Manhattan Associates Inc (MANH) 2003 Q2 法說會逐字稿

Good afternoon. My name is Shayla and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates second-quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer period. (CALLER INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, July 22, 2003. I would now like to introduce Mr. Richard Haddrill, President and CEO of Manhattan Associates.

Thank you and welcome to the Manhattan Associates second-quarter earnings call. With me today is Ed Quibell, our Senior Vice President and Chief Financial Officer. Ed will review the financial results and I will give some more color on our operating results for the quarter and then we will open up for questions.

Thank you, Dick. Good afternoon, everyone. The second-quarter of 2003 continued to be difficult for the software industry, however, I'm pleased to report that Manhattan once again had a very good quarter, achieving record levels in both license and hosting fees and services revenue. 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 for the future financial performance of Manhattan Associates. You are cautioned that any such forward-looking statements are not guarantees of the 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 document 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 the Safe Harbor compliant 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 second quarter ended June 30, 2003 were, total revenue set a new record at $51 million, up 13 percent from a year ago. Software and hosting fees was also a record at 11.4 million, and we had record services revenue of 33.4 million with margins of 58 percent. We had adjusted earnings per share of 21 cents, an increase of approximately 26 percent over last quarter, and we generated cash from operations of 13.7 million with our total cash in investment balance at quarter end of 143.5 million.

Our DSO is reduced to an exceptional 59 days, once again a strong quarter in a difficult market. Let me now review our numbers in more detail. Software licenses and hosting fees for the second quarter of 2003 totaled approximately 11.4 million, an increase of 12 percent over the first quarter of 2003, and 11 percent over the second quarter of 2002. Services revenue were a record 33.4 million for the quarter. This represents an increase of 10 percent over the first quarter of 2003 and an impressive 19 percent over the same period last year. Our services business continues to perform exceptionally under the new organization.

Our hardware and other revenue is down 4 percent from the prior quarter and 19 percent 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 revenue contribution reduced to 18 percent from the quarter from 21 percent last quarter, but is up slightly from the 17 percent achieved in the second quarter of 2002. We received the last payment from the Kmart settlement in the amount of $848,000. We have recorded the recovery of the Accounts Receivable reserve for this amount and have excluded it from our calculation of adjusted EPS, which is consistent with our prior treatment of Kmart.

During the quarter, we incurred a restructuring charge of $893,000. This consists primarily of severance payments to approximately 25 employees when we reorganized our services and technical operations. We anticipate no further costs in relation to this reorganization in future quarters. This amount was also excluded from our adjusted EPS calculation.

Adjusted net earnings for the second quarter of 2003 were $6.4 million or 21 cents per fully diluted share. Adjusted net earnings excluded the amortization of acquisition related tangible assets, the recovery of Kmart reserve, and the restructuring charge. The result is an increase of 26 percent over adjusted net earnings of $5 million or 17 cents per fully diluted share in Q1 of 2003 and in line with the adjusted net earnings of 6.6 million or 21 cents per fully diluted share in Q2 of 2002.

Overall, our expenses increased in line with our expectations as we continued to invest in our future. Research and development expenditure was 7 million for the second quarter of 2003. This is consistent with last quarter at 14 percent of revenue. We continue to build out our India development center with the addition of 74 new employees. We will continue to invest in our future, but expect this percentage to gradually get back to our targeted 12 to 13 percent of total revenue.

Sales and marketing expenses were 8.6 million or 17 percent of total revenue for the second quarter of 2003. This increase of 14 percent over Q1 of 2003 is seasonal and in line with the Q2 growth in prior years. Additional costs were incurred with our annual user conference, trade shows, and the rebranding of our product suite. General and administrative expenses, excluding depreciation and amortization expense, were in line with previous quarters and remain at approximately 8 percent of total revenue.

As I mentioned earlier, we are extremely pleased with the continued performance of our services operations. Our services gross margin percentage remained at 58 percent, which is consistent with both last quarter and the same period last year. We encountered some rate pressure that was offset by improved productivity. Our operating income was 7.9 million, which equates to an operating margin of 15 percent of total revenue, up from the 14 percent achieved in Q1 of 2003, but lower than 20 percent of a year ago.

Interest and other income for the quarter amounted to 1.1 million. We continued to earn extremely low returns on our sizable cash position, but did benefit from the continued weakness of the dollar. Our income tax rate for the quarter was 35.4 percent as compared to 36.3 percent for 2002. I will now address our financial condition at June 30, 2003. Our cash and investments at June 30, 2003 increased $15 million to 143.5 million, as compared to 128.5 million at the end of Q1, 2003. Cash from operations during the quarter amounted to $13.7 million.

We closed the acquisition of ReturnCentral at the end of the quarter. The deal consisted of a cash payment of approximately $600,000 plus an earnnout over the next 24 months based on agreed sales levels. Deferred revenue reduced by 400,000 in the quarter to 20.2 million. This minor reduction related principally to cash collected for projects not yet completed. I'm very pleased to say that our Day Sales Outstanding improved an excellent 59 days at June 30, 2003 over the 71 days last quarter. This statistic is indicative of the overall satisfaction of our customers and the internal discipline of our organization. We remain well below industry average and our internal target of 70 days.

Although we only gave annual guidance, I'm pleased to report that we met or exceeded the street's expectations in all our major metrics for the quarter. Total revenue, license and hosting fees, services revenue, and adjusted EPS. We once again showed strong growth in a tough environment and we look forward to the inevitable turnaround in capital expenditure. Thanks for your attention. I will return the call to Dick Haddrill.

Thank you, Ed. We are obviously very pleased with these record results. There were many positives for the quarter, and I will just repeat again there was record level of license revenues, services revenues and total revenues and record net cash generation of $15 million in what is still a weak IT spending environment. And as you know from our last call, we were not particularly happy about our DSOs creeping to 71 last quarter and due to a concerted effort, reduced those to 59 this quarter.

And we also, as Ed mentioned, had excellent services margins at 58 percent. We also welcomed some key new customers during the quarter, including Giant Eagle, a leading grocery chain, Simon & Schuster, the Publishing Company, Specialty Retailers, Big 5 in the U.S. and Games Workshop in Europe, third party logistics companies, Sin Ram (ph) and New Roads (ph), and National Grid, a utility. And existing customers Cabelas, T&T Logistics and Chico's expanded their investments with us. We continue to make excellent progress on our key growth strategies of product line expansion, geographic expansion, industry diversification, quality, developing strong partnerships, and capitalizing on our ID developments. I'm pleased with our progress on these strategies during the quarter.

Regarding the expansion of our product lines, open systems license revenues represented over 80 percent of Q2 license revenues for the second quarter in a row, above our historical norms in the 40 to 60 percent range. We completed the acquisition of ReturnCentral, a leading reverse adjusted technology solution. We are very pleased with the interest that we are receiving in the solution, although a relatively niche market, returns comprise an estimated 20 percent of consumer product sales, and represent a significant cost saving and asset recovery opportunity for many companies.

Regarding transportation management, we continue to build out key functionality for major customers and have initiated major enhancements for both ocean and air transportation for a strategic European customer. TMS performed better than expectations for the quarter. And we released a revamped version of our labor product, which had not been a strong product for us in the past and does represent a quick and tangible ROI for many customers.

Regarding geographic expansion, international core revenues -- and core revenues are licenses and services combined, were up 38 percent from a year ago, and represent a 19 percent of total core revenue, up from 16 percent of core revenue a year ago, but down from the 22 percent of revenue in Q1. License revenues in Europe were weak in Q2, but services were strong. We continue to make some progress in Asia, although relatively small by comparison to Europe and the U.S., we went live with our first Japanese customer during the quarter and our second go live in Japan is in progress for later this year.

Regarding quality, I'm very pleased with the success of our Bangalore, India offshore development center. We now have 137 personnel in Bangalore, including four seasoned Manhattan Associates managers who have moved back to their home country of India. Our U.S. research and development team declined by nine people during the quarter. We expect Bangalore to reach a relative plateau soon at about 170 people. You will recall we just began this initiative a year ago. This research and development center is a strategic advantage to us, allowing us to further expand our lead in product quality, functionality, and interoperability.

Our synchronized product release came off without a hitch in May and has been very well-received by our customers and in our selling process. Regarding our vertical industry expansion, Giant Eagle continues our good progress in the food vertical. New roads [and] Sin Ram and the 3PL vertical and Simon & Schuster joins our list of publishing customers. Overall, the retail and consumer goods manufacturers segments made up about 53 percent of total revenues during Q2, which is less than our historical range of 60 to 75 percent. So we are continuing to make good progress on vertical diversification.

Regarding our partnership strategy, during the second quarter we closed our first deal related to our PeopleSoft partnership. We also completed the PeopleSoft product interface, where we expect certification this quarter, and began several marketing initiatives with PeopleSoft. Our partnership with Siemens, which is the largest material handling equipment company, and we announced that earlier this year, is generating some good leads and we believe we will close our first deal in conjunction with Siemens here in the third quarter. We did close one deal in the second quarter with our new Accenture partnership that we signed in April, and we have a dozen deals in the pipeline with Accenture.

We continue to make good progress with our other technology partners such as IBM, Microsoft, and JDA. Overall we estimate that about two-thirds of our deals in the second quarter were partner influenced. Regarding RFID, we recently announced RFID in a box to allow companies to develop a business case for RFID, and now have one customer and approximately 60 additional interested prospects for RFID in a box. In July, we invested $2 million in Alien Technologies, the leader in RFID chip technology and our founder and board member Deepak Raghavan, has agreed to join their advisory board. And we sponsored the CORFID (ph)symposium at the Auto-Id Center which was held last week. By any measure, this was an excellent quarter for progress on our strategies and leaves us very well positioned for the future.

I also note that 60 percent of our license revenue in the second quarter came from new customers, 40 percent from existing customers, reflecting a continued healthy mix of new companies partnering with Manhattan Associates, as well as existing customers continuing to invest. We completed the internal reorganization we discussed on our April call and this reorganization more closely aligns our customer advocates with our services implementation teams and our customer support organization with our technical teams. We are already seeing improvements in customer service and cost structure.

Our total personnel at June 30 was 1083, up 80 people from March 31, and reflects our continued investment in building our business and our belief in the market needs for our solutions. Sales and account management personnel were 59 at June 30, versus 62 at March 31, and is adequate to grow our business. Our team of people at Manhattan Associates again performed extraordinary well in the second quarter. Despite our ever more complex business and a difficult IT spending environment, they continued to meet or exceed the high expectations of our customers. I'm very proud of them.

As we look forward to the balance of 2003 and 2004, our company is very strong. With excellent cash flow, Ed mentioned 15 million during the second quarter alone. A leading product suite that is now integrated, a global presence, very good customer satisfaction, and strong domain expertise. We have been making good investments for our customers future at a time when most competitors are cutting back. However, we did not see noticeable IT spending improvement in the second quarter, although our sales pipelines are up significantly from one year ago, we are not seeing a corresponding increase in license fees flow through the pipeline. And in fact, we had expected $1 or 2 million more in license fees in Q2 than we actually produced. We are managing our business and providing our guidance with the expectation that there will be a modest improvement in the economy and in IT spending in the second half of '03 and in 2004.

Today, the average of financial analyst estimates for Manhattan Associates is for adjusted earnings-per-share of 2003 of 87 cents per fully diluted share. This seems reasonable within a 5 cent range either way. I should also note that if IT spending does not improve in mid term, we could curtail many of the investments we are making, thereby reducing costs. As we look forward, our level of business activity is strong and our total sales pipeline is at record levels. Now, these barometers are from sales personnel and systems and are subject to judgments, but nevertheless they remain positive indicators. We are off to a very good start to this third quarter, with a strong services backlog and approximately $3 million of Q3 software and hosting deals already signed, and another 2 to 3 million where we have been selected are in final approval and contract stages. Further, we expect expense growth to moderate in Q3 when compared to Q2.

We remain both enthusiastic about the outlook of our business and yet appropriately cautious due to the overall uncertainty surrounding the economy and IT spending and the normal historical challenges of software licenses in Q3. Without, Shayla, I would like to open up for questions.

(CALLER INSTRUCTIONS) Cameron Steel of RBC Capital Markets.

Could you talk a little bit about linearity in the last quarter and what you're seeing in terms of sales linearity in the current quarter?

We-- at many quarters with respect to our license fees can be tail-end loaded. Our services is more even throughout the quarter. The second quarter was not as backend loaded as many of our quarters are, and we expect the third quarter to be not as backend loaded as many of our quarters are. That said, the last few days of the quarter are always very interesting.

Also you are seeing a good traction with your open systems business. Ahead of where you thought it would be, could you describe what is going on there? Is it the partner influence that is impacting that, or is it a slowdown in the AS/400 business? Any color on that would be helpful.

We have seen a steady trend of increase in open systems. I think that a couple of things have caused us to have a more dramatic shift in the last two quarters, although I should say we still have plenty of interest in the iSeries, but in the last couple of quarters I think our sales force has gotten even better educated, as have our partners on our quality of our open systems product. But at the same time, I should add that IBM is very interested in further promotions surrounding the iSeries, so it is possible that going forward we won't be over that 80 percent level in the next year on a regular basis, but we do believe steady trending up from that 40 to 60 percent open systems up in the long term to 70 to 85 percent range is likely over the next one to two years.

Robin Roberts of Stephens Inc.

When I look at your guidance, it is down from the previous guidance you give of 87 cents to $1.01. I'm just wondering have you seen any decline in IT spending that prompted you to reduce your guidance?

No, I think if you will track our guidance, we said that we have expected a modest improvement in the economy in IT spending, and we did not see it in Q1 and did not see it in Q2, so as I indicated earlier on this call, we ourselves had expected another $1 to 2 million in license fees, so our second quarter, while excellent, was still not as good as we had expected, and that is due to what we believe is still the pushing out of this increase in IT spending to which we are cautiously optimistic that it will begin in the second half of this year.

Okay, and is Logistics.com revenue still on track? You expected $15 to 20 million run rate each year.

Yes, as I indicated, our transportation actually performed better than our expectations in Q2. We are particularly pleased with the functionality we are delivering and now that we are building out in the way of ocean and air, to be really a global product by the first part of next year, so we are pleased with our transportation progress.

Okay, and is that still a 40, 60 split between license and services?

Robin, it is coming in at around 40 percent license fees at the moment.

And is -- let's say that if I take the middle point of $15 to 20 million, so say 17.5 and I take 40 percent of that on a quarterly rate, and if I assume that Logistics.com license and hosting fees, and if I exclude that amount, it looks like that your license revenue compares to second quarter last year is actually down. Is that the right way to look at it?

We are not in the business of actually doing your model for you, but we appreciate your interest. I think what I would say that we are not breaking out separately our transportation versus our warehousing versus our optimization product suites. I will say that as a software company, we are in the business of constantly acquiring and developing new products and will continue to do that, so look for our growth to come from a lot of new products over the future, and that is always going to be the case.

Okay, do you still have the accelerated commission type of compensation structure?

We do have a compensation plan for most of our reps, not all of them, that would allow them once they go beyond their quota to achieve a higher level of commission than when they are below their quota.

And how many sales reps get to the next level of commission rate in the past quarter?

We're not going to disclose that.

All right. In your sales organization, the quota carrying sales reps number is down. I am wondering how much is the voluntary turnover versus just management looking at lower performance people and replacing them with better ones?

You'll probably recall from our prior two calls that we did say we have plenty of capacity in our sales force. Most every quarter, we do have a couple of people that aren't performing that it is best if we part company. I think one might have been voluntary during the quarter and the others would have been people that we nudged out. AT the same time, without knowing the exact numbers in my head, I believe we have added a couple in the quarter. So there is usually a little change in the mix of reps every quarter with some new ones coming on and some leaving.

Adam Holt of J.P. Morgan.

I was hoping you could talk a little bit about the large deal environment. I apologize if I missed this on the call, but did you break out the number of $1 million plus deals? Generally what the close rates have been like with larger deals?

We had two deals in the quarter over $1 million, and one of them over $2 million, which is pretty normal for us to have one to three deals over $1 million a quarter. As we look at our pipeline, and I think I mentioned this on our last call as well, we have probably a lower percentage of deals over $1 million than we would have had, say one or two years ago, but a very high volume of deals because our total pipeline is up, so in general, and if I look at our average deal size of the quarter, it is about consistent with our historical norms, but I would say as we look at the pipeline, there is -- we do not anticipate in this next quarter, for example, to have four or five deals over a million. We might have one or two, maybe three. So a lot of midsize deals in the pipeline.

And sort of along that line, in some past quarters you have given out ways to quantify the increase in the pipeline. Are you comfortable giving a number, perhaps what the sequential pipeline looks like or sequential in the quarter pipeline?

No, I did that two calls ago and due to the nature of the input into the pipeline data from our excellent sales reps, but they are sales reps, they are not accountants, feel like it is best just to leave that in general terms.

Okay.

And I did say, Adam, the pipeline is up substantially from a year ago, but I also said that based upon the pipeline is up, that same percentage isn't coming through the pipeline, so indicating that the deliberation of companies still remains very slow, very cautious, multi-levels of approval, so we are seeing that certainly in the marketplace, even though we had some great results here, we still thought we'd enclose another million, maybe two million in license fees in the quarter, based on how business was in early June even. So it's still, whether we see business activity high, pipeline growing, and it is a record pipeline we've got, we are seeing still moves through the pipeline pretty slowly.

Just a follow up on the guidance question, I had thought your guidance was 82 to 92 cents. Are you actually changing the range of guidance or are you maintaining the guidance you gave in the previous quarter?

The guidance we gave three months ago was 87 cents to $1.01 and that was assuming a modest improvement in the economy, and I think is consistent with my comment that we expected to close one to two million dollars more license fees in Q2, so now our guidance is 82 to 92 for the year, partly due to our economy not improving as we had hoped. And our own performance of 21 cents a share is very good, but we would like to do a couple of cents better in the quarter than we did.

Ed Wolf of Bear Stearns.

This is Philip Alling in for Ed. Can you give us a little more color on the pipeline with respect to RFID? And, you mentioned I believe you said 60 companies have contacted you. I wanted to clarify that, but could you give us a sense of what the expected sales cycle may be for that and are they all primarily interested in RFID in a box and what are the upgrades in new license sales opportunities in that space, and when do you expect we might see that flow through the income statement?

Let me just clarify in the pipeline I did say our pipeline is at a record level and did say that we've got $3 million worth of license and hosting deals closed already and another 2 to 3 million were we've been selected and are going through final approval and contracting, so we get a lot of good things going on with respect to pipeline. With respect to RFIDs specifically, the 60 I referred to are interest in the RFID in a box, which is really a proof of concept kit to improve the ROI in the business case for the business. We have other companies that are expressing interest in product upgrade or systems upgrade based on RFID. Very hard to quantify whether that is the sole driver at this point for their IT project or not. But the RFID in a box is priced at around $0.25 million, obviously could be more or less depending on the scope of the project, includes middleware, includes a limited license on our training partner management products, includes some readers, some chips, as well as business case analysis by our services team, and for that, we have a high degree of interest were people want to over the next, we think, 6 to 9 months really prove out the business case.

At the same time, it is one criteria in other companies decision processes for upgrading their systems, but it is hard to quantify how many people that is, and how much that could break loose some of this slow movement in the pipeline. We think it could and we hope it will over the next six months.

Is that hundred 250 K, is that all the license revenue for those sales, or is some of that services, and is there sort of a services component in conjunction to that?

There is a services component. There is actually a resell a few readers in with that and then there is a license component as well, so there is a combination of revenue lines in that $250,000.

Are you making any moves to perhaps set up a separate consulting practice in that area, or is it really you're just looking to sell RFID in a box and perhaps pursue a license sales opportunity going forward?

We have a small team of people that are focused on the core expertise around the middleware, the interfaces, the ROI benefit analysis, that we do see evolving into a strong consulting business around this, but it will be around selling our middleware and around our partnership with Alien Technologies.

On the international decline in international revenue as a percentage of total, could you give us a little more color about sort of what the plans are for addressing that, and is it your view going forward that international will perhaps trend down as a percent of total, or is it you think this is perhaps just a blip, or perhaps you can fill us in there.

In general, the international European market has been tough, I think, for a lot of software companies here recently. And with us, despite some very good inroads with some key customers and in some key markets -- and we are still laying track in Asia, laying track in Germany and France, so we are not backing off in those markets -- I think we're just taking what the market gives us, which frankly in Europe right now is not very strong. We are seeing a building of our European pipeline, which gives us confidence to continue to invest.

I've got a number of reps for additional people in Europe. We've expanded our headcount in Europe during the past quarter. So we still believe strongly in Europe. And yet Q3 has never been real strong in licensed revenue in Europe, and yet the pipeline is building where we feel like European business will be back on good footing certainly by the end of the year. And in Asia, there is enough pipeline building that we think that could be something interesting to talk about over the next six months, nine months as well, although still relatively small compared to the U.S. and Europe.

All right, what about increasing business you have with some systems integrators and larger firms such as PeopleSoft, what is your sense about the impact to services gross margins going forward as you work more in conjunction with these larger firms?

We're not concerned about an impact there. I think if you look at our Accenture partnership, for example, because that tends to be Tier I customers, our experience with Accenture projects in the past has been that our margins are just fine there, and our total dollars in services are just fine there. I don't see there being a significant change in our partnerships with PeopleSoft on that front or JDA or the other technology partners.

Final question, and I'll let someone else take over. Just on the ReturnCentral, the expected revenue contribution from them in the next quarter or two?

We're going to be a little cautious on that. We've got a couple of very nice big deals in the pipeline, which by being part of Manhattan are real deals now, we think, versus before we acquired them what we felt like those companies probably would not want to invest in a company as small as ReturnCentral.

But we think it can be reasonable, but I think at this point until we've closed a couple of those deals, we would rather be cautious and just say it's not that material at this point. I would also add that we see it as a strong differentiator for us, as we've talked to companies who say, "Gee, that's great you've got that down the road, I can see wanting to invest in that." So we're going to wait until we get through this third quarter and maybe give you some more guidance in October.

James Friedman of Fulcrum.

With regard to the headcount, Dick, you had mentioned you have about 1083 people, and you had increased that about 80 people in the quarter, but you took down sales slightly. Could you describe to us where it is that the additional headcount went?

The majority was in India, where I think we grew that by about 70, 71 people during the quarter, and from an expense perspective, that represents somewhere around a 60 to 70 percent lower cost to us than adding someone in the U.S.

Okay so with regard to your billable integration personnel, you didn't increase that headcount at all? If so, not meaningfully, but you did show quite a strong services revenue number. If you could decompose for us to some extent either the utilization in general terms the trend in the hourly billable rate, because you said, I thought, that you had some billing pressure. That would have meant that your utilization rate had to have increased significantly, if I'm doing the math right.

A couple of things there. Our services billable personnel did increase by 20 people during the quarter. I think I mentioned earlier that our U.S. R&D headcount was down nine, sales down by three, and a variety of other mixes shook out where we were able to add 20 billable people. With respect to rates and billability, I think as Ed alluded to in his comment, our bill ability is efficiency and productivity which we call billability was up in the quarter from our historical averages and our billing rates down slightly. Part of that is due to a couple of customers that have worked out arrangements with us whereby they commit to personnel for long periods of time, which allows us to achieve higher billability for which we can then give them a lower rate and still achieve the same margin. So if you net it all out, Jamie, I don't think we have seen any really any net change in our profitability and services during the quarter.

Last question then I will turn it over to someone else, but with regard to the license gross margin, could you go through, if you can, what this cost of sales on the license side are, and if there is any increased fee as you move from an AS400 iSeries environment to open systems? That would be helpful and what we can expect on a going forward basis in terms of license gross margin.

Our cost of sales on software fees was consistent with last quarter at about 11 percent. And that is because our open systems were in excess of 80 percent. But don't forget included in that number is our cost of sales for hosting as well, which runs at a margin of around 50 percent, so between those two combinations, if our open systems stays up there I would expect our cost of software fees to be around the 10, 11 percent, but as that mix maybe comes back a little bit to a little more iSeries, it could drop down to 9 percent. It is not going to be materially different.

Brad Whitt of Southwest Securities.

Just make sure I heard you correctly, did you say you took a $892,000 restructuring charge, is that what it was?

Yes, Brad.

And what was that all about again?

When we reorganized both our technical and our services side of the business, if you remember, our Executive VP left us and we did some reorganizing. There was about 25 people who we laid off and the restructuring charge relates basically to severance charges in that area.

Because you laid off 25 people, but then you added 20 people in your service department, so the headcount went about 80. I don't understand why you are taking charges out of the income statement.

These are severance charges; paying people for severance when they're not actually working for us.

Okay, and on other income, it doubled sequentially from last quarter. What is included in that other income?

Other income consists of two areas that [is our normal] interest on our cash and foreign exchange gains. The movement of money and the consolidation of our subsidiaries overseas.

And how much was the foreign exchange gains?

Foreign exchange gains were around $700,000.

Okay, would you expect -- do you anticipate that next quarter, or is it just hard to say?

Depends what you think the dollar is going to do.

Getting back to I think what Robin was talking about, it looks like if you just use some logical assumptions for Logistics.com, it looks like your core WMS business is down about 20 to 25 percent, so I'm just curious as to, are you seeing increased competition, is the market slowing down? What are you seeing that would cause your core business to be down that much?

Our core business is supply chain execution and when we have a sale, many times customers buy multiple products. We do make some arbitrary allocations. We didn't say our core business was down. I think you and Robin may have concluded that or may not. I don't know what your conclusion will be. But our basic business is very strong and we as I said earlier, we're going to constantly acquire and develop new products. I have been around the software business for 20 years. That is what you do in software.

Sure, now getting back to the visibility, you talked about 3 million already signed. I assume that is some of the percentage of completion in the hosting business?

There is some of that in there, that is correct.

Because that was about 2.5 million plus $800,00 I guess is what you talked about last quarter. Is that pretty consistent this quarter?

We've got about $3 million of deals closed, which are either business closed and shipped, or percent complete deals that we have visibility through for the quarter. We have another $2 to million of license deals that we've been selected that are in the final approval process and contract process.

Okay, so how would you compare your visibility going into Q3 with the visibility you had going into Q2?

Pretty consistent. I think in Q2 we had 4 to 5 million that was slightly lower number than what I just presented here, but part of it was a little harder than what I presented here, so I would say it is pretty consistent.

Okay, and your guidance, it looks like--

And Brad, our services visibility is a little bit better this quarter because our backlog at this point.

Yes, the guidance, that has been lowered a couple quarters in a row here, and I am curious as to if we -- you are assuming that IT spending environment is going to get better, but if I am an analyst and I'm assuming that IT spending environment is not going to get better, would I be at the 82 cents or below the 82 cents?

I think that is up to you.

But if you're saying that IT spending improvement is going to get better, is that to get to the 82 cents or the 92 cents?

Well, just to be clear what we said, we said we expect a modest improvement in the economy in IT spending and we said we expect to produce adjusted fully diluted earnings per share of 82 to 92 cents a share, and that is our guidance.

Why would you assume that the IT spending environment is going to get better? Why not just assume that it is not going to get better and give guidance based on that?

Brad, I think you're fully capable of doing whatever analysis work you wanna do. We are trying to follow what our belief is from how we feel about our business, from what we see in research reports from AMR and other economists, so we're doing the best we can to give guidance what we think is most appropriate to what we're hearing in the marketplace. You're certainly entitled to do anything you think you should do, as you have.

It seems like your guidance is more based on what the street has out there than what you're seeing internally. That's just my, cause that just seems the way it has shaked out the last couple quarters.

And if you got any further questions, we will move on. It is not a forum for you to comment, it is a forum for us to answer questions.

Any revenue from ReturnCcentral this quarter?

We closed it on 30th.

Any revenue, I guess no revenue from Siemens (indiscernible ) this quarter? You said expecting next quarter?

That is correct.

Chris Rowen of Robinson Humphrey.

Can you give us an idea of when you expect margins might get back to the 20 percent range, just kind of a ballpark?

Chris, part of the margin contraction was due to the Alcom transaction where we picked up a lot of personnel in connection with that, as well as these investments we have been making in things like RFID in Asia and global expansion. And also I think if you look at if we had produced $1 or 2 million more license fees, that would have had a pretty good impact on the margins as well. So I think as you see the IT spending improving over the next 2 to 3, 4 quarters, it is reasonable to expect those margins to improve a couple of points.

Okay, and on the close rates, one of the things that --

Can I just add one clarifying, too? If we chose to slow down the investments, we can clearly, as I alluded to in my comments, cut some costs. We are making the investments because we believe that IT spending will prove somewhat over the next 6 to 12 months, and therefore we think they're smart investments. But it wouldn't be rocket science to cut costs and get the margins up in short order if we chose to do that.

Fair enough. On the close rates, one of the things differentiated Manhattan over the last 1.5 years is that you have been able to keep hitting numbers and get the deals closed. And I think part of that might be because WMS is less discretionary than some of the other areas. I think you have even said that on previous calls. If some of the close rate issues and the close rates not getting better or maybe deteriorating a little bit, could it be because you're branching into trading partner management and transportation management, that you are leaking into more discretionary areas?

It could be Chris. I don't think so. I think it is a reflection from what we hear from other software companies and from what we see in our competitive landscape as well. I think it just continues to be a very deliberate decision-making process. Most customers seem to have been educated over the last couple of years on not venting their schedules for their vendor schedules, and requesting a lot of contractual things to get through the legal process, and so I think its just harder to force the timing to our schedule, and companies are very deliberate. So I don't think its that. It could be but I don't think it is that.

Terry Tillman of Soundview Technology.

I had a question on the TMS side. You had alluded to a European company helping build out some of the ocean and air. Was that a second-quarter deal and was that that on the opti (ph) manage side or the former opti manage branding?

It is on the former opti manage, and that was a plan we put together during the quarter. That is correct.

Is that similar to some to some of the other deals that you mentioned in the first quarter (indiscernible) percent of completion, this one would be, so that it is spread out over multiple quarters?

Yes. That was more of a product development initiative with this customer that they agreed to deploy our development initiative around ocean and air and help us spec it out, so it has very limited revenue associated with it and what revenue is associated with it to us will be services and will be incurred between now and the March timeframe, so it was contractually arranged during the second-quarter.

And in terms of the opportunity base, do you see it accelerating more of the pure TMS side or is it still more of an FY 04 story in terms of license potential?

Could you ask the question again please?

In terms of the opportunity base for the core TMS that you are working on-- the functionality side, do you see the opportunity base expanding in FY 03 in the back half or is this still a FY 04 story?

Oh, there's two things here. One is the functionality that we've been developing starting around the December timeframe for two major U.S. companies is functionality that we will be able to sell in the fourth quarter and perhaps even some in the third quarter here as it gets closer to being delivered. The functionality we're developing for the air and ocean that I discussed will be delivered in March, so realistically, we don't expect much revenue from those international demands until probably the first quarter, possibly a little bit in the fourth quarter.

And you may have mentioned this, I apologize if you spoke about it, but on the (Pronto) side, the Windows-based product, can you talk about demand trends for that?

Demand trends still good for that. We're not treating that it as a separate business unit anymore because it is now mainstream product line, but demand is still very good for that product.

Okay, thanks.

At this time, there are no further questions.

Thank you very much for your interest in Manhattan Associates and we appreciate your continued support.

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

(CONFERENCE CALL CONCLUDED)