Manhattan Associates Inc (MANH) 2004 Q2 法說會逐字稿

Good afternoon, my name is Holly, and I will be your conference facilitator today. At this time, I would like to with welcome everyone to the Manhattan Associates Second Quarter 2004 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 and then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. As a reminder, Ladies and gentlemen, this call is being recorded today, Wednesday, July 28th, 2004. I would now like to introduce Mr. Matthew Roberts, Director of Investor Relations. You may begin your conference.

Thank you, Holly. This is Matt Roberts, Manhattan Associates Director of Investor Relations. I am going to start the call with our cautionary language and then turn the call over to Pete Sinisgalli, our CEO.

In our statements during the call and the question-and-answer session, we may make forward-looking statements regarding future events or the future financial performance of Manhattan Associates. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements. I refer you to documents that Manhattan Associates files from time to time with the SEC. In particular, our report on form 10-K for the year ending December 31, 2003, filed with the SEC on March 15, 2004. 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 Compliance Statement for forward-looking statements, included as Exhibit 99.1, to the company's annual report on form 10-K for the year ending December 31, 2003. Manhattan Associates undertakes no obligations to update or revise forward looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.

I will now turn it over to Pete.

Thanks, Matt, and welcome to our second quarter earnings call. I have with me Ed Quibell, our Senior Vice President and Chief Financial Officer, and Dick Haddrill, our previous CEO and now our Vice Chairman. I want to start the call off by taking you through some of the highlights from the quarter. Ed will then get into the details of the financial results. I will follow with additional details about the business and what we see going on in the market and Dick will provide comments and then we'll move into Q&A.

We had a solid second quarter. Our financial results were good and our execution of our business plan strong. For the second quarter in a row, Manhattan Associates set records for license fees, core revenue, total revenue with license fees being 1.5 million higher than any previous quarter. We continue to generate substantial revenue from within our installed base while adding key new customers. This success is the result of solid sales execution across all our product lines, vertical industries and geographies. Here are just some of the highlights for the second quarter. License fees were a record 13.8 million, up 12% from last quarter and up a healthy 21% from a year ago. With two deals of more than $1 million. Total revenue hit a new high of 56 million, a 9% increase from last quarter and a 10% increase over Q2 of 2003. International revenue came in at 12.7 million or 23% of our total revenue, both of which are records. International revenue was up 38% versus second quarter of last year. And adjusted earnings per share was 23 cents. Up from 20 cents last quarter and 21 cents a year ago and matched analyst expectations to Q2. Although we're pleased with these results, we continue to see opportunities for further revenue growth and profit improvement.

I'm going to turn now to Ed to take you through the financial results. Ed?

Thank you, Pete. Good afternoon, everyone. Pete gave you some of the highlights. Now let me review the numbers in more detail.

As Pete mentioned, we had an excellent revenue quarter with all categories exceeding the street's consensus. Software licenses and hosting fees for the second quarter of 2004 were 13.8 million, a new record for Manhattan, and the third quarter in a row when we have broken our previous record. This was an increase of 12% over the first quarter of 2004 and an excellent 21% over the second quarter of 2003. Services revenue totaled 36.3 million for the quarter and this was also a record. This represents an increase of 8% over the first quarter 2004 and 9% over same period last year. Hardware and other revenue was up 9% from the prior quarter and 7% from the prior year. This continues to be a service to our customers who require a single point of contact for their systems and is not considered strategic. This resulted in records total revenue of $56 million. Our international revenue was also a record and contributed 23% of total revenue for the quarter compared to 21% last quarter and 18% a year ago. We were pleased with the success we have achieved internationally in the first half of the year and are excited about our new areas of expansion.

Our total gross margin remained constant with last quarter at 60%, down from (ph) 1% a year ago. Our services gross margin also remained in line with last quarter at 55%, down from 58% a year ago. We believe that our increased international activity, new employee training and continued rate pressure will keep the services margin percentage at this level in the near future.

Our expenses for the quarter were in line with our expectations. I am pleased to say our operating margin for the quarter increased to 18% from 16% last quarter and 15% from the second quarter of 2003. This is a positive move toward our target of 20% operating margins.

Research and development expenditure increased by less than $100,000 over last quarter, achieving our goal of leveling off research and development expenditure and thus reducing it as a percentage of revenue as the company grows. It was 13% of revenue, down from 14% last quarter and a year ago. Our offshore development center in Bangalore, India, continues to perform well and we believe our total investment of approximately $30 million a year on R&D will remain a key competitive differentiator for us.

Sales and marketing expenses were $8.9 million or 16% of total revenue for the second quarter of 2004. This was an increase of 13% over Q1 of 2004 and 4% over last year. The main reasons for this increase over first quarter of 2004 relate to the increased selling costs due to the higher license fee revenue, our user conference momentum taking place in the quarter and increased trade show activity. General and administrative expenses, excluding depreciation and amortization expense came in at 8% of revenue, down 1% from last quarter and in line with a year ago. We anticipate some increased costs due to Sarbanes-Oxley but to date have been able to keep our overall G&A costs in line.

Interest and other income in the quarter amounted to $304,000, down from $389,000 last quarter and $1.055 million for Q2 of 2003. We continue to earn low returns on our sizeable cash position and had a foreign exchange loss in the quarter in contrast with the gain we experienced last year.

Our income tax rate was 34.5% for the quarter as compared to the blended rate of 34.3% for 2003. We do not anticipate any major variances in the near-term.

Net income for the quarter increased 17% over the last quarter, increased 14% over the same quarter a year ago. Adjusted net earnings for the second quarter of 2004 was 7.2 million or 23 cents per fully diluted share. Adjusted net earnings excludes the amortization of acquisition related intangible assets. This result compares to adjusted earnings of 6.2 million or 20 cents per fully diluted share in Q1 of 2004 and adjusted net earnings of 6.4 million or 21 cents per fully diluted share in second quarter of 2003. This result was consistent with the street's EPS consensus.

I will now address our financial condition at June 30, 2004. Cash from operations during the quarter amounted to $9.7 million. During the quarter, we spent $6 million on a stock buyback where we purchased approximately 220,000 shares at an average price of $27. The board of directors has authorized $20 million available for future buybacks as the opportunity arises. Our cash and investments on June 30, 2004, increased $2.7 million to $169.5 million. After the end of the quarter, we acquired the stock of Ebiznet, our partner in France. There was a nominal up front payment and an earn-out component. The few employees of Ebiznet transferred to Manhattan. France is a key market where we have had some success to date, and with our large cash position, we continue to evaluate strategic acquisitions that we expect to be accretive.

Deferred revenue consists mainly of maintenance revenue and was 22.3 million at June 30, 2004. An increase of $600,000 over March 31, 2004 and an increase of 2.1 million over June 30, 2003. Our days sales outstanding were 77 days at June 30, 2004. Our increased international activity and the opportunity of capitalizing on our strong cash position points to our DSOs remaining in the 70s going forward. This is well within industry norms and our overall customer satisfaction level remains excellent.

I'm extremely pleased with our record results and the growth we achieved in the quarter, particularly our Bellwether license fee growing over 20% in the last year. The execution of the 1214 employees was exceptional, and I would like to congratulate them on the job they did this quarter.

Thank you for your attention, and I hand you back to Peter Sinisgalli.

Thanks, Ed. As most of you know, following the close of the quarter, Dick Haddrill officially stepped down as CEO to become Vice Chairman. At that time, I completed my planned transition into the CEO role. It was a smooth and coordinated handoff and I can't thank Dick enough for his tremendous contributions to Manhattan Associates over the past five years. In his new role, he will continue to play a key part in the ongoing success of the company. I'm excited about the opportunities that lie ahead of us as a company and am focused on providing value to our customers, our employees and our shareholders.

Our second quarter operating results reflect the market demand for the advanced execution and optimization solutions that Manhattan Associates offers. Companies are continuing to look to us to improve and add value to their supply chain and enterprise operations. Our third consecutive quarter of record license fees can be attributed to our increasing momentum and our ability to capitalize on past investments, including international expansion and the growth of our product areas such as transportation management, RFID, and distributed order management. Our international revenue this quarter exceeded expectations, hitting a record high of $12.7 million. The teams throughout EMEA and Asia-Pacific worked hard to close key deals. The substantial growth in these markets is a reliable indication that our investments in international expansion are continuing to pay off.

During the quarter, we extended our relationships with existing clients, including Averitt Express, Cornerstone Brands, the Hillman Group, Chico's, ClientLogic, Cost Plus, Garan Manufacturing, Geest Foods, HoMedics USA and Walgreens. We also added some exciting new customers during the quarter, including Avon, Co-operative Group, Libbey Glass, Software Research Associates, New Balance Athletic Shoe, Estee Lauder and Norauto. 55% of second-quarter license fees were generated from new customers and the remaining 45% came from existing customers. This is an ideal balance that allows us to continue to add new customers while maintaining a firm foundation and delivering ongoing value to our large customer base. We closed two license deals in excess of $1 million for the second consecutive quarter. Both were strategic competitive wins for us.

A key area of focus for us has been and continues to be the radio frequency identification area. As compliance deadlines from major market movers draw near, we have seen an increase in activity around RFID technology. During the quarter, we completed 9 RFID deals and recognized 1.2 million in RFID revenues, the majority of which was license fees. This was more than twice the RFID revenue recognized last quarter. More than 25 companies are now using or installing Manhattan Associates solutions for RFID tracking and we are active in talks with more than 100 additional RFID prospects. We are optimistic about opportunities in this area.

Transportation management is another area that saw a great deal of success this quarter. The high point was the closing of our company's largest-ever transportation deal. Coupled with some key wins on carrier management side, transportation management revenue growth was a big help in our reaching record levels of revenue this quarter. Overall, business activity remains solid in all product areas and we continue to have a healthy sales pipeline across the globe and in each of our eight target industries. Maintenance renewal remains consistent at more than 90% reflecting a high level of customer satisfaction.

During the quarter, we held our annual U.S. customer conference in Orlando, Florida. The meeting brought together nearly 900 of the industry's top professionals and was a big success. The conference also served as a formal launch of Manhattan Associates' Integrated Logistic Solutions or ILS. The source to consumption suite of solutions integrates all of our products and allows our customers to optimize their supply chains and lower their cost of technology. By providing a platform for logistics, for the chief logistics officer and CIO that leverages our warehouse management, transportation management, training partner management and distributed order management applications and our RFID solutions, we believe we can provide customers with visibility across their entire supply chain and assist them in optimizing it. What's more, customers can implement these solutions one at a time or all at once, whatever meets their needs. But if they implement just one application, we believe that by providing our suite of solutions, customers can have confidence that Manhattan Associates is ready when they are to optimize other areas of their supply chains.

I'm quite proud of one statistic in particular for Q2. During the quarter, we installed our solutions and went live at 75 customer sites. That's well over one go live every business day in the quarter. Our services team around the world are doing an outstanding job delivering our solutions on time, on budget, and with full functionality.

Is each implementation perfect? Of course not. But I'm quite proud of the job our teams are doing.

Our R&D spending was essentially flat during the second quarter as expected but remains significantly larger than any supply chain execution vendor we see. We continue to gain economies of scale leverage by leveraging our 375-plus R&D resources to help us deliver and improve the breadth, depth and quality of our solutions. About half of the R&D team is in the United States and half in Bangalore, India. I believe this balance gives us a very attractive mix of great talent in proximity to many of our customers and great talent in a lower-cost region.

From an employee perspective, we continued to grow our team during the second quarter with a net edition of about 30 employees. This brings the total number of employees to a little over 1200.

Although the quarter was strong, there were still several areas for improvement. Service margins were expected to increase by about 1% this quarter over Q1, but held flat at 55%. While we still achieved the satisfactory profit margin relative to others in the market, this number is slightly below internal expectations. This is partially attributable to increased international business and continued pressure on our services rates. I am confident that we're doing the right things to improve this, however, in the near-term, we expect margins to remain around 55%. We continue to build experienced teams of implementation experts, both internally and with our partners, and improve upon the processes we have in place today.

Our days sales outstanding or DSO increased to 77 days this quarter from 74 days last quarter. As is the case with most companies with international operations, our DSO for international operations is considerably higher than for our domestic operations.to 23% this quarter from 21% last quarter explains the majority of the increase in our overall DSO. The quality of our accounts receivable remains good. The supply chain execution market remains quite competitive. We continue to battle against the same companies we have seen in recent quarters. As consolidation in the software industry continues and probably accelerates, we must continue to strengthen our market position and competitive profile. Our substantial R&D staff is a competitive advantage for us and we continue to look for attractive acquisition candidates that can help us extend our reach. But we'll only acquire a company if it makes great sense.

As I look into the second half of the year, I'm cautiously optimistic about the third and fourth quarters. Our sales pipeline remains at record levels and business activity is solid. Our license revenue visibility for Q3 is about 6 million, about the same as at this time in Q2. As a reminder, our visibility number represents closed contracts, percent complete contracts expected to be recognized in the quarter, and business where we have been selected and are negotiating a contract. We're executing well across the board and believe we will continue to do so.

Having said that, I'm concerned about the direction of the overall economy and in particular, all the recent software company earnings misses. We're not so big that we're immune to economic forces on the software industry. For a growing midsized technology company, I believe it's quite difficult to project with accuracy, financial results over an extended period of time. For that reason, we'll be shifting to a policy of providing earnings guidance for the upcoming quarter only and eliminating guidance beyond that time. This is the approach we used when I was president of another public technology company.

For the quarter ending September 30, 2004, we expect to achieve adjusted earnings per share in the range of 21 cents to 26 cents per fully diluted share and GAAP EPS of 19 cents to 24 cents per fully diluted share. In Q3 of 2003, we achieved earnings per share of 20 cents on an adjusted basis. So our guidance for adjusted EPS over the third quarter of last year is between 5% growth and 30% growth. I believe achieving results in this range represents strong growth and builds upon our success in the first half of 2004.

Now I would like to ask Dick to provide his thoughts.

Thank you, Pete, good job. I'm certainly very proud of my association with Manhattan Associates as CEO over the past five years. We have accomplished a great deal as exemplified by the outstanding performance in Q2 and our excellent position for the future. In Q2, we saw some of the benefits of our prior investments in such areas as our integrated logistics product offering, RFID, transportation management, Asian expansion and our Bangalore R&D.

With Pete driving our excellent execution in Q2, I had the opportunity to make trips to our newer locations in Tokyo, Shanghai, and Bangalore. The teams of people we have in those markets represent the same high-quality Manhattan Associates industry experts we have developed across the globe and I'm pleased with the current production and the prospect of further near-term shareholder benefits from these Asian investors.

Looking forward, I believe we're just beginning to harvest and leverage the many investments over the last few years. Our strong license revenue growth in recent quarters and the strong increase in operating margin in Q2 are evidence of this. And our services reorganization in Q1 combined with other investments should result in improved services margins over the longer term.

I am very pleased with the transition to Pete. He's quickly grasped the nuances of our business and earned the respect of the senior management team and the board of directors and our customers. He and I have an excellent working relationship, and I am looking forward to contributing to the future growth and success of Manhattan Associates in my new role as Vice Chairman.

In closing, I’ve got to thank the board of directors, the senior management team, share owners, and most of all, our outstanding team of employees for making me be proud to have been part of developing such a market leader as Manhattan Associates.

Let me turn it back to Pete for questions.

Thank you, Dick, and thank you very much for all of your help in the transition period. I couldn't have found a better partner to study under. With that, Holly, we're ready for questions.

Thank you, sir. At this time, I would like to remind everybody if you would like to ask a question, press star and the number 1 on your telephone key pad. The first question is from the line of of Aaron Schwartz from J.P. Morgan.

Good afternoon. I had a couple of quick housekeeping items. n the sales and marketing, you mentioned there were some costs in there that appear to be maybe one time in terms of the event, should we expect that to be either flat or down sequentially in the third quarter?

Well, Aaron, the big influence wasn’t actually the commissions on license fees, so, you know, naturally as license fees grow, sales and marketing costs will continue. However, the two other costs, mainly the momentum costs and a lot of the trade shows were more seasonable and would normally happen in Q2.

Is there any way to quantify what -- what part of that was in Q2?

I would have to look at that and get back to you on exactly what type of numbers. But, you know, we're -- it's the -- no, let me get back to you.

Okay. The next question was, you gave a metric about half the R&D headcount was half offshore and half on the United States. Can you update us on the target for offshore headcount by the end of the year?

Sure, I would be happy to. This is Pete. We're continuing to add headcount staff in Bangalore. Our expectations, currently, we have close to 200 people in R&D in Bangalore, plus about 50 others doing other work for us there. By the end of the year, we would expect that number will have approached 300 people.

Okay. Great. And then the last question I had, obviously, pretty solid execution given what appears to be a difficult environment and you have that $6 million in license visibility going into Q3. Is there any way to talk about sort of how your visibility may have changed going into September and if there is any way to talk about maybe company specific versus the broader software market at this point.

We don't have a great crystal ball, certainly not better than anyone else in the general world regarding what is happening to other companies. We believe we’ve got solid visibility into our September quarter. As I mentioned in my comments about $6 million of visibility, which is consistent with what we had at this time a quarter ago. So, we think that's solid and we're optimistic about our prospects in Q3. We don't have a good sense, though, of what will likely happen in the rest of the world.

It's also important, Aaron, our overall pipelines have remained pretty consistent going into this quarter as we saw going into last quarter.

Okay. Great. Did you guys see any of the slowdown toward the end of June, that much of the industry did?

We had a very solid second quarter and we're pleased with that result.

Okay. Great. Congratulations on a good quarter.

Thank you.

Your next question comes from the line of Phillip Alling, Bear Stearns.

Thank you very much. Can you give us an sense of the split in your license revenue among warehouse management, transportation management, and training partner management solutions and whether we're really looking at a mix shift going forward? You did mention there was some strength on the transportation management product.

Well, I know, Phil, as you know, we don't break out license fees by the various products. Part of the reason of that is with this whole integrated logistics solution we provide, there is always a decision on how you allocate the funds across the different products. We're seeing a pick up in combined sales, which is our overall strategy, but we don't actually break it out between the various. We focus totally on the supply chain execution side of it.

All right, you showed some growth in RFID-related revenues, you indicated the bulk of that was license revenue. What would be a reasonable expectation for investors to have as far as that component of your revenue going forward?

Yeah, we were pleased with the momentum we gained in Q2. The market seems to be continuing to gain momentum, so we would expect to see growth in Q3 over Q2 as the mandates get closer. Trying to quantify the specifics of that is challenging for us, so I won't venture a guess. We have seen nice momentum, we’re talking with a hundred-plus prospects and expect to see continue to see growth within the RFID revenue number.

That hundred prospects, is that comparable with this figure that was in the 50s from last quarter?

Yes, that is.

So double the number of prospects three months ago that you are pursuing in the RFID space.

Correct.

I just wanted to question, I wanted to circle back on the service gross margins, you know, you did make comments about that on the call. What's the likelihood you're going to be able to boost service gross margins, say beyond the next couple of quarter when you indicated that were going to be flat? Certainly historically you had higher service gross margins and that had been a meaningful contributor to your earnings.

Philip, one of the big things is as we have been expanding internationally, there's a lot more costs related to training and getting people up to steam plus we're using more of ex-pats to do some of the work, et cetera. Hopefully as we go on, that will stop and that will bring our overall international costs down. Once again, rate pressure is also a big influence, so, you know, as I think, the general economy picks up, hopefully we can pick it up there. It's our intention to improve our service margins, but our overall intention as a company is to focus very much on our operating margins, and I think that's what we're very pleased about that, that we actually picked that up from the 16% and 15% from a year ago to 18%.

All right, and the final question, really, just concerns consolidation. You did make some comments about looking at some acquisitions when there was news this week in the RFID space about consolidation there with Matrix. Looks to be acquired by Symbol Technologies. What -- should investors expect that that's an area where you would focus in terms of making some acquisitions?

Well, we won't talk specifically about any particular area, but you would expect us to continue to look very closely at areas where we already compete or have meaningful sustainable competitive advantage. We're doing some interesting things within RFID. We have a very nice partnership with Matrix, a good partnership with Symbol. Good partnership with Alleon, and we’re quite active in that space but don't want to comment on anything other than we're looking fully at opportunities within supply-chain execution and tangental to that.

Good enough. Thanks a lot.

Thanks, Phillip.

Your next question comes from the line of Jamie Friedman, Fulcrum Global Partners.

Hi, thanks. A couple of questions. First with regard to the share repurchase program. I was a little bit surprised by the magnitude of it. If can you remind us when the prior program was put in place and what the board's thinking was to expend it so significantly to 20 million.

Jamie, first of all, they had it at 20 million, effective at the last board meeting about a year ago and we used 6 million of it. So the number hasn't been increased, just at this last board meeting, all we did was re-up it back to the existing 20 million, so we haven't increased it at all; we just kept it consistent.

Okay, so what was the 6 million you that mentioned in the original comments?

The 6 million was of the 20 million that we had been approved, we actually exercised and purchased back, spent six million of the 20 that we had and then after that, this last board meeting, we replenished our float back to the 20 million.

And then with regard to some of the composition of the revenue, could -- in the past, you have given us metrics about the consumer retail component of that. I was not sure if you mentioned that as well today.

No, the retail related, which basically covers retailers and consumer goods was 58%. That's up from a lower, I think we were 51 or 52% a quarter ago. The other major areas, which are consistent in the lower teens was industrial, food and beverage and 3PL with life sciences and high-tech kind of picking up the balance.

Okay, last few questions. With regard to the seven-figure deals, were either of those international?

Yes, one was.

Okay. And then with regard to the increase in headcount by the 30, what part of the business are those 30 going into?

Actually, Jamie it was a little bit across the board. A couple of folks in sales, both domestically and international, services organization, support organization and R&D.

Great. Okay. That's all I got. Thank you very much.

Thanks, Jamie.

The next question comes from the line of Jim Yin (ph), [Erin, Klaus, King Nessbaum].

Thank you. Can you give me the revenue breakdown by product platform, and do you see any trend in one of three platforms?

The -- basically the statistics we always give, Jimmy, is we break out the iSeries. That's been traditional. Once again, our open systems this quarter was very high, it was 83% with iSeries at 17%. That compares to 74% open systems last quarter and 26% iSeries. So that gives you the idea; that's the statistic we normally give.

Oh. And you no longer go of out the product by -- for the Windows platform?

No, we always, traditionally, we have been grouping thatin open systems, because it actually is an open system product.

Okay. And about the international, I know it seems to be ramping up, what do you expect the percentage of revenue coming from international a year from now?

What we said, Jimmy, is our expectation is over the next several years for international revenue to contribute about 1/3 of our total revenue. We're on track continually improving the contribution from international and would expect over the next few years that revenue from international can contribute a third or more of our total revenue.

Okay. Thank you.

Thanks, Jimmy.

The next question comes from the line of Bret [Holio], Prudential.

Oh, thanks. You’ve had the luxury of a number of new conversations opening around RFID. If you could give us a sense of some of the cross-sell opportunities that those new conversations have had with your warehouse management offering. It seems -- I think you talked about it in the past that that's going carry a larger average sales price, but just give us a high level sense of some of those openings and what you're hearing from customers.

We're continuing to be optimistic our RFID customers, as well as prospects will lead to additional revenue for Manhattan Associates in the future. For the most part, folks we're talking to today are really focused on near-term compliance issues. Leveraging Manhattan Associates' expertise to meet the Wal-Mart, Department of Defense, Target, Metro, et cetera, compliance requirements. So most of the activities is there, but of course when we're talking with them about compliance requirements, we're also talking about ways in which they can improve the productivity and efficiency of their entire supply chain. So we continue to be quite optimistic that in time those transactions will turn into larger relationships for us.

And you mentioned the two deals over a million, were any of those deals 10% of license revenue or if you could quantify. I don't know if can you give any more details in terms of the size of those contracts.

It's been our practice to announce the number of deals over 1 million and we're going to stick with, that if you don't mind.

No deals over 10% of license revenue.

We wouldn't announce that.

Okay. Thanks.

Your next question comes from the line of Rick Vallieres, Credit Suisse First Boston.

Hi, guys. Sorry. Muted the phone there. Rick Vallieres, congratulations on the quarter. On the RFID deals, 9 deals, how many of those were to existing customers or to new customers?

Rick, frankly I don't have that data right in front of me.

It's probably about 50/50 would be my guess.

Let us get back to you, Rick, though; we'll take a look to make sure we give you accurate data. Ed’s expectation would be about mine as well.

And then the 1.2 million in revenue. Does that include service revenue from the RFID deals signed last quarter?

Yes, some of it does. This is the entire revenue recognized in the quarter. So it would be license fees sold in the quarter and services revenue delivered in the quarter, services revenue would be tied to the license fees from last quarter and this quarter.

Okay. Are you ready to sort of break out the license versus service component of that revenue?

Not yet. We’re still learning a lot of the space and want to continue to leverage that.

One last one. You had a large deal you were expecting to see closed in May. I'm wondering if that did close.

You know, Rick, I'm not sure which one particularly you're talking about, in particular, but we didn't lose a large deal and the ones we were tracking we did close in the quarter, so, I think the answer to that is yes.

Okay. What I'm thinking of is that there was a greater than $1 million deal that slipped from Q4 and as I recall, it was -- the last quarter sort of talked about as a May decision, so I'm wondering about the 13.8 million, as to whether we should think about it as a $12.8 million run rate or if that's normal slippage and the 13. 8 is the run rate coming out of the quarter.

I think that would be the normal activity. We, every quarter, have a couple of deals that accelerate, a couple that slow down for different reasons, and I think that would be a normalized run rate.

Okay. Thank you very much.

Sure. Thanks, Rick.

Thanks, Rick.

The next question comes from the line of Robin Roberts, Stephens Incorporated.

Thank you. On the guidance and also looking at your deal closing the past two quarters, you have two deals each quarter that exceed $1 million. The 21 to 26 EPS guidance for the third quarter, does that include any large deal in assumptions (ph)?

Robin, we don't try to forecast the large deals closing within the quarter, so we won't give any specifics on that. It’s our expectation that will deliver a quarter somewhere in the 21 to 26-cent range next quarter.

Okay. So does that mean that you didn't include any large deals in your assumptions if you don't forecast to the timing of the large deals?

Well, we have looked specifically at all clients that we expect to close in the quarter, but we don't disclose the specifics of clients we expect to close in the quarter.

And, Robin, historically we have closed traditionally one to two, sometimes three large deals. We only had one large quarter in the last year, the forth quarter where we didn't have any. So, you know, it's part of our focus. So we will continue to be focusing on larger deals.

Okay. And, Pete, I understand that you changed your guidance methodology. Just to reconcile the new methodology versus old methodology, the old full-year guidance of 91 cents to $1.04, seems a modest to pick up in IT spending. Should we continue to assume modest pick up in IT spinning or has that assumption changed?

That's about the same. Our outlook on the business is consistent.

Okay. And in addition, have you seen -- I understand you're cautiously optimistic. That cautiously optimistic, the cautious part, does that just look at other software companies who miss the numbers or is a trend supply chain execution market specifically, can you give us some color on that?

It has more to do with the general overall market and the number of software companies that were disappointing in the last part of June. We had a very solid quarter. Our pipeline looks good. Our visibility looks good. We're executing well. We believe we're performing well, but the cautiousness, well, I'm cautious by nature. So that’s part of it. But in addition, the number of surprises within the tech sector just makes us a little bit nervous about Q3 and Q4, and 2005, for that matter.

Okay. And on RFID, um, Manhattan has been starting to do some pilot projects with the customers ever since second half or toward the end of '03. And so with that 25 customers, you're already either in production or in the process of implementing, how many of, roughly how many of those have given indications that once they pass the deadline, of operating (ph) compliance with Wal-Mart, they're willing to upgrade? Or they absolutely have to upgrade their warehouse management systems.

Robin, right now most folks we're working with are really focused on the near-term and compliance and pilots and learning what they can. I think most folks recognize in time there is an opportunity to significantly improve their supply chains but there is not a lot of detailed discussions along those lines today. I think it's more of a near-term focus on meeting compliance, getting solutions installed, learning from those and then moving forward and we actually are quite optimistic about that approach. We believe that the more involved we get, the more likely it is we can stay (ph), the strength of our solutions bring to the overall solutions space and will work out well for us.

Okay and the [Yusephina] is supposed to release a new scanner for Gen 2 UHF standard in October, so after that new standard is released, how much additional R&D do you have to do in order to comply with the new standard?

We don't have to do a lot of additional R&D to be able to comply with the Gen 2 standard. Our teams have been working closely with the folks that have worked on developing that Gen 2 standard. After that goes through the testing process and is agreed on and rolled out and the intellectual property issues are resolved, I think we'll be able to comply rapidly.

The last question, you said, Ed, the long term operating margin is 21%. Did I hear that right?

No, what I was saying is that our long-term goal is to get back into the 20s. If you remember Manhattan used to operate in that area earlier in its life and we moved it up from 16 last quarter to 18 and our direction is toward the 20% mark.

Okay. And so roughly what level of license revenue can you get to 20% operating margin?

Well, you know, I don't think license revenue alone is going to drive operating margin. It's the big picture, it’s, you know, the level of R&D expenditure, it’s the margins on services. It's do it, you know. Everything put together. It's the combination of the business. As we built our products and broadened our offering, we're getting a bigger base across the whole thing. So, I think it's much more the overall business itself as opposed to just license fee.

Okay. Thank you.

Thanks, Robin.

The next question comes from the line of Woojin Ho, CIBC World Markets.

This is Woojin for Brad. Peter, you have been with Manhattan for a few months now. Could you just discuss what you think you need a better handle on in the business now that you're CEO?

Yeah, I think primarily one area that I'm quite optimistic about, but we have work to get there is our integrated logistic solutions. We have some very good products in that space, our next generation is leveraging those as a completely integrated suite. It will be a very powerful opportunity for us. So, staying focused on delivering our solutions while we’re evolving to the integrated logistics solution suite is an area of keen focus.

Okay. Now, you stated in the prepared remarks that you had $6 million in visibility and you may have stated the large deal activity, did you mention that at all or if not, could you clarify few that a bit.

I'm sorry, I heard the first part of your question about the 6 million of visibility. What was the -- .

Right, the large deal activity going forward.

Actually we mentioned a couple of moments ago we're not comfortable providing that level of detail in our guidance or in our visibility comments.

Okay. With regards to the 100 RFID discussions that you're in, how many of those are with new or existing customers?

You know, I would have to get the specifics on that as well. I apologize. Our sense here in the meeting room is about 50/50.

Okay.

We'll try to get better specifics for that going forward.

Lastly, with regards to the 9 RFID deals that were closed this quarter, how many of those were part of a larger bundled deal?

Yeah, the vast majority were standalone RFID deals.

Great. Thank you very much.

Thanks.

Thanks, Woojin.

Your next question comes from the line of Michael Wang, Schwab Soundview.

Hi, guys.

Hi, Michael.

Hey, real quick, TMS, the TMS wins --were they with existing customers or new customers and were they competitive wins?

Yes, they were competitive wins, primarily with existing customers.

Yeah.

Okay. Is there any difference in product interests by a geography? Are you seeing more TMS demand in Europe or Asia-Pacific or is it here in the U.S. or broad based.

The products at this point are more mature in the U.S. We're better known in the U.S. in products other than WM. Warehouse management, we're having good success globally. We're having better initial success in trading partner management and transportation management, RFID in the U.S. Distributed order management in the U.S. But our international teams are very excited about the potential of just adding those products capabilities into their sales tool kits and we will, we expect to see additional velocity in our international sales organization for products beyond warehouse management over the next several quarters.

When you kind of look at the pipeline for TMS, is it fair to say you that you would expect more sales activity with the existing customers over the near-term then and maybe some newer customers as referencability built up?

Probably that would be an okay assumption. But some of our conversations would lead us to believe we'll see new activity as well, so, the deal closure rates will be important.

Okay. So in terms of closed rates, were those, did you see those improve in the quarter or were they pretty consistent with the last couple of quarters or -- .

They're pretty consistent. Maybe better but pretty consistent. We have a good pipeline and had a good license now in the quarter. We continue to have a good pipeline for the balance of the year. So we're pretty pleased with our closed rate in Q2.

Based on what you said, would you expect those close rates to kind of remain pretty consistent through the latter part of the year then?

The only one thing to always remember is Q3 traditionally is a bit of a tough license fee quarter because of the vacations in Europe, et cetera, and other type areas. So as far as pure close rates are concerned, you know, I don't see many changes at all.

Great. Okay. Thank you very much.

Thanks, Michael.

The next question comes from the line of Alan Weinfeld, Fulcrum Global Partners.

Congratulations on the license (indiscernible). I just had a follow-up on the deal closures at the end of the month. Is there something you guys did that was able to maybe get past some of the extra signings that might have had to go on at other software vendors or maybe some of the Sarbanes-Oxley compliance money coming out of tech budgets that, you know, possibly could have held back some purchases? Is there anything you guys did differently to get around some of that?

Acually, we were surprised as everyone else when companies started announcing missing Q2 expectations. No, we didn't do anything unusual. We had good solid execution in the sales force, good closure rates. Didn't do anything unusual. And don't know what caused that for other companies.

Is there anything, I mean, unusual that you're seeing in the supply chain execution market versus other market's application software, like supply chain planning which were near you that made your environment better than some others?

No, you know, I don't have a great perspective on that. I know some of the other markets tangential to supply chain execution. Some of the competitors are struggling a bit. I'm not sure how much of that is economic industry specific or company-specific.

Great. Thanks.

Thanks, Allen.

Your next question comes from the line of Phillip Alling, with Bear Stearns.

Yeah, I just wanted to circle back on the stock buyback issue. So, you know, last quarter your average price was $27, a couple of bucks above where your stock is trading now. So, should investors expect that you guys are going to be in the market?

Well, you know, we've got to be opportunistic. So we're going to look at it. When we were buying back at 27, we were comfortable to do it based on the stock price where it is. So, as we look to see where the price goes, we'll make our decisions on an opportunistic basis going forward.

Right. There are no current restrictions now in terms of, you know, you can be in the market now and so you're not restricted from buying back the stocks at the moment?

Correct. We believe, and we have had counsel look at it post the announcement of our results for the quarter, communication of those results, we're free to enter the market.

Thanks very much.

Thank you. Operator, we have time for one more question.

Yes, sir. The final question is comes from the line of Wayne Homren, Parker Hunter.

Hi, a question on international. I'm wondering about the mix of clients in terms of the industry sectors they're in. Is it largely retail or are these clients made up of other sectors as well?

It's broad based. To be honest, Wayne, it pretty much matches a lot as we do in the States. So we focused on the same eight verticals. We don't do any different verticals overseas. I'm looking down the list here, you know, it's pretty much covering all areas. The percentages might be a little different. Third party logistics market is a little bigger in Europe than it is here, so there is some kind of, you know, geographic variances but it’s pretty much across the board.

Okay thank you.

Thanks very much. I would like to close the call by thanking Dick for the very smooth hand-off to myself. I would like to thank Manhattan Associates team for a very strong Q2 and continue to encourage them to keep up the great work. And then, finally thank you for attending the call. We look forward to speaking with you in about 90 days. So long.

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