Manhattan Associates Inc (MANH) 2003 Q3 法說會逐字稿

Good afternoon. My name is Tina and I will be your conference facilitator today. At this time I would like to welcome everyone to the Manhattan Associates third quarter 2003 earnings 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 star then the No. 2. As a reminder, ladies and gentlemen, this call is being recorded today, October 28, 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 and welcome to the Manhattan Associates third quarter earnings call. With me today I've got Ed Quibell our senior Vice President and Chief Financial Officer and Eric Peters our Senior Vice President strategy and product management. Ed's going to give us an overview of the financial results and then Eric and I will give some more color on the operating results and the strategic outlook. Then we'll open it up for questions. Ed.

Thank you, Dick. Good afternoon, everyone. Before I get into the details, let me first 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 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 to 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 as Exhibit 99 9.1 to the company’s annual reports 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 in the occurrence of unanticipated events or changes in future operating results. The highlights from our third quarter ended September 30, 2003, were total revenue matched last quarter's record and is up 17% from a year ago. We had record services revenue of $33.5 million with very strong margins increasing to 59%. Software and hosting fees was a disappointing $9.6 million, down from last quarter and a year ago and below our expectations.

We had adjusted earning per share of 20 cents, down a penny from last quarter, and the same period last year. We generated cash from operations of $7.8 million and that total cash and investments balance at quarter-end at $150 million. Our DSOs came in at 66 days, well within are our target range. Let me now review the numbers in more detail. A total revenue of $50.2 million equaled last quarter after adjusting for reserve recovery in the second quarter and in increased 17% over the same period last year. Software licenses and hosting fees for the third quarter of 2003 totaled approximately $9.6 million, a decrease of 15% from the second quarter of 2003 and 4% from the third quarter of 2002. Services revenues were a record $33.5 million for the quarter. This represents a minimal increase over Q2 of 2003 and an impressive 18% over the same period last year. Our services gross margin percentage was 59%, which is slightly better than the 58% of last quarter and consistent with the same period last year. We continue to see some rate pressure that was offset by improved productivity. Once again, our services business continues to perform very well in the quarter. Our hardware and other revenue was up 29% over the prior quarter and 59% over 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 17% for the quarter from 18% last quarter and 20% in the third quarter of 2002. The European business environment was difficult with very few new license deals in the quarter. During the quarter we incurred acquisition-related expenses of $885,000. This consists of legal, accounting, and other out-of-pocket diligence expenses on two deals that we chose not to close. This level of expense is unusual for our normal acquisition activities. We naturally will not be naming the target companies and we should not be incurring any further costs on these deals. This amount has been excluded from our adjusted earnings per share calculation. Adjusted net earnings for the third quarter of 2003 were $6.1 million or 20 cents per fully diluted share. Adjusted the net earnings excludes the amortization of acquisition-related intangible assets and the acquisition-related expenses. The result compares to adjusted net earnings of $6.4 million or 21 cents per fully diluted share in Q2 of 2003 and adjusted net earnings of $6.3 million or 21 cents per fully diluted share in Q3 of 2002. Overall, our expenses reduced over the prior quarter in line with our expectations. The research and development expenditure was $6.8 million for the third quarter of 2003. This is consistent with last quarter at 14% of revenue. Actual costs were down 3% from last quarter and up 25% from a year ago. The nine months ended September 30, 2003, we have invested $20.6 million in R&D, a clear indication of our long-term commitment to our customers and products. We will continue to invest in our future and anticipate R&D to gradually get back to our targeted 12 to 13% of total revenue.

Sales and marketing expenses were $7.3 million or 14% total revenue for the third quarter of 2003. This reduction to 15% over Q2 2003 is seasonal and also relates to the lower license revenue and showed an increase of 5% over last year. General and administrative expenses excluding depreciation and amortization-expense were in line with the previous quarter and remained at approximately 8% of total revenue. Our operating income was $7.4 million which equates to an operating margin of 15% of total revenue, is in line with the 15% we achieved last quarter. Interest and other income for the quarter amounted to $402,000 and is lower than the $1.1 million of last quarter and the $679,000 of a year ago. We continue to earn low return on our sizable cash position and did not benefit as much from foreign exchange variances. I will now address our financial condition at September 30, 2003. Our cash and investments at September 30, 2003, increased $6.4 million to $150 million as compared to $144 million at the end of Q2, 2003. Catch from operations during the quarter amounted to $7.8 million. During the quarter we invested $2 million into alien technologies and RFID chip manufacturer. They are our strategic partner and this investment strengthens our relationship. The recent central acquisition made at the end of last quarter has independent grated well into our trading partner management operation and achieved some early success in the quarter. After the end of the quarter we acquired stream soft, a optimization company for approximately $1.5 million cash which equates to slightly less than two times LTM revenue. With the strength in our financial position we will continue to look at strategic acquisitions that we expect to be accretive. The revenue was $18.1 million at September 30, 2003, up 2 .9 million from a year ago and down $2.1 million from last year. Increase from a year ago reflects the overall growth in our business and the decline from last quarter was principally due to the run-up of deferred maintenance which occurs during each calendar year as a result of heavy maintenance renewals in the first quarter of each year. Our day sales outstanding was a very good 66 days at September 30, 2003. There were 67 days last year and an unusually low 59 days last quarter. This statistic is indicative of the overall satisfaction of our customers and the internal discipline of our organization. We remain below our internal target of 70 days. As I have mentioned, we have come through a difficult period with the timing of deals has been extremely difficult to predict and although we are disappointed with our software fees this quarter, we have once again shown that we can continue solid financial performance in a tough environment and we are excited about the trends and opportunities we are seeing in the market. Thanks for your attention, and I will return the call to Dick Haddrill.

Thank you, Ed. Now I would like to provide some further details regarding our operations and the current state of our business. As Ed noted, we were disappointed with the level of license revenue for the quarter and had, in fact, expected $2 million more than we produced during the quarter of license fees. Europe was particularly weak at only $300,000 of license revenues, which is over $1 million less than their average of the prior six quarters. Also in the U.S. we were surprised by one $900,000 license deal where we had been selected and had finalized the contract early in the quarter. They decided to stay with their existing solution for the time being, which surprised us. We had 15 other decision deferrals at the end of the quarter of which three of those have now closed in October, seven where we have been selected and we expect to go to contract, three which remain active competitive situations, three which have been deferred until either later this quarter or next year, and one $100,000 license deal was lost to a competitor in October. Further, during the quarter we spent significant management time and expense pursuing two larger acquisitions of companies which had approached us wanting to be acquired. We found both of these deals not suitable and we incurred $885,000 of unusual out-of-pocket expenses in Q3. Now, despite these two disappointment areas the rest of the quarter was excellent, and the outlook is distinctly better. As Ed has pointed out, our Q3 services revenue and margins were very strong with record revenues at $33.5 million and margins at 59%. And as we expected, our expense levels moderated during the quarter. We also welcomed some key new customers during the quarter, including singular wireless, Ahn semiconductor, Bic, need west. Wall greens, BJ wholesale club where we replaced a competitor, [inaudible]supply, ocean pack, which is a part of HJ high , hot topic and Cobb Ed of New York. We believe this our competitive position is stronger than ever. We continued with a good mix of license revenues from both new and existing customers with 53% of license revenues coming from new customers during the quarter.

I am also very pleased with the continued progress on our key strategies during the quarter. First, regarding the expansion of our product line, open system license revenues represented over 80% of Q3 license revenues for the third quarter in a row, which is above our historical norms of 40 to 60%. The acquisition of return central, our leading reverse logistics technology solution, is going very well. We signed a marquee account for reverse logistics during the quarter and we are seeing strengthening interest for returns as well as the rest of our trading partner management solution. Regarding transportation management, we continued to build out key functionality for highly respected customers and our sales opportunities there are increasing. Regarding geographic expansion, the only disappointment was Europe's license revenue. European services revenues were good. We had a great European user conference in Amsterdam in October, and sales pipelines in Europe are improving after six months of weakness. We continue to make progress in Asia with two customer license deals signed in Q3 and a good outlook there. Now, regarding product quality, we continue to be very please with our Bangalore India, offshore development center. We now have 153 people in Bangalore.. This R&D center is a strategic advantage to us allowing us to further expand our product quality, and intra-operability. Our India development center and synchronized product release that we did in May have contributed to greater services efficiencies, and I was personally very pleased with our recognition by nucleus research and business 2.0 magazine in September which gave us a big thumbs up for our customer satisfaction levels. And this really builds on one of our core assets, our loyal customer base.

Now, regarding vertical industry expansion the retail and consumer goods manufacturer segments made up 49% of total revenues during Q3. This is less than our historical range of 60 to 75%, so we continue to build out our vertical industry progress however I should note that our retail sales pipeline has jumped quite a bit if the last three months. We closed our first deal with the federal government defense department and do see other opportunities with the federal government. Our partnership strategy is continuing to expand our leadership. During Q3 we closed deals with key partners Peoplesoft, Siemens, Extenture and IBM and we are very excited about premier partnership with Microsoft to supply RFID solutions to the market which leverages Microsoft technology. Regarding our RFID, we have approximately 160 companies interested in exploring our RFID pilot projects with us. Almost half of these are Fortune 500 companies. Of these, we have now signed three, three where we have been selected, and many others are progressing. Eric will talk more about our RFID in few minutes. By any measure this was an excellent quarter for our progress on our strategies. We are better positioned for the future than at any time in our past our total personnel increased by 13 during the quarter to 1,096, and we have plans to continue to selectively add head count because we see many opportunities. We currently have over 40 open requisitions for hiring. Sales and account management personnel were 56 at September 30th versus 59 at June 30 and is an adequate level to grow our business over the next few months. Our team of people at Manhattan Associates again performed extraordinary well in Q3. As we look forward to the balance of 2003 and 2004 we are very strong with excellent cash flow, leading integrated products, a global presence, very good customer satisfaction, developing partnerships, and strong domain expertise. We've been making good investments for our customers' future at a time when our competitors are cutting back. Further, our sales pipelines are up significantly from just three months ago and even more significantly from one year ago, and we do expect license revenues to improve in the fourth quarter. We are off to a good start in Q4 with almost $2 million of Q4 software and hosting deals already signed and another two to three million where we have been selected and are in contract and final approval stages. We currently expect adjusted earning per share for the fourth quarter to be in the range of 21 to 27 cents per fully diluted share, and at this time we expect to provide guidance for the year 2004 early next year. Now Eric Peters will give you a few more insights into our strategic progress before we take questions.

Thank you, Dick. For the first three-quarters of this year and leading up to today we continue to execute our marketing, alliance and gross strategies focusing our efforts on expanding our solutions to over 2000 companies growing our application footprint, expanding our technology leadership and supply chain execution and creating an eco system of partners that can enhance the value of the Manhattan Associates solutions. We continue to get key wins this with major partners like IBM and PeopleSoft and continue to add new partners and ISEs each quarter who enhance the value of Manhattan Associates supply team execution solution. Earlier this month we closed our acquisition of stream soft. Stream soft complements our current slot optimization offering by providing us with a Java based solution and adds over 40 additional facilities for the roster of companies that run Manhattan Associates software. This small team of sorting experts will also enhance our domain knowledge and expertise in the space. We believe the continued squeue proliferation and additional company in the marketplace makes this an acquisition that is both strategic and accretive. Earlier this month we had our fifth European user conference. It was a record event in terms of attendance and sponsorship. In fact it was one of the largest supply chain user conferences of the year. Our first Asia-Pacific user conference will be held next week in Australia. We expect a great turnout for this inaugural event and other events we are cosponsoring with our partners next week in Australia.

I would also like to provide an update on our RFID initiatives. The third quarter of 2003 we completed and shipped our first version of our RFID middle ware solution. We demonstrated at the EPC symposium in September an integrated [inaudible] geared towards helping companies jump start their Wal-Mart compliance initiatives. We had our first customer executive training session, and later this month we'll hold our first two-days hands-on implementation course. And finally to follow up on Dick's comments regarding Microsoft, we view the Microsoft RFI D relationship an important expansion of the Microsoft relationship we have today. We want to be the trusted band in RFID to [inaudible] deliver RFID solutions that reduce risk of implementation and provide superior results as companies move toward an RFID supply chain environment we continue to see our pipeline for R FID opportunities expand and want to be in a position to take advantage of these marketplace opportunities as they develop.

And finally an update our synchronized release Strategy. May was our first synchronized release of the product and the goals of the release were to improve product quality, improve product development efficiency and improve the integration of the different products. To that end we have seen a significant improvement in the quality of the codes since the beginning of the year. We were also able to complete the integration of the transportation products into the core Manhattan products in only seven months demonstrating the flexibility of our architecture and the capabilities our product development organization. Consequently, we have been able to become even more efficient in product development while improving overall customer satisfaction. This will allows to deliver a 4R 1 release in Q1 of 2004 that will be the most feature rich release ever. We will be bringing the mark new RFID capabilities. We'll be adding functionality of the transportation and trading partner management suites, and we'll be releasing new supply chain execution applications. We believe these investments will allow us to increase our strategic selling capabilities and increasingly make Manhattan the partner of choice for supply chain solutions. Now I'll turn it back to Dick Haddrill.

Thanks Eric, Operator , I we're ready to open it up for questions now.

At this time I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ed Wolfe with Bear Sterns.

Hi. This is Phillip Alling for Ed at bear. A couple questions on license revenue. From looking at, if I back out expected revenues from logistics.com, looks to be that your core license revenue would have been about $6 million in the quarter. That's a pretty significant drop-off from earlier levels. Can you give us a sense of sort of what's going on with the core WS business and -- should we be looking at it that way or is that skewing the results some.

Just to be clear we certainly consider transportation core to our business. We've been in transportation now for four years. And it is a core of our business. I think in general the space was pretty tough in Q3 overall, and I don't know whether people were hesitating a little bit to pull the trigger because of RFID considerations, that they wanted to finalized over the next few months, but our competitive win rates in the quarter were very good and we continue to make good progress with our non-WMS products. I can tell that you our WMS pipelines are up nicely for Q4. As you know, Phillip, it's difficult for us to say which percentage of our revenues are from any one product line because we have a number of sales that are multiple products, but in general we are seeing strengthening demand for WMS as we're looking forward now.

Okay. With respect to 4Q, you had made the comment that management was expecting $2 million more in license revenue than your recognizing in the third quarter. You know, what are you expecting? What are management's expectations for license revenue in the fourth quarter? You expect that it's going to be up. What sort of range are we looking at with respect to sort of license revenue assumptions for the fourth quarter?

We're not giving any guidance other than the adjusted fully diluted EPS of 21 to 27 cents but we are at this point confident that license revenue will be above Q3 for this year, and as you know our Q4 for services can vary, so I think that you can work your own numbers, but we are expecting license revenues to increase in Q4.

With respect to guidance for the fourth quarter of 21 to 27 cents on an adjusted basis, the midpoint's about 24 cents, that's up 4 cents from what you reported for this quarter. In the last three years the sequential increase in adjusted earnings from the third to the fourth quarter has been 2 cents, 2 cents and flat the last year. Could you just give us a sense of why you think that this year that you could make a 4-cent sequential improvement when that's really not been what you've done the past several years?

Well, we appreciate your math. Of course, we're not giving our guidance is 21 to 27 cents, but I think a couple of points. One is that the -- we certainly were disappointed with the license fee, in Q3. We are into Q4 with significantly higher sales pipelines than we had three months ago and high level of business activity, so it allows us to feel comfortable with that 21 to 27 cents adjusted EPS range.

Okay. With respect to RFID, can you give us a sense of when you expect to see meaningful revenue from that and sort of in your assumptions going forward now with respect to RFID, do you still consider that the largest driver of growth for calendar '04.

I don't know if that will be the largest driver, at least from our business plans we're excited about our RFID but we're not yet spending as if RFID. is going to be the biggest single driver for the next 12 months but we certainly see it causing a lot of activity. Of these, for example, 160 companies that are talking to us, as I mentioned, about half of them are in the Fortune 500. Most of them are not currently clients of Manhattan many of them, we've got, I think, about 20 or so that are well along in the sales process that would factor into a pipeline. We've got a pipeline of about $6 million of license revenue for RFID that is relatively near-term of those, say, 20 or so companies we have got a dozen or so telling us that after the Wal-Mart meeting on November 4th they think they'll have some decisions, and we've signed a couple of them already of that 20. So we're beginning to see, as the Department of Defense, as Wal-Mart provides more clarity, and we have the Wal-Mart meeting November fourth, we do see more and more clarity coming that will allow customers to move more aggressively not just on pilots but programs, so we are excited on the one hand and yet we only expect it to be a fairly modest amount of our Q4 business.

Just a final question of these 160 or so companies that have expressed an interest so far in doing something on the piloting side of RFID, how many of those are existing customers?

Eric, what do would you say, about a quarter of them maybe?

Yes, about 25 to 30% are existing customers.

And what percentage of those do you think are existing suppliers to Wal-Mart or the Department of Defense?......Would that be all of them?

relative to Wal-Mart, 25 to 30%. We haven't categorized the Department of Defense suppliers.

Thanks very much, gentlemen.

Thank you, Phillip. Next.

Your next question comes from the line of Adam Holt with JPMorgan.

I was wondering if you could break out the number of million dollar deals that you had in the quarter.

Yes, one of the challenges to Q3, Adam, was we did not have as many large deals in the pipeline. We closed two deals in the quarter at $1 million, and they were just at $1 million, and as we look forward for Q4 and beyond, we have back to a healthier number of deals in the pipeline that are over $1 million, and some of them could be a million and a half to three, four million dollars deals so we feel better about the big deals going forward but Q3 had two that were right at $1 million.

Of the deals that you thought you would close that slipped into the fourth quarter, is there any common denominator that is -- seems to be popping up again and again with the variability in those types of deals?

Well, the challenge we have had is we tend to sell often middle level in an organization and often times at a subsidiary level, so it requires numerous signoffs, which I think a lot of IT companies are seeing, and in our case since it's often with middle level people it's hard to get a read and Q3 is particularly challenging because of the vacations, and over the last few years you've found that people not willing to alter their schedules for their technology providers, and I think the biggest challenge we had was getting the signoffs on the deals on our schedule as opposed to the company's schedule.

But I guess what I'm asking is that has been the case, that that environment has been the case for several quarters. You know, as we look into the fourth quarter, at what point due feel like you're adequately able to cut the pipeline, the expectations, you know, to take into consideration those factors going into the quarter?

Well, we've done a relatively good job of forecasting. I do believe that in Q3 here we did caution you on our July call that Q3 can be the most - difficult to read because we've historically had problems with sign offs and vacations, particularly in Europe. And Europe I must tell you was very disappointing. We didn't expect them to have a $2 million license quarter but we certainly expected them to do better than $300,000 but we couldn't get signoffs and some of those deals are coming along just fine now but it's dragging on another month, so I don't know that we have seen anything new but Q3 has been harder to get signatures than other quarters.

Just two final questions. Would you anticipate seeing a sequential increase in license revenue into the fourth quarter and secondly, of the $6 million in pipeline deals for RFID, you said reasonably near term. What would that duration look like? Thanks.

Yes. First, we do expect license fees in Q4 to be higher than Q3, and with respect to the -- you know, the RFID pipeline is probably our most dynamic because people are evolving their thinking on their plan for RFID, whether it's pilot or full-blown and whether it's now or it's later so that's the hardest one to read. As I said earlier, though, I do believe we are expecting our RFID to be relatively small contributor to Q4 License fees. Like I said, we've got three, where we sign three deals; we've got three where we've been selected; we've got another 12 that we think could make decisions after November 4th but most of these are pilot projects which would be modest in license fees. Now, there are a couple that are looking to do some pretty broad applications so it's a broad range. Our RFID license fees in Q4 could be anywhere from 300,000 dollars to 2-1/2 million dollars. Pretty broad range.

Great. Thank you.

Your next question comes from the line of Robin Roberts with Stephens incorporated.

Hi. If I look at your guidance and add all the numbers up, it looks like guidance for fiscal year '03 is 79 to 85 cents, and that's down from your previous guidance of 82 to 92 cents, and this is the third quarter in a row you reduced guidance. And when I look back, looking at year '01 and '02 when every other software company was reducing expectations, you were the only one who were able to maintain or exceed expectations, and now it looks like the trend has just reversed. I'm wondering what has changed in your organization or forecasting methodology or fundamental shift in your market demand that has caused the constant reduction in guidance.

Well, just to be clear, as we discussed on our last call, I think in response to one of your questions, Robin, was that we have given our guidance each time in the first three-quarters based on an assumption of an improved economy and improved IT spending environment, which for the first nine months of this year we didn't see and most technology companies did not see. We're giving our guidance for the fourth quarter based on the current conditions as we see them here in the fourth quarter. So our fourth quarter guidance doesn't have that qualifier on it. So had we seen the modest improvement in IT spending that we expected, and I think most economists expected it in January this year, we are confident we could have made that initial guidance we gave.

And so the head count you add in, the thirteen head count you add, were they sales people or none of them quota carrying salespeople.

None were quota carrying salespeople on a net basis. They were, you know, a variety of departments in R&D and international, and of the hiring plans going forward, a number of them are billable people and some also in international and R&D. We think that our sales head count is probably, as I've said for the last few quarters, we have capacity to grow the business with our current sales head count and probably won't increase that much during the quarter, but would probably start to increase it again early next year.

Okay. If I look at your sales marketing as a percentage of total sales, this quarter was 14.5%, and that compares to 16.1% in the third quarter of '02, so there is year-over-year decline and also there is $1.3 million sequential decline. I'm wondering if the decline, is that caused by lower commission payout or is that caused by lower sales head count? And is the current rate sustainable either on a dollar basis or as a percentage of sales basis?

Robin, this is Ed here. It definitely wasn't a reduction in head count. There was a reduction in commissions, but it was also seasonal in the fact that Q2 is a very expensive quarter for us with our momentum conference, trade shows, et cetera. So we were anticipating some of that sequential reduction, buts there was some natural commission reduction due to the fact that the license fees were lower than the previous quarter.

Okay. And, Dick, will you go through those deals you detailed, like you have three deals that delayed but closed already and seven likely, pending closing, and the rest, I'm just wondering, can you give us a breakdown between those deals. Are they more WMS or TMS or a combination? And, also, you said that the U.S. deal that was a $900,000 deal, supposed to close but they stayed with existing system, was that a WMS deal or TMS deal?

That $900,000 deal, to answer your second question first, was principally a WMS deal, and then I'll kind of review what I said about the deals that deferred. There were 15 decisions that were deferred at the end of September of which three we have now closed in October, seven where we have been selected and are in the contract and final sign-off stages, three remain open, active, competitive situations; another three have been deferred, meaning we don't know when it's going to come back. It could come back in December; it could come back next year, but they haven't cancelled the project. They just have stopped and delayed a decision process for the time being. And then one of the 15 for about $100,000 we lost in October to a competitor.

Okay. Can you give us some details? Were these all WMS deals?

No, they're all across the board. They're all a mix, pretty good mix of the product lines.

Okay. And lastly, Dick, when you look at the environment and also look at your own organization, what factors can accelerate to the deal closure rate given you have a strong pipeline and yet you're back to the trending in 2002 or so where you kind of exceed expectations and what factors will further delay deal closing and cause you to reduce guidance again.

Well, a couple of things on that front. First, I mean, our revenues have continued to grow. If we wanted to make the EPS guidance, we can certainly cut costs and do that. That's not hard. We felt like the investments we're making are really good investments strategically, and if you look at our competitive situation, it has never been stronger, so the key is going to be for IT spending to come back, and I think many people are starting to feel better about that, but it's really hard to predict how fast it's going to come back and when, but we are certainly well-positioned for that. As it comes back I think the main issue is with building pipelines and fairly flat license revenues, clearly what's happening is deals are taking longer to close. So we just need a little bit more confidence out there for companies to go forward and not find any little excuse to delay a deal. We think we have strong ROI proposition and integrated broad product sweep that we're going to be able to sell more and more strategically. We think because we have got to broad product sweep we're going to see some bigger deals the IT spending environment improves where we can sell a broad product line to customers who want to take advantage of the single partner. So it's all a matter of IT spending, Robin, and I think as we look at our guidance for '04 we're certainly going to consider how we feel about the IT spending environment at that time, and that's one reason we're not making any 04 guidance. We want see how Q4 goes given our strong growth in the pipelines right now. We see our closure rates wrap up in the fourth quarter and be in a better position to give you our view on the IT spending environment as we go into '04.

Thank you.

Thank you.

Your next question comes from the line of Cameron Steel with RBC Capital Markets.

Thanks very much. Just a couple questions. Dick, you can you just clarify a comment you made earlier in terms of M&A activity going on in the quarter. You mentioned there were two opportunities you were looking at. Could we take from those comments that they are not going to close or there is a possibility that one of those may actually close .

Just to kind of reiterate some of our M&A philosophy, we're certainly looking for acquisitions that are Los-risk, and you've seen us do a series of smaller acquisitions of good products, good people that fit into our customer base and our infrastructure, and we can integrate the technology quickly. If deals are of a larger size, we're going to be more cautious because many deals are not successful. We want to make sure the integration risk is reasonable; that we're getting some good products and people and that we can make the deals accretive. There happened to be a couple of deals in Q3 that came to us. We weren't looking for them. We spent a lot of energy looking at those deals, and we just couldn't make them near-term accretive in our minds, and so we backed away. Could those deals come back? They could. But we, again, are going to be disciplined in the acquisition process to be confident we can integrate them and make them accretive in the near term.

Okay. Could you just comment on the pricing environment? Are you seeing any desperation tactics that maybe by some of your smaller competitors that are pressuring deals maybe in the short-term? Can you just kind of comment on what you are seeing out there?

Yes, pricing pressure continues, and it certainly is an indication of what I think is a tough environment for our competition who is not able to invest like we're investing. So our strategy is to continue to differentiate with broad product sweep, great functionality, global presence, strong partnerships, minimal risk of installation to differentiate and to be able to command a premium price. Not always able to do that, but we typically are able to command some premium over the competition, and once again I think as IT spending improves there will be some pricing power return but there is a tough competitive environment on pricing right now.

Dick, are you seeing more or less seven-figure opportunities in the pipeline?

More today than three months ago.

Okay. And then lastly, could you just comment on what was the contribution in the quarter from both funded development projects and the hosted business and what you would assume that would be in the fourth quarter?

The only area we talk about is hosting, which is approximately $800,000 and has been consistent and should be the same going forward.

And I think you've broken out the funded development in your filings historically. Is that not going to continue or is that completed?

I think, Cameron, what I did say earlier was that we had almost $2 million of deals that either represented hosting or deals closed, and then another 2 to $3 million of deals that have been selected. That probably gives you what you need to know close enough without us giving you too much customer information.

Got it. Okay. Thanks very much.

Your next question comes from the line of Allen Winefeld (ph) with Fulcrum Global Partners.

Hi, Dick and Ed. I was wondering in the retail CPG side, last year when some of the -- your partner JDA or competitor Retech was having trouble on larger deals or merchandising customer facing like CRN that you guys were still plowing ahead strong with the lower costs by solutions, do you think those companies still of your business are playing offence now, that they have a better at least consumer economy that looks like a better holiday spending period for those companies? Are you seeing any of that for your customers, more buying of merchandising, CRM type solutions, maybe a deferral of something in execution area?

Allen, our value adds up to retail sales effort, has the view that we do somewhat lag investments in merchandising systems. On the other hand, we do see times when retailers are unwilling to invest in long lead time, long deployment projects in favor of our projects. So I would say there are times when we can decouple and accelerate. There are other times when we'll lag. And we have been watching what's going on there and have noticed in the last, you know, 60 days a pretty nice jump in our retail pipeline. So we'll see. We have a lot of activity in the retail sector again now where the last nine months or so we've actually had pretty good success moving into new areas like high tech and manufacturing where ARC says we're now the leader like the government sector where we've got a good pipeline, but we're seeing the retail pipeline jump back here in the last 60 days.

About the open systems, is that going to stay at relation if I have, you know, 80% license? I know that each quarter you said it probably would go down somewhat but it seems like it's probably a good thing long-term that everyone's going for the Internet architected software.

Yes, I think there is three-quarters that it's been over 80% I think it's been a point of interest as to when our customers are going to be switch to be more systems oriented. It looks like that transition has occurred. At the same time we have got a lot of customers that still love the I series and we still have a number of good opportunities for I series. But I think as far as we are concerned, the transition is complete. We expect to probably be 60 to 90% open systems for most quarters going forward with still a good interest in I series, but probably not going back to that 50/50 ratio any time soon.

Just a quick comment on the longer sales cycle. Are we talking six months plus from a three-to-six months before the last few quarters?

You know, it's really hard to say exactly what the time tame frame is, but I would say compared to three years ago when the average sales took might have been in the three to four month time frame it's more like six to eight months now, and you can just find some deals that take a year or more to close. You still find some that can surface and close in 60 days. But on the whole the sales cycle is definitely length ended by several months over the last several years, and it's just hard to predict on an individual basis when you can get a deal closed. The other thing we had a couple of years ago that is less prevalent now but is likely to come back over the next 12 months, and that is people building new facilities. When someone's building a new facility, the time frame is pretty predictable. You know they've got to make a decision by certain date. We've got to have a system line for the new facility, and over the last several years we haven't seen that many new facilities being constructed but a lot of that is going used up and we think over the next 12 months we will start to see more facilities being built.

Thanks a lot.

Thank you, Allen.

Next question comes from the line of Navin Chowdhury with sterling financial.

Thank you very much. A couple of questions. On RFID, Dick, as you talk to your prospects in CBG area and other retailers, other suppliers to retailers, what is their feeling about the deadline for January '05? Do they think it's a doable thing or are they holding back wanting some more information?

Well, there are clearly a number of companies that that fall into that category of going to only do it when they have to do it, but by the same token there are a number of companies that are afraid that if they're not RFID compliant with Wal-Mart coming out of the blocks they're going to lose business. They are going to lose business if they aren't RFID. compliant. I think November 4 is a key date. Eric, is there anything else to add?

I think the only thing we are seeing is the customers that are not in the top 100 or 150 for Wal-Mart are actually encouraging Wal-Mart to let them get in on the pilot too. Which shows a movement among the supplier base to be RFID compliant to please Wal-Mart.

Could you talk about them, how big a revenue opportunity this might be for you guys in '04 or '05?

If well, we're trying to stay away from it now because there are so many moving parts. Middle wear and services itself could be substantial. I mean, the partnerships we're developing with companies like Microsoft could be substantial in their own right. And it's very hard to predict how much warehouse management, transportation management, and trading partner management are RFID system upgrades are going to drag. We firmly believe that a lot of compensation are going to look at their existing systems. In many cases they're paper based or their home-grown systems and decide they've really got to update those transportation and warehouse systems to take advantage of the additional volume that they're going to get from RFID but it's very hard to predict right now, and we will continue to give more clarity as we work through like the next couple of weeks with the Wal-Mart meeting where specs will be defined. We think that will free up some decisions for people to at least go forward with pilot, and clearly if we're going to have to compliant by earlier '05 people have got to start on projects no later than that May-June time frame.

One more question on synchronized release product. I think you mentioned in the past that the release will have a material positive impact in the second half of '03, and I'm just wondering, have you seen that starting to that play out or do you think it's more of an '04 event or people are just trying to get their hands around an integrated product or what is the situation there?

Well, really the integration of the products is a long-term strategy that allows companies to buy any module and then easily buy additional products and have them quickly integrated. Or if they choose, buy an entire release So we've had conversations with a number of companies now on a more strategic level where there is a bias for a Manhattan solution on an individual product because somewhere in the next two or three years they see needing one or more of our other products. So I think what you will start to see us do is do more of our sales organization, more and more to add the capability to sell high at a strategic level and talk about a broad range of supply chain distribution challenges because we have this broad independent grated sweep, so I think that's going to be a key driver for us as IT spending improves, and at the same time we've got to continue to change our sales force to be able to sell high and sell strategically.

Great. One question for Ed. Ed, could you talk about the vertical mix? You mentioned retail was 49%. What were other large orders in this quarter?

Industrial wholesale, which another they're was around 13% of food, beverage growth, 13%, EPL 11, and then the government last signed high tech made up the difference.

Okay. Thank you.

Sure.

Your next question comes from the line of Peter Coleman with SoundView.

Thanks, guys. Dick, can you talk a little bit about you mentioned you shed 15 materials in the quarter. That seems to me to be a bit higher this quarter than in the past. Can you kind of remind us what that's looked like through the years?

It's not a stat we've looks like a lot but it was so painful this quarter that we did. It would be normal to have at least a half a dozen deals in the last three-quarters get deferred, maybe even as high as eight or nine, fifteen is definitely on the high side, though, and we don't blame it on the inability to get people together on decisions because of vacation schedule and maybe some uncertainty surrounding year-end budgets, surrounding R FID, a lot of different reasons, but clearly with a higher level than we're accustomed to.

Okay. And then I guess maybe you could comment a little bit on, again, on the TMS side. I understand you've got some interesting releases coming up. Is that look looking like the first part of next year or when do you think you'll see some of the work you've been doing with some of your customers and when do you think that will be available for sale?

On the TMS front, we've been building out some great functionality with three very large companies. Some of that functionality including ocean and air to make it a global product where today we think it's a great U.S. product. So that will be available in February next year. And we think we'll -- you know, where our win rate is in warehousing predominant deals is very high, our win rate in transportation deals today is not as high because our fit is not as broad, and we expect that to help our win rate come the February-March time frame.

And then do you have any further progress on sort of when you look at our RFID products or the ways you may sell that solution starting with R FID in a box, any kind of feel for how those revenues would be recognized?

Well, I mean, the services revenue would continue to be recognized as we deliver. We have released the middle ware, so to the extent that that's the product weep are buying, that would be recognized again upon shipment. If somebody had us do a large amount of custom work, that would be recognized on a percent complete basis unless there was something unique about it on a contract basis, but the summary, Peter, is no different than our current model, and having the first release of the middle ware means that we can ship product today.

: If you look at the RFID in a box when which you said would roughly sell around 250 as sort of a rent for the year, obviously, that comes with hardware as well as some amount of services and licenses. Is there any feel for how that my show up?

If somebody were to buy that R FID in a box, it's probably about, depending on the case, about a third, a third, a third between license, services, and reselling of chips and hardware, but what we are finding is especially among these Fortune 500 companies that we are talking to, that each project is a little bit different. Somewhat higher level of consultation. Some want to buy -- do more of it themselves and buy more of the middle ware. So I don't think we're going to see any standard approach here in the next three or four months. I think each case can be a little different.

And then just finally, is there any color you can give us on the Department of Defense deal that you signed? Any kind of feel for what it looks like, what area of the Department of Defense, anything at all you can give us.

Well, the it's the defense logistics agency, and I would say like any customer we don't disclose the details of what they bought or what they paid or what not, but I think we have started a government initiative about a year ago in terms of forming partnerships, investing people in learning the space, and understanding particularly the defense department. We now have a pretty nice pipeline in the federal government, largely in the defense sector but really there are seven or eight agencies we're actively calling on, so I think over the next six months we do expect to close some more government-related business.

Thanks a lot, guys.

Operator I think we have time for one more question or so.

Your next question comes from Chris Rowen with SunTrust Robinson Humphrey.

Hi, guys. On RFI D with the Fortune 500 customers, is there any danger that -- you know, they've got big wallets but they're really just sucking up a lot of your sales time and distracting the organization and when it gets down to it, they're kind of learning from you guys and not really ready to sign any deals?

Well, that's possible. I would say that we're not relying a lot on RFID for our Q4 guidance, but at the same time I think they represent that kind of risk. They also represent that kind of upside. And in general, there is a feeling out there amongst a number of companies we have talked to that they need to do something, and most of them that we've talked to very much appreciate the expertise that we have here, and I'm sure there will be a few that sponge and move on, but I think most of them appear to be sincere about forming a partnership, but, you I know, I'd say out of 160 you're going to have a lot of different scenarios and I'm talking mostly about the 20 that are moving kind of down low in the funnel.

Right. Can you just give us a quick explanation on the RFID middle ware. What is it middle ware between? What apps would it make talk to each other?

The RFID middle ware solution, what it would do is either bullets onto older Manhattan solutions or competitor delusions, and it allows us to RFID enable those solutions, and we also take other pieces of our software and combine it with to make different flavors of that solution. So it going forward will be the software that we use to communicate with RFID technology and take that information and push it through the enterprise.

Okay. And, Dick, why you can you give us a little comfort on the seven-figure deals? I think you said something to the effect that they weren't in the pipe three months ago but that you expect them to close in the fourth quarter, and I'm just worried there on, you know, are they really going to close that fast.

I think you phrased it a little different than I did. I said our pipeline includes a lot more seven-figure deals now than it did three months ago. So the good news is that we've got a lot of business on a lot of different sizes, and the deals that are over $1 million are across the product lines, and we're certainly not counting on just the deals over $1 million to have a decent fourth quarter. but I think we're encouraged that there are more deals over $1 million to cause us to get a sizable license revenue you need a couple deals over $1 million and we're counting on that.

Okay. Thanks a lot.

Well, operator, I think we're about out of time. I just want to thank everyone for their interest in Manhattan Associates and continued support.

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