading partners in a constructive way; that they can control cost and factors outside of their own four walls. So we are excited about that.

Then, lastly, I would say that we have been focused very heavily the last nine months on strengthening partnerships. So some of the partnerships that we just talked about have the potential to drive some good revenue for us, particularly in the tier 1 marketplace where the deal size can be bigger and where there's still relatively low penetration of supply chain execution solutions. So the variety of fronts we're working on, it's hard to say which one will really take hold, but we're cautiously optimistic.

Great, thanks.

Your next question comes from Adam Holt, JP Morgan.

Good afternoon.

Hey, Adam.

We're all obviously aware at this point about the geopolitical situation and the impact on the quarter. I was wondering, though, from your perspective, if you look at, I guess, the linearity of the quarter, whether or not there was anything different at the very end of the quarter, you know, that maybe now a month since past has resolved itself from a demand perspective?

Well, I do feel like there was. Our pipeline held up relatively well during the quarter, so we didn't see, for example, in late February or early March that much fall-off in the pipeline, but there was, the last few days of the quarter, some surprise to us in some companies that had all but committed to sign. You know, we had a pretty good understanding with certain people in the organization they were going to sign, but they weren't able to get all the approvals done. So we were more surprised than we had been, even over the prior eight or nine quarters, where it's been a tough environment. And I do believe that although from time to time we've had some good closings early in the quarter, that some of this 2 million that closed early in April was due to companies feeling a little more comfortable in moving forward. But that's a subjective call on my part.

And were there any situations similar to last quarter, where the economics of a transaction didn't make sense, and you actually proactively walked away?

No. And that's not to say that terms and conditions have gotten easier out there. Customers are very demanding now, and competitors appear to be very desperate now, but I would say that we did not run into any meaningfully sized deal that we couldn't get through those issues with the companies.

And how many of the deals this quarter -- I apologize if I missed this -- were over $1m and could you comment on what the pipeline looks like, particularly at the high end?

We had two license transactions during the quarter over a million signed; one of those over 2m, and the pipeline, going forward -- but I would say for clarifying, that our average deal size during the quarter was slightly lower than our average of last year. So more transactions to make up the license number than, say, the average of last year. Once again, we've said that we expect some of that, a, due to the environment but also due to our focus on tier 3 market as well.

Looking out at the pipeline, there is a combination of bigger and smaller deals, and with a very strong pipeline I would, without knowing the exact statistic in my head, would think that the average deal size in the pipeline, going forward, is also smaller than the average of the deal size we did last year.

Okay, great, and then just one final question -- would you be comfortable breaking out what the mix was within your services between maintenance and actual professional services and what the margin was on the pro services business on a stand-alone basis?

We don't disclose that but, clearly, just our professional services margins would be somewhat lower in the very high 40s or low 50s as opposed to the high 50s, but we don't break that out.

And were those constant with the fourth quarter?

No, if you deduct the impact of maintenance, our services margins were up slightly in Q1 versus Q4.

Great, thanks.

Your next question comes from Peter Coleman, Soundview Technology.

Thanks, guys. Dick, I was wondering if you'd just give us a little bit of an idea -- I mean -- you've done such a good job of moving into some of these larger deals, and I guess I'm trying to figure out do you think about it a little bit differently with regards to increasing or decreasing -- obviously not -- the volatility in any given quarter and how you are trying to grapple with that?

Well, on the one hand, having a broader base of products, a broader geographic presence, and what I would say is less dependence on large deals, that's good news. On the other hand, you like large deals because they get you there quicker, right? I think our strategy in tier 1 is, first and foremost, to get companies in tier 1 to buy some of our suite and have a good experience with Manhattan, and if it means we don't get a big deal up front, that's okay. On the other hand, we do believe that a lot of the bigger companies know their buying power, they see the benefit of the integrated suite, and we'll continue to get tier 1 companies buying deals over $1m.

So I think we're going to continue to see a mix of good size and smaller-size deals, going forward. Do look for the average deal size, I think, this year to likely be the same or slightly lower than last year due to the environment but also due to our conscious effort to get customers with any piece of our product and to push into tier 3 as well as tier 1.

Okay. So I guess some of it is being offset by the performance of the Pronto as well on the other side?

It is, and the fact that some companies want to buy it and try it before they buy more. With that said, you know, if you look at our history, it's usually one to three deals over $1m a quarter -- Q1 was that way. As I sit here today, I wouldn't expect it to be any different for Q2.

Okay. And then on the partnership side, which you certainly have talked about, I mean, it seems like a fairly -- I don't know if significant is the right word, but it seems like a fairly decent shift from strategy in the past. You had a couple of fits and starts with some of the other software vendors, however, it does seem to be picking up some momentum, especially with the larger integrators. What is it, at this point, is attracting an Accenture to say, "Hey, let's do something," and what makes you confident that these relationships now are actually going to be fruitful versus some in the past?

You know, a couple of things there. One is we believe that supply chain execution is becoming relatively more important in the areas of IT spend and CEO's minds than it was a couple of years ago compared to other areas of spend. And so that's growing companies like an Accenture to be even more interested in supply chain execution.

Our emergence as the leader in the space and then our target at the tier 1 companies, who we believe are getting more receptive to package versus custom solutions in this area, where they're trying to reduce their IT budgets, and they're finding that package solutions can do that.

So I think there's a couple of drivers there. The partnerships you might be alluding to in the past -- I mean -- partnerships are never easy things to manage, right, and these won't be, either, but the fact that you have a Siemens, the largest material-handling equipment company in the world wanting to partner with us -- after studying the market for 15 months on this subject, that you have an Accenture, with their reputation in the tier 1 space, partnering with us -- PeopleSoft -- those are very positive moves and investments these companies are making. Our other partnerships, we're very pleased with our JDA partnership, our Intentia partnership. I think the only one we've really had disappointment in has been the Manugistics, which we still think can work, longer term, as they continue to stabilize their business and move forward. And even JDA, which is maybe a little slower now than it was three or six months ago, you know, they've had some internal challenges, but we still think they're a good partner, and we've got half a dozen deals that have a chance to close this quarter with them.

Okay, well, that's great. I appreciate that, Dick.

Your next question comes from Edward Wolfe, Bear Stearns.

Thanks. Dick and Ed, is Alan still there?

No, he's not, Ed, but he still plans to be at your conference.

That wasn't the question, but I was going to give him some congratulations and ask him a question. Maybe you know the answer. He alluded to it, but is there going to be any change in his 10B selling programs or anything like that as a result of his change?

What he told us is pretty much what you heard on the call -- that he intends to continue to be prudent. He did file a 10B5 a month or two ago, and I know he loves the company and the people here. So as I said here, I don't think we expect any major changes from him but, you know, as he said, he expects to continue to be prudent, and I know of no plan change.

Okay. Let's switch gears for a second -- I mean -- if you look at where the shortcomings were in the quarter, it was really on the cost side. You were pretty blunt about that in the pre-report. Can you talk about the costs? I mean, when I look at it, most of it looks like it's at R&D but also on the gross margin for license. How much of that is already fixable and how long -- where is it? Is it at Logistics.com and how do you fix it?

I think looking at the overall expenses, Ed, you know, we definitely do have Logistics.com, which added, as you know, 86 and heads into our organization, and we continue to grow. I think the best way to look at it is just to kind of give you some feel of what I think the expenses are going to look like, going forward, for the balance of the year.

You know, traditionally, we've always looked at R&D as being somewhere around 11, 12, 13%. I expect that's going to be about 12 to 15 and gradually we'll get that more back in line, but at this stage we need to put the additional investment into the integration, et cetera, of what we're doing. So I'm looking at a 12 to 15% there. Sales and marketing has been very consistent and should stay about 14 to 17%. The G&A, including depreciation, amortization, should be consistent at 12 to 14%, which would get our operating income back in line around 18 to 22%. So those are the kinds of expectations I'm looking at, going forward.

And getting back the R&D to 11 to 13, how many quarters are we talking to get there?

I think we're going to be looking at next year before we really get it totally back there. It should be a gradual move.

Okay.

Ed, let me just reiterate, too. We were not surprised by our expenses. We were disappointed in the license fee revenue.

Yeah.

But you're right, the Street definitely had expenses higher than we came in.

Yeah, so I'm guessing you thought you'd be able to leverage that with more revenue that didn't materialize.

That's correct.

Now, the 48 additional heads that you mentioned in the quarter -- how many of those were Logistics.com and where were they? They're not salespeople you said.

No, and let's be clear -- of those 48, about 12 of them were contractors that were doing contract work for Logistics.com in India that we put on our payroll -- that we've hired people to replace them. So there's actually a cost savings there, and then the exact increase in our India development of the other 48, there's at least 10 more of the other 48 that was growth in our Bangalore offshore development -- 10 or 12 more. So about half of that 48 is at a lower cost structure than you would normally expect and has been assimilated quite quickly.

And is it fair to say that some of them are going to help -- your service people have been so utilized, can you grow services?

Yeah, there have been adds in services, and we are adding services people now.

Okay, and then, Ed, you didn't address the gross margin on the license side. Is that going to pick back up, or is this a difference in mix?

You know, part of that, Ed, is with certain of our products, we resell an embedded component of another software application. So that varies, based on the mix of the product. And so that's harder for us to project. I would think that it's going to trend a little higher than last year, going forward, maybe not quite as high as this quarter. And then we also have costs related to hosting in there, which also contributes to that. So I would say it's going to continue a little bit lower than this quarter but still higher than what you saw last year.

I'm confused. I'm looking at a software gross margin of 89% this quarter, and last year for the full year I'm looking at 95. It's going to be somewhere between those two you're saying?

Yeah, I think so. It will probably be closer to the 89 because there is a little bit more embedded product in some of the new products plus there is some of the hosting fees, which we will now show in that line. So I think it's probably going to be closer to the 89.

Okay. And, Dick, with the Accenture agreement that you signed yesterday, can you give more flavor about that? Is this going to require them to do -- take some of the service component from you and, if so, what part of that? How are they going to get paid under this arrangement?

Well, you know, clearly, as we penetrate tier 1 and work with Accenture, and we worked with them on half a dozen projects here in the last year and a half or so -- in those projects we typically haven't seen significant impact on our services because the projects tend to be large in scope. There's a lot of work that they're doing surrounding strategy and business process and project management. So in terms of a percentage of the total project, we're likely to have a slightly lower percentage, but the projects will tend to be large and plenty of work to go around. And in terms of the license fee component, we would expect the same thing. So we don't expect significant impact on our margins from any of these new partnerships.

And how are they going to get paid? Then they're getting paid by doing these strategy and planning and business management -- their getting an hourly fee or how are they getting paid in that scenario?

Well, you know, when it comes to individual partnerships and low level individual customers, we're not going to discuss the details for competitive reasons and for respecting the individual partnership. So I really can't tell you more than that. We just expect it to be positive to our business and not have a significant impact on our margins in our business.

Is there anything in the pipeline with them yet?

Yeah, we have a half a dozen deals we're actively working -- the Siemens Dematic partnership. We have over 30 deals we're working of which half a dozen are pretty active. PeopleSoft -- the integration work won't be done until Q3, so that's a little too early, although there's a couple of joint opportunities there, but we're not expecting too much there for at least a couple more quarters.

Thank you very much, Dick, for the time and, Ed, and I appreciate it.

Thanks, Ed.

Thank you.

Your next question comes from Robin Roberts, Stephens, Inc.

Hi. Ed, on the Logistics.com subscription revenue, you disclosed about $840,000 in the first quarter, and I remember that you mentioned before LCOM's [ph] service versus license is about a 60-40. So if I put those two numbers together, I deduct that you got about -- a little bit over $2m from all Logistics.com that -- right deduction or?

Well, Robin, not totally, but I can't really break it down, but Logistics.com do also get license fees as well. So it's not as if it's only subscription business. Some of their products, there are license fees attached to it as well. We've now fully integrated them, so we don't break them out anymore.

How is your progress of cross-selling WBMS to LCOM's carrier base and vice-versa? What is the progress of setting LCOM to existing PKMS customers?

We've got a couple of active opportunities selling transportation management into PKMS customers. We have a couple of active actually going the other way, as well. So the cross-selling is going good. One of the reasons, just so you know -- we don't break out the individual revenue allocations is on some deals when companies are buying multiple products from us, it's sort of an arbitrary allocation as to how we allocate the spend, because the companies haven't bought them independently. So I would say we're pleased with the progress.

The one challenge I'll put forth that we talked about before is the TMS team has a lot of work they're building out for a couple of key customers that we closed on in late December with Logistics.com, and so we're somewhat resource-constrained and have to pick our opportunities carefully for the next couple of months.

Okay. You mentioned that sales and account management personnel total is 62. How many of them are former Logistics.com salespeople?

I believe it's around six. It's five to seven. I think it's six, and we did have that headcount in our December 31 report to you as well, and you will recall on the February call I did say that at 62 people we felt that we had capacity in sales and at 62 today, we still feel we can handle some pretty good growth in license revenues with that number. That said, we're always looking for good athletes, but don't look for the sales headcount to grow dramatically in the next three months.

Okay, and the sales compensation change and also a quota change -- now the salespeople were going to sell both LCOM and also PKMS?

There haven't been significant changes in quota, and we have some people dedicated to different segments but, you're right, most of the people do sell -- have the opportunity to sell both, but we haven't made significant changes to quotas. But thanks for that, because any salespeople listening should be warned -- maybe we'll increase quotas now.

Well, I'm wondering if is it possible for, let's say, existing Manhattan Associates salesperson be able to make their quota just by sending PKMS and zero LCOM?

Oh, yeah, for sure.

Okay. And at the pre-announcement, you also mentioned that you have closed $2m of deals in the first two weeks of the quarter. So after that how much deals have you closed and -- you also mentioned the five delayed deals from first quarter into the second quarter. Will you talk about the progress of closing those deals?

I don't recall us talking about five specific deals that slipped from Q1. We have closed a couple of deals since Q1 that make up over 2m of license revenue. We continue to be active with some deals that slipped from Q1 that we think will close in the next couple of weeks, and we have $2m to $3m worth of percent complete license arrangements that we expect to deliver on during the quarter. So that sort of sums up our hard visibility at this point, which is the best it's been, but -- and the pipelines are good. We still have to get things through the pipeline, but it is a good start to the quarter, for sure.

Okay, and last question -- with Alan leaving, are you expecting any changes to effort in the Japanese market?

No. As you recall, Alan spent much of last year in Japan, and one of the conclusions was that, at least for the near term, we did not want to and did not think we should go direct in Japan. So we did line up a partnership there that's progressing quite well.

Okay, thank you.

Your next question comes from Brad Whitt, Southwest Securities.

Yeah, on the 2m to 3m in percentage of complete, what products is that related to?

Well, some of it is in the TMS area, the transportation management area, that was part of the two engagements we closed toward the end of December.

I think that's most of it.

Traditionally, do you recognize PKMS modifications as software revenue or services revenue?

If we do co-development, or if there are certain milestone payments or unusual contingencies on any type of contract, we would defer revenue recognition to either beating the milestones or until percent complete and, under very unusual circumstances, to a completed contract method, and we've -- even over our history have had one offs every now and again that have been on percent complete.

Basically, the majority of any custom work we do, interface work or what we call "technical services," does go in our services revenue and recognize, as we perform it, on our PKMS deals.

Okay, because that 2m to 3m, you've never had that much in percent complete before, have you?

Oh, no, those were specific joint development deals. We did mention those on the last call.

I didn't realize they were that much. Now, the -- Ed, what tax rate shall we use, going forward? What's the 87 to 101 -- what tax rate are you assuming there?

Well, we're assuming around 35 to 37, so I think 36% is kind of where my middle mark on tax at the moment is.

Okay. Is that down from 37.5?

Well, not this, really, because last year we were at 36.3, and this quarter we're at 35.3. So I think, to be conservative, 36 is probably a good number.

Okay. Now, the 2m that has already closed this quarter -- do you expect to recognize all that this quarter?

Yes.

Okay. And do you expect to recognize software revenue from Dell or BMW in future quarters?

Well, without discussing individual clients, we do have at least a couple of deals where the company would be either committed to or highly incented to buy additional licenses from us within the next 12 to 18 months, and that's not uncommon, either.

Okay, and what about -- I think in the past you had talked about converting Logistics.com subscription revenue to license revenue. I'm just curious as to -- did any of that occur this quarter? What do you anticipate there in the next couple of quarters?

None of them have actually converted yet. We are working with them, and we'll continue to look at that, but if they want to stay subscription, we will continue to support them.

Okay, and are you still anticipating 15m to 20m from Logistics.com this year?

Yes, our outlook on Logistics.com hasn't changed either at the top or bottom line.

Okay, and just looking at some of the departures we've had over the last couple of quarters, some pretty key folks, including chairman, CFO, and senior VP of services -- do you anticipate any further management changes, near-term, here?

Well, I think we are always looking to have a strong team of people, and one of the things I'm very proud of is the team we have built, whether it's under Alan or under me or under Ed Quibell or under Neil Thall, and so we tried to build a succession plan in the company, and a transition plan in the company, that's very constructive. I'm extremely pleased with how those transitions have all played out, so far, and I expect these to go well. I have no other planned ones at this time, but it's a free market.

Okay, and a final question would be -- specifically, what third-party software are you using? That's a pretty big drop in the software gross margin. I mean, historically, you've rarely had gross margins lower than 95%, and now you're saying that 89 is more like what we should model, going forward.

Brad, you'll recall that we had 86% of our license revenues this quarter come from open systems, and as Ed said, some of the open systems products have a higher component, and then we also have the hosting costs that go in there. So those are the two issues that have caused us to think that margin will be somewhat less than it has been in the past.

Okay. All right, thanks, that's all I had.

Thanks, Brad.

Your next question comes from Chris Rowen, Sun Trust Robinson.

[no response]

Mr. Rowen, your line is now open.

Hi, one thing I was looking at is, on sales cycles, if you look, and you've added TMS, you added more of an effort into tier 1, and now you're getting into sales cycles with Accenture, and all three of those would tend to make me think that sales cycles are going to expand. Do you have that fully worked into your forecast? And what are you doing to counteract that?

Well, the forecasting approach is pretty disciplined with respect to qualifying leads, so regardless of where it comes from, it's up to the rep and the sales management to put the appropriate timeframe and qualification on it. Now, this economic environment is hard to forecast. I don't think being more in tier 1 or more with Accenture or more with TMS is going to cause us to have more difficulty forecasting. I think it's just going to continue to be the environment that will make that challenging.

One of the things we're hoping from our partnership relationships is that they'll do some of the selling effort and relieve us of some of that timeframe and some of that cost but, at the same time, tier 1 can be a long sales cycle, and we also believe that with the broad products we're doing more strategic selling, as I referred to in my comments, which is really a consultative, educational sale that can take a long time but the idea is to plant seeds at high levels in major companies, that they come to Manhattan when they do have a need.

So, once again, those kinds of selling efforts don't get into the pipeline as a meaningful deal in the near-term until it gets qualified.

Okay, and then does Dell qualify as an enterprise customer? I forget the exact term you were using for the large customers like K-Mart.

You know, we just would rather -- if Dell wants to talk about that, that's fine, but we respect individual customer confidentiality, and other than what I've said before, that we do expect them to be active with multiple product deployment over the next six to 12 months, I wouldn't say anymore.

Okay, that's fine, and then, lastly, what would you say is the gross margin on hosting?

I would say it's probably around 50%. I'll have to look at that a little closer. It hasn't been a material number, but I think it's about 50%.

Great, thanks a lot.

Thank you, Chris. Operator, we've got time for one or two more questions.

Your next question comes from [Tom Leach], [Bennett, Lawrence, Mann].

Yes, good afternoon, gentlemen. I've got a question on maintenance revenue. In your deferred revenue, you have a combination of service revenue and maintenance revenue, correct?

That's correct.

We've heard from a number of software companies that there has been pressure back from their customers on maintenance renewal rates. Can you talk about what the renewal rates are, especially with some of your large customers? I know you did a lot of work with K-Mart. Like, do they renew all their software? Because I know that's always been a big profit area for a lot of companies.

When it comes to specific companies, we won't discuss whether specific companies renew or not. Our maintenance renewal rates in the last couple of years have been very strong between 93 and 95%. This year the rate, I think, is, like, at 94%. Last year, I think it was 93. This year we've only got three months in. So it's very high, and basically it's sound economics.

I think, contrary to some other software companies, we have had a lot less situations where companies have over-bought and not deployed the software, and we also take a lot of pride in our high level of customer satisfaction, where they're using and getting benefit of the software. So we've seen good growth in our maintenance revenue and good strong margins there.

And when I look at your deferred revenue, especially you said were crossed over here where I guess a lot of people renewed their maintenance -- what percentage of the change we had in the deferred revenue was maintenance revenue?

It was just over 50%, and that happens quite a lot because some of the old Logistics -- old LogPro [ph] customers renew annually at the beginning of the year. So we normally do get a bit of an uptick of our maintenance revenue in the beginning of the year, but it was just north of 50% of the growth number.

And you mentioned before, your percentages were running around 95, then you said 94. So has there been a little bit of a trend of a few people cutting out maintenance to try to save a few dollars?

No, it's actually up this year over last year. So there was for the first three months of this year, the renewal rates, I believe, at 94%; last year they were 93%.

Thank you.

Your next question comes from [Barry Quinn], [Camelot Capital].

I was just wondering whether the rates that you were getting on the professional services side had begun to stabilize a little bit more than what they had been back in the fall, and there had been a lot of talk within the industry about having to really begin to, say, compromise on the consulting and services side in order to placate some of the customers?

Our services rates have felt pressure for two years and four months, since November of 2000. There has been a lot of price pressure on services. So I would say that's continued. It certainly hasn't gotten any better. What we've been trying to do to counteract that, Barry, has been -- we've asked our people to work a little harder, which they've done and through training and employee retention, we've gotten more efficient in our delivery on services that has allowed us to keep good margins in services.

But, yeah, you're right. There is pressure on rates, and that's how we've been trying to counteract it and doing a pretty good job, so far.

What are you billing at this point?

We don't give our billing rates out. Our people are typically billable between around 64 and 69% billability -- percentages, but we don't give out billing rates.

Would it be fair to say it's comparable to some of the -- from Accenture, for example?

You know, our billing rates tend to be a little bit lower than the top -- than Accenture would be.

Okay, all right, thanks.

Your next question comes from Brad Reback, CIBC World Market.

And this will be our last series of questions. Brad?

Great, hey, guys, how are you?

Great.

On the percent of completion deals, when did you -- or have you collected the cash yet for those deals?

We have collected some cash, and we've also collected some cash in advance, which has caused our deferred revenue to go up slightly as well.

So would that be the other half of the change in deferred in the quarter?

That is part of it, yes.

Okay. On the hosting side, do you guys outsource the hosting or do you host it yourself?

We actually use a third party -- independent third party to manage the data center for us.

Okay -- any chance on getting your rates down there?

We just renegotiated with them this last quarter, and the answer is, I guess, yes.

Okay, so we should see a little improvement there, maybe, going forward?

Well, we hope so. We'll see what happens.

That's not a big part of our business, though, Brad.

Sure, no, I understand, but, you know, 500K on the gross margin line is meaningful, right?

Absolutely.

And, lastly, Dick, on the management side of the business, obviously, you can't foresee when people are going to leave. It's going to happen. Is there anything you feel you need to do to sort of prevent more people from leaving, especially maybe when the economy picks up? Any changes in comp plans or anything along those lines?

I really don't think, other than Tom leaving, you know, that Alan and Neal -- those are different personal issues, and I don't think have anything to do with the comp plans, and I think we've got a great team that likes working here and that's well compensated, and we're always looking at it to make sure that they're fairly and adequately compensated.

Sure and, one last question with Alan. I'm not sure if you mentioned this or not -- is there going to be any sort of charge or any sort of cash severance payment related to his departure?

No.

No.

Okay, thanks.

Thank you, Brad, and, Operator, thank you, and we thank everyone for their continued interest in Manhattan Associates. We'll be wrapping up the call at this point. Thank you.

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