Manhattan Associates Inc (MANH) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, my name is Jeremy, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Manhattan Associates third 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. (OPERATOR INSTRUCTIONS.)

I would now like to introduce Matthew Roberts, Director of Investor Relations. Mr. Roberts, you may begin your conference.

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

In our statements during this call and during the question-and-answer session, we may make forward-looking statements regarding future events or the future financial performance of Manhattan Associates.

You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. I refer you to documents that Manhattan Associates files from time to time with the SEC, in particular our report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 15, 2004. These documents contain and identify important factors that could cause 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 in Exhibit 99.1 to the company's annual report on Form 10-K for the year ending December 31, 2003. Manhattan Associates undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.

Thank you, and I hand you over to Pete Sinisgalli.

Thanks, Matt. Welcome to our third quarter earnings call. Ed Quibell, our Chief Financial Officer, is here with me. I’ll start the call by taking you through some of the highlights from the quarter. Ed will then get into details of our financial results. I’ll follow with additional details about our business and what we see going on in the market, and then we’ll move to questions and answers.

On Thursday, October 7th, we issued a press release announcing we would miss our previous EPS guidance for Q3 of 21 to 26 cents per share on an adjusted basis, and would report adjusted EPS of 16 to 18 cents per share. Our final adjusted EPS results for the quarter were 17 cents per share.

Our miss in the quarter was due to software sales at the end of September not closing at the rate we expected. While we lost few deals in the quarter to competitors, we weren’t able to get the number of deals closed we expected. In many cases, the cause was longer approval processes at our prospects, with more sign-offs than expected.

This may sound like a typical sales execution issue. Everyone knows to identify the approval process early in a sales cycle and then closely monitor it as part of the close plan. I don’t believe our sales shortfall was an execution issue. We had the same sales teams throughout Manhattan Associates as in previous quarters that have consistently delivered results, and in each region of the globe, we ran into added approvals required to close business.

Nonetheless, we’re going to significantly increase the review of our sales closing processes for Q4 and beyond. We are very disappointed with our EPS results for Q3. I, and this management team, pride ourselves on delivering on our commitment. We are focused on this not happening again.

While we missed the EPS targets, there were many important successes for Manhattan Associates during the quarter. License revenues were up 6 percent versus Q3 of 2003. Services revenue set a new record and was 10 percent higher than prior Q3. Core (ph) revenues, which exclude hardware and reimbursed travel, were up 9 percent compared to the third quarter of 2003.

We drove over $9 million in cash from operations and we landed some very important new clients. Moreover, our strategic mission to be the global leader in providing technology-based solutions that optimize the supply chain for our customers, continued to advance smartly. Our Integrated Logistics Solutions product direction continues to be well-received in our market.

I’m now going to turn it over to Ed to take you through the financial details. Ed?

Good afternoon, everyone. Pete gave you some of the highlights. Let me now review the numbers in more detail. First of all, some high level metrics are that on October the 7th, 2004, we announced preliminary GAAP earnings per share for the quarter ended September 30th, 2004, in the range of 14 to 16 cents per share, and non-GAAP earnings per share in the range of 16 to 18 cents per share.

Non-GAAP earnings exclude amortization of intangibles. We achieved GAAP earnings of 15 cents and non-GAAP earnings of 17 cents per fully diluted share. Our software license fees, although down sequentially, were up 6 percent year-over-year. The third quarter of the year continues to be a challenge for new license fees.

Services revenue was a record at $76.8 million, up 1 percent from last quarter and 10 percent from last year. Our core revenue, consisting of licenses and services, was up 9 percent over the same quarter last year. The details are as follows -- software licenses and hosting fees for the third quarter of 2004 were $10.3 million. This was a decrease of 26% from the second quarter of 2004, and an increase of 6 percent over the third quarter of 2003.

Services revenues totaled $36.8 million for the quarter, and this was a record for Manhattan. This represents an increase of 1 percent over the second quarter of 2004, and 10 percent over the same period last year.

Our hardware revenue and other revenue was down 17 percent from the prior quarter and 31 percent 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 considered non-strategic. This resulted in total revenue of $51.9 million, down 7 percent from last quarter, and up 3 percent from a year ago.

Our international revenue contributed 24 percent of total revenue for the quarter, compared to 23 percent last quarter and 17 percent a year ago. Our international business performed well in the first half of the year, but once again, European new business was a challenge in the third quarter. We remain excited about our new geographical areas of expansion.

Our total gross margin came in at 57 percent, down 3 percent sequentially and 1 percent from a year ago. Our services gross margin was down less than 1 percent from last quarter at 54 percent, and down 5 percent from a year ago. This is the third quarter in a row that we have been at these levels, and based on our increased open system activity, competitive pricing pressure, international activity and new employee training, we feel our services margins will remain at this level for the foreseeable future.

We continued to manage expenses and they remained in line with our expectations for the quarter. Due to reduced license fee revenue, our operating margin for the quarter reduced to 13 percent from 18 percent last quarter, and from 15 percent in the third quarter of 2003.

Research and development expenditure reduced by approximately $170,000 over the last quarter, keeping us in line with our goal of leveling off research and development expenditure in absolute dollars. It was 14 percent of revenue, up from 13 percent last quarter, and in line with a year ago.

Our offshore development center in Bangalore, India continues to perform well, and remains a key competitive differentiator for us.

Sales and marketing expenses were $8.1 million, or 16 percent of total revenues for the third quarter of 2004. This was a decrease of 10 percent over Q2 of 2004, and an increase of 11 percent over the same period last year.

The main reasons for the decrease this quarter over Q2 2004, are lower commissions or reduced license revenues and seasonably lower marketing costs. For example, our user conference took place in Q2.

General and administrative expenses excluding depreciation and amortization expense came in at 9 percent of revenue, up 1 percent from last quarter and a year ago. Increases in this area are due mainly to Sarbanes-Oxley and should continue through the next quarter. Interest and other income for the quarter amounted to $540,000, up from $304,000 last quarter, and $402,000 for Q3 2003. The small improvement is directly related to slightly improved interest rates.

Our income tax rate was 36.6 for the quarter, as compared to 34.5 percent for the previous two quarters this year. This brings our blended rate for the year-to-date to 35.1 percent, 0.6 of a percent higher than anticipated. The reasons for this are twofold, namely the changing mix of our international business and some adjustments to our R&D credit. We do not anticipate any further major variances in the near term.

As I mentioned earlier, adjusted net earnings for the third quarter of 2004 were $5.3 million or 17 cents per fully diluted share. Adjusted net earnings exclude the amortization of acquisition-related intangible assets. This result compares to adjusted net earnings of $7.2 million or 23 cents per fully diluted share in Q2 of 2004, and adjusted net earnings of $6.1 million, or 20 cents per fully diluted share in Q3 of 2003.

I will now address our financial condition at September 30th, 2004. Cash from operations during the quarter amounted to $9.2 million. During the quarter, we spent $3.7 million on the stock buy-back, where we purchased 152 thousand shares at an average price of 24.29 cents per share.

The board of directors has authorized $20 million available for buy back as the opportunity arises, leaving us with $16.3 million available at September 30th, 2004.

Our cash and investments at September 30th, 2004 increased by $3.5 million to $173 million. During the quarter, we acquired the stock of eebiznet, our partner in France. This was discussed on our last earnings call, as it closed prior to the call.

We also incorporated in China and Singapore and opened up offices in Shanghai, Singapore and Tokyo. With our large cash position, we continue to evaluate strategic acquisitions that we expect to be accretive.

Deferred revenue consists mainly of maintenance revenues and was $22.1 million at September 30th, 2004, consistent with the balance at June 30th, 2004, and an increase of $4 million over September 30th, 2003.

Our days sales outstanding was 78 days at September 30th, 2004, which is similar to last quarter. Our international activity and the opportunity of capitalizing on our strong cash position points to our DSOs remaining in the seventies going forward. This is well within industry norms and our overall customer satisfaction level remains excellent.

Although we did not meet our license revenue expectations, our overall fundamentals remain intact and we continue to focus on the execution of our plans in a difficult market. We achieved a 10 percent net profit margin for the quarter and generated $9.2 million positive cash flow from operations.

Thanks for your attention and I’ll hand you back to Pete Sinisgalli.

Thanks, Ed. We had a successful quarter, adding new clients and expanding our relationships with existing clients. During the quarter, we extended our relationship with Alco Industries; Dollar General; Excell Home Fashions; Jockey International; Newell Rubbermaid; Olympus America; Pearl, Incorporated; Perry Ellis; Raley's and Scholastic.

We also added some exciting new customers during the quarter, including British Land, Distribudora Flexi; Hewlett-Packard; Genco Distribution Systems; Global Home Products; Japan Logistics Development; Nippon Express; Sinopharm Logistics; The Cato Corporation; Forzani Group and Urban Outfitters.

53 percent of second quarter licensees were generated from new customers and the remaining 47 percent came from our existing customer base. This is an ideal balance that allows us to continue to add new clients while maintaining a firm foundation and delivering ongoing value to our existing client base.

A little more than half of the quarter’s license revenue was from non-warehouse management solutions. About 80 percent of the quarter’s license revenue was on open systems and about 20 percent on iSeries. The retail and consumer goods verticals combined for about half of license revenue in the quarter. We closed no license deals in excess of $1 million this quarter.

The radio frequency identification market continues to evolve. Interest in RFID projects remains active, although deal flow in Q3 was slower than we expected. During the quarter, we closed six RFID deals and booked a total of about $700,000 in RFID revenue. That compares with ten deals and $1.2 million in total revenue in Q2. Pricing for RFID middle-ware is under significant competitive pressure, as many vendors vie for this market space.

We continue to view RFID as an enabling technology for business management, and in particular, supply chain management. We do not view RFID middle-ware as a long term market in and of itself. We believe it is an important piece of our Integrated Logistics Solutions. Therefore, we have and we will continue to compete aggressively in instances where we believe there is a longer-term integrated logistics play for our Company.

It is our belief that so far, only about half of the so-called Wal-Mart 137s, those vendors to Wal-Mart that need to meet its January RFID compliance requirements, have chosen a technology provider. It looks like some Wal-Mart vendors will have difficulty meeting the deadline, or will have very simple solutions in place to meet the minimum requirements. We are talking with many of those who have yet to implement a solution.

More than 30 companies are now using or installing Manhattan Associates RFID Solutions, and we are in active talks with more than 100 additional RFID prospects.

Overall, business activity remains solid and we continue to have a healthy sales pipeline for all of our solutions around the globe and in each of our eight target vertical industries. Maintenance renewal remains consistent at more than 90 percent, reflecting a high level of customer satisfaction.

We recently held our European customer conference in Wales. The meeting brought together about 250 customers and business partners and was a big success. The conference also served as the formal launch of our Integrated Logistics Solutions in Europe.

We are focused across our Company, driving our integrated logistics solutions strategy. This source to consumption model integrates all of our solutions and allows our customers to optimize their supply chains and lower their total cost of ownership. By providing a platform for logistics for the Chief Logistics Officer and CIO, it leverages our warehouse management, transportation management, trading partner management, reverse logistics management and distributed order management applications.

In 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.

Regardless of their approach, we believe that providing our suite of solutions, customers can have confidence that Manhattan Associates is ready when they are to optimize other areas of their supply chain. We believe we are making solid progress with our ILS strategy.

The number of new client sites that went live with our solutions this quarter was 55. That brings our year-to-date total to about 200 new client sites going live with our solutions. Our services teams around the world are doing a good job delivering our solutions on time, on budget and with full functionality.

Our research and development spending was down slightly from the second quarter, in the third quarter. We continue to gain economies of scale by leveraging our 400 R&D resources to help us deliver and improve the breadth, depth and quality of our solutions.

About half of our 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.

We now have about 1,300 employees around the globe. That’s an increase of about 100 since the end of Q2 and an increase of about 200 since the end of 2003. Well over half of the growth over Q2 and over year-end 2003, is in our Bangalore center. We now have about 300 very talented people in Bangalore at a much lower cost per person than our average US cost per employee.

Our US population has remained steady since the end of 2003. In addition to Bangalore, the remainder of our headcount growth is in our international businesses. We now have about 50 people in Asia, up from about 10 at year-end 2003. In Europe, we now have about 160 people, an increase of about 30 since the end of ‘03.

Market pressures continue to place strain on our services margin. Our services margin in Q3 was 54 percent, which was down from 55 percent in Q2, and 59 percent in Q3 of 2003. Competitive price pressure is having an impact on our services margin. Compared with a year ago, our average price per hour is down about 5 percent.

In addition, more and more customers are requiring fixed-price services contracts to win their business. In a few cases where we have entered fixed-price arrangements, the actual time required to complete the agreed-upon work is running higher than our original estimate, and therefore, our services margin is negatively impacted.

I believe Manhattan Associates must continue to grow its market share to gain further sale advantages, but we will compete on price when necessary and agree on fixed fee engagements where necessary, but we will do so with care. For the near term, as Ed mentioned, we expect services margins to remain in the mid-50 percent range.

Looking ahead to Q4, for the quarter ending December 31st, 2004, we expect to achieve adjusted earnings per share in the range of 17 cents to 21 cents per fully diluted share and GAAP EPS of 15 cents to 19 cents per fully diluted share. To achieve results in this range, we will need to increase our license revenue above that achieved in Q3. Q4 has historically been a strong software quarter, so beating our Q3 results in this area seems likely.

Gains in Q4 software revenues will be required to offset the typical seasonal decline in services revenue. For the past two years, services revenue has declined sequentially from Q3 to Q4 by 3 to 4 percent, due largely to fewer working days caused by the additional holidays in Q4. We expect that to occur again this year.

Regarding software visibility, we are no longer going to provide a software visibility metric for the next quarter. In the past, we provided a metric during this call we called visibility. That was intended to be a leading indicator of our license fees for the current quarter. The metric included current quarter contracts already closed, percent complete contracts expected to be recognized in the quarter, plus business where Manhattan Associates had been selected, where we were negotiating a contract.

For Q2, our visibility metric at our analyst call was about $6 million and we delivered $13.8 million of software license revenue in that quarter. For Q3, we also had visibility of about $6 million at the time of the analyst call and closed only $10.3 million. Obviously, the metric wasn’t very accurate in helping to predict last quarter’s software sales, so we’ll retire it.

We are working to determine if we can develop a better metric to offer for that area, but so far have not come up with one we have confidence in. We’ll continue to look for a better indicator to offer the investment community. At this time, our best leading indicator is our sales pipeline, and they continue to be strong.

I believe delivering adjusted EPS in the 17 to 21 cent range in Q4 accomplishes the balance of delivering solid earnings in a tough technology marketplace and continuing to invest to increase long-term shareholder value. We are confident in our long-term market position. Industry analysts forecast the global market for supply chain execution solutions to be about $4 billion in 2004, but this continues to be a highly fragmented market with no competitor having dominant market share.

We believe we have a good chance to establish that dominant position. We have the largest global market share of warehouse management systems, and believe we are the overall global leader in supply chain execution and optimization solutions.

We also believe we’re well-positioned to capture additional market share in warehouse management systems and to firmly establish our presence in transportation management, trading partner management, distributed order management, reverse logistics management and RFID.

To capture this market opportunity, we’ll continue to invest in three key areas -- one, our Integrated Logistics Solutions products suite. This strategic platform for logistics will allow us to address the marketplace’s desire for broad, deep supply chain execution and optimization functionality that is easy to integrate with ERP and other existing applications, because it’s high quality and delivers a low total cost of ownership.

Two, we’ll continue to invest in international market expansion. And three, we’ll continue to invest to further penetrate the vertical markets beyond our strong position in retail and consumer goods. This includes areas such as food, life sciences, 3PL, government, industrial wholesale and electronics, where we have already established key clients and vertical solutions capabilities.

We believe our plans balance the need for profits and investments for the future. I’m thrilled to be part of Manhattan Associates. I have great confidence in our leadership team and the management team throughout the Company. I believe our employees are far and away the most talented, knowledgeable and committed in the industry.

Our products are the best in the market and our relationships with our customers strong. I believe we have within our grasp the full opportunity to be the dominant software and service provider in supply chain execution and optimization and to firmly establish this space as a long term dependable market. In summary, we feel very good about the future of Manhattan Associates.

Operator, we’ll now take questions.

(OPERATOR INSTRUCTIONS) Our first question is from Phil Alling, with Bear, Stearns.

Could you give a little bit of color with respect to the license shortfall in the quarter? Was that in the WMS areas, the TMS? You did make some comments about RFID, but maybe you could help us better understand if it’s a particular product area where there was some trouble in the quarter.

Actually, there weren’t any particular product areas that had more challenges closing business than others. It was a general delay across the board, product-wise as well as across our region.

The last week or two of September turned out to be tougher to get signatures on paper than we had expected. But for the quarter we had about half of our revenue with WMS products, about half non-WMS products, and I’d suggest that the delays were about equally distributed, similar to what we did close during the quarter.

Can you give us any sense as to whether the deals that slipped in the quarter - have any of those subsequently closed?

Yes, a couple have closed so far and we’re working hard to close the remainder.

Were any of those deals lost to competitors?

During the entire quarter, we lost a few deals to competitors. Down the stretch, during that last week or so of September, we lost a couple of small RFID deals to competitors and one small WMS deal to a small competitor.

With respect to RFID, you’d indicated that it was a little lighter than you had expected. Can you give us some more details about what, specifically, your expectations were for RFID-related business in the quarter? That would help us out.

Sure. Well, as you may recall in Q2, we did about ten deals and had revenue of about $1.2 million. With the level of activity we were experiencing, we had expected that we would do more than that, both in terms of number of deals and in total revenue. While we continue to be quite active in the marketplace, and believe we’re winning more than our fair share of business, there is (sic) a lot of issues that need to be resolved in this space.

As you well know, you cover the space very extensively, a lot of questions about the standards that will be adopted and how the hardware and tag (ph) companies will embed their standards into their solutions, and that’s causing some decision making to be delayed. From what we can tell, there is a lot of activity.

There will be some challenges for folks down this next couple of months that need to meet compliance deadlines, to select solutions to meet those deadlines, and we believe we’re in the throes of competing for many of those deals. But it seems that, Phillip, there’s a lot of activity. We’re involved in a ton of it. The EPT global meeting in Baltimore a couple of weeks ago was well-attended and energetic.

We think there’s a lot of activity, but like other brand new, potentially disruptive technologies, some of the kinks need to be worked out in the technology for the market to get more comfortable investing in more meaningful ways for its adoption.

Right. On the follow-up question, with respect to unresolved standards in the RFID space, I mean, do you have any visibility as to whether that issue is impacting investment decisions at some of the companies facing mandates, as far as the extent to which they’re going to make investments in hardware and software and the timing of those?

What we hear is it is (technical difficulty) complicating decision making. Folks don’t want to invest much until there’s clarity - clarity on some of the intellectual property as well as the specific standard that does get adopted whether it’s GEN2, which is very likely, or something else. So it does appear to be creating some noise in the market. What that tends to do is encourage folks to find the lowest cost, minimal solution to meet the most immediate requirements. We see a lot of that happening.

You talked about a lot of pricing pressure in the RFID space. Are there certain competitors emerging that are more of a force to be contended with than others?

I wouldn’t say so. We see ODE systems in most of the middle-ware deals. We see a bunch of other competitors in the middle-ware space, but my personal opinion is it’s probably too many folks competing for the middle-ware space. It’s not a real market, I don’t believe, in the long run, but we’ve got a lot of folks vying for less than a lot of activity. So that’s developing into a price-sensitive market space.

In instances where that price competition or that competition will lead, we believe, to opportunities for our broad suite of integrated logistics solutions, we will compete very aggressively for that business. In other cases, where we don’t see the real opportunity to expand into an ILS opportunity for us, we will probably be less involved. There’s (sic) plenty of opportunities for us to develop relationships, so we’re going to focus on those that we think have the best opportunity for us over the long-run.

Our next question comes from Rick Vallieres, with Credit Suisse First Boston.

Pete, could you talk a little bit - your comment on the pipeline and the extended sales cycle, so the question is - the deals that slipped from Q3, you’re moving ahead on trying to sign those. But is the sales cycle permanently extended across your pipeline, so we really don’t see a snap back at any point in the next couple of quarters?

That’s a great question, Rick, and I wish I could give you a definitive answer on that. We were disappointed and a little bit surprised at the delays at the end of Q3. Our sales team is working very hard to be better prepared for any surprises down the stretch. At this point, we hope that that was an aberration and not a more lengthy extension of the sales cycle. But time will tell.

We’re very focused on that, but our crystal ball doesn’t give us a good indication. We’re confident we have a very solid pipeline, continue to believe that it’s robust and more than ample to deliver our goals and objectives. But we do have to work hard to make sure we close the deals that are closeable in Q4, and we’ve got teams focused on it.

Okay. Q4 guidance seems to imply a mid-teens operating margin. Have you thought about an operating margin target for the company, not necessarily for Q4, but a medium term outlook?

Rick, we’re still working on our ‘05 plan. It’s a great question. We’ll be working on that as we try to formalize our plans for ‘05. As you probably gathered from my prepared remarks, I’m quite optimistic about the long-term opportunity for Manhattan Associates. I think we, more than anyone in our space, have the opportunity to create a business around supply chain execution and optimization that will lead to substantial long-term shareholder value.

Our plans for 2005 need to include the appropriate investment to be able to achieve that. So we’re still working through our preliminary plans for 2005, so probably we’ll have a better response for you at next quarter’s call.

The plans that you do talk about as far as expanding into other verticals, clearly it sounds like at least a one-year period of investment. To your mind, is the return on that investment a two to three-year outlook as a return on the investment over the next year, or is there some kind of low hanging fruit where we’ll start to see a return a little bit quicker?

Well, we certainly would like to see some of the returns of the investments we’ve made over the past couple of years, as well as the current investments begin to pay off in the near-term. We’re making, I think, good progress, particularly in some of our newer solution areas. Distributed order management is starting to pick up some traction. We’re quite optimistic about our role in transportation management, particularly as some of the other competitors in that space struggle.

I believe our Reverse Logistics Solutions is a very attractive application for many companies, and I believe we’re getting more traction. We’ve spent a good chunk of 2004 getting greater visibility in the marketplace for our non-WMS applications to try to drive greater penetration to those markets, and believe that some of that payback should begin showing up sooner rather than later.

Similarly, we believe our investments in international expansion have already started to pay off and should continue to grow in ROI over the next year or two, so we most certainly are not waiting for 2006 or 2007 to be able to show benefits from the investments we’re making.

I’ll just conclude with one on the RFID. The message I’m taking there is that there is pricing pressure, so you don’t want to go in with a loss leader, so you want to see an opportunity for incremental sales around the RFID component, which is where the pricing pressure is.

So is RFID, at this point, still attracting new customers to Manhattan Associates or is it starting to shift back? Where are those opportunities to add on to the RFID component of the sale? Is that in the existing customer base or is that in new customers?

The answer to that, Rick, is both, that it’s continuing to bring us into new prospects. We have, we believe, very good visibility in the marketplace as a leader in RFID solutions as well as traction with ILS, and that’s getting us invited to many dances. In addition, our install base is fertile ground for us to approach for complete RFID leader capability.

While it, in some cases, may be a loss leader, we believe we can continue to drive reasonable economics from our RFID activity. But in cases where we do see an opportunity for RFID that can lead to a bigger long-term relationship for Manhattan Associates, we intend to be quite aggressive in pursuing that business.

Your next question comes from Robert Schwartz, with Jefferies & Company.

I was hoping we could talk about some proof points around the investments in the ILS platform you just talked about and in the new verticals. How do we see where ILS is being adopted by customers? What should we be looking for, what were some of the deals in the last quarter where ILS became part of the sale and important to the sale?

There’s (sic) a couple of components to that. We’ve sold to a couple of customers our complete Integrated Logistics Solutions, a couple of large deals that we’ve announced in the past. Raley’s was an important Integrated Logistics Solutions sale for us. Co-op was a very important ILS win for us.

But as important, one of the things that we’re seeing over and over again as we talk to prospects, our ability to offer them a broader suite of solutions over the long-term is an important distinguishing factor in our winning a point solution.

So while we may end up with a so-called “best of breed” WM contract, our ability to talk to the CIO, the Chief Logistics Officer, the CTO, about a broad suite of solutions that can bring them high-quality, easy integration at a low total cost of ownership, is a message that is working very well.

I think we should add some other industries too, where the suite really helped. I was wondering, in particular, if we should expect to see TMS customers pulling along WMS sales or vice versa, and have you had customers where they’ve bought both together?

The answer to that is yes and yes. We’ve been able to sell additional clients TMS that have bought WMS. And although our TMS install base is much smaller than our WMS base, and we believe there will be more traction there, likewise, we’ve had good success selling TMS to our WMS applications.

We’re also having good success, at least initial success, with some of our newer products. The initial interest in distributed order management is picking up nicely. We believe there’s a real opportunity for us there. Our trading partner management solution is getting solid traction. Reverse logistics - we’ve had a couple of very attractive deals to big companies that we believe have nice opportunities to help broaden our ILS suite of products.

We believe the cross sell opportunity for us is quite attractive. And in addition to that, some of our optimization products – our labor management, plotting, performance management products – are also giving us nice opportunities to cross sell into an install base and attract folks who have not yet made the switch to Manhattan Associates.

I take it that the comp plans differentially encourage these new products?

Yes, they do, but I suggest to you they will more so in 2005. I think we’ve done a nice job in encouraging our sales organization to broaden the suite. But Jeff Mitchell and Jeff Baum, the guys leading our sales organization, have invested a lot of energy this year in developing their sales organizations to be more fluent at selling our suite of solutions.

We’re building up our capacity to sell ILS within the sales force globally. We’ll continue to do that in 2005, and begin targeting more of the incentive compensation to encourage that.

One last question and one clarification, if I will. I’ve been interested in the verticals, one - it seems a bunch of companies this quarter had strong government verticals and I know that’s a new vertical for you. I was wondering how it played in the mix and if there were others that were particularly strong? And a clarification - there was quite a bit of discussion around taxes. What would you suggest as the tax rate we should use going forward?

Government is still a new vertical for us and basically didn’t influence our sales at all in the last quarter. So we’re continuing to work on government, but we’ve had no major breakthrough or success in that one. Other verticals where we did see some success with last quarter were specifically 3PL, Third Party Logistics area and food, beverage, grocery. That’s on top of our retail and consumer goods, which Pete mentioned was over 50 percent. That kind of is what happened there.

As far as the taxes and tax rate going forward, we were using 34.5 percent; we’re now looking at about 35.1. So I would suggest around the 35 percent rate going forward would be a good estimate.

Your next question comes from Brent Hill with Prudential.

Pete, you mentioned no deals over $1 million. I had to go back to the model for a couple of years to find a quarter that didn’t have a deal over $1 million. So I was just wondering if you could give us some color on what happened. Do you think customers are continuing to put more pressure, cutting deals into smaller sizes or did you have a couple big, million dollar deals that were forecasted that slipped out? Can you just give us any color on that?

Ed was mentioning to me during your question that it was as recently as Q4 of last year when we did not have any million-plus dollar deals. So while we’re always looking for the big fish, it happened to us recently. And one of the things we find attractive about our business is we do tend to close a lot of mid-size deals that give us confidence that we aren’t heavily dependent on closing that one or two big deals.

There are several big deals that we’re working in our pipeline, million dollar plus deals that we’re working in our pipeline. Hopefully some will close in Q4 -- big benefits to us, obviously, in being able to land a couple of larger deals. Generally speaking, we don’t think there’s any unusual economic impact on the larger deals in Q3 or Q4 than we’ve seen in the past.

There may be some, but it doesn’t feel like there’s a meaningful difference, the larger deals, just think there’s an overall risk aversion in the marketplace that’s affecting technology spending in certain segments and affected us in Q3.

Obviously, with your new role, have there been any operational changes that you’ve made since you’ve been in -- taking over for Dick, in terms of organizational restructuring that may have led to any of the downfall? I don’t know if there are any other major changes that you made to the sales force this quarter that may have had any disruption.

Brent, I don’t believe that’s an issue. We didn’t make any changes within the sales force. We may have had one or two sales reps leave the Company, three or four be hired in the last quarter.

But as far as sales management is concerned, the same, very capable group of sales executives who have led the Company for the past couple of years continue to lead the Company, led by Jeff Mitchell and Jeff Baum. They have strong staffs underneath them and all of their executive staff have been in place for a while. I don’t think there was any restructuring or personnel changes in Q3 that might have caused some of the shortfalls from our expectation.

Our next question comes from Adam Holt, JP Morgan.

This is Derek Long, for Adam Holt. Two quick questions - Ed, if you could comment on the maintenance pricing portion of the services, the maintenance and kind of what you’re seeing there, given the relatively high renewal rates. And also, what you’re seeing in the services utilization, both internationally and domestically. And two, Pete, if you could comment on some of the retail color going into Q4 in the pipeline, whether you’re expecting a greater than 50 percent mix there or what kind of commentary or color you may have there?

First of all, as you know, we don’t break out maintenance. But as Pete mentioned in his prepared words, over 90 percent have continued to renew and we haven’t seen a change in that. We haven’t seen any major pressure on our maintenance renewals or pressure on our maintenance pricing at this stage, so we’ve been very pleased with the way the maintenance has been going.

As you know, we traditionally charge 20 percent, roughly, per year, on our new sales. And that number can vary slightly depending on whether they have their own help desk or not, but that’s been solid for us going forward.

The second one was on the utilization visibility, that came down slightly, wasn’t a big move, a couple of points in the quarter, but was still in the high 60 percent range, which we’ve been pretty consistent at that level for the last few quarters.

This is Pete. Regarding your question about retail activity, we did have strong retail activity in Q3. As I’m sure you know that’s part of our heritage and believe we have a very robust suite of applications for the retail space. Our pipeline for Q4 and, frankly, for 2005 in the retail space is quite strong. So we believe that space is moving aggressively to improve visibility and optimization of its supply chain, and expect us to be a beneficiary of that added activity in the retail space.

Our next question comes from Robin Roberts, with Stephens.

Your guidance for the next quarter is 17 cents to 21 cents, which is a year-over year decline compared to fourth quarter ‘04 of 23 cents, so does that mean that the license revenue is going below fourth quarter ‘04 number of $12.1 million and total revenue below 49.4 million?

Robin, we have slightly higher expenses in Q3 that will run into Q4 than compared with last year. In my prepared remarks, I mentioned that we expect license revenue to be up over Q3, and that license revenue growth will be necessary to offset a 3 to 4 percent or so decline in services revenue.

From Q3.

From Q3, so if you work with some of that math, I think you’ll come to a conclusion that’s a little bit different than that and be able to arrive at an EPS outcome within our guidance range.

You said the sales pipeline is strong, but can you give us some qualitative or quantitative measure? I mean is it 50 percent stronger compared to second quarter of ‘04 and third quarter, I mean fourth quarter, I’m sorry, second quarter ‘04 and third quarter ‘03, or how does that compare?

Yes, it’s consistent. We’ve had a strong pipeline for several quarters now and we continue to have a strong pipeline. As one of the earlier questions that was raised, the challenge for us is making sure we can get decisions completed within a prompt timeline.

So we feel good about the depth and quality of our pipeline. We need to help our customers demonstrate strong ROI and convince them of the benefit of moving quickly and get more of those deals closed in the fourth quarter and hopefully build some momentum into 2005.

Related to RFID, ever since the end of last year, you have been talking about the real opportunity of RFID is not necessarily the middle-ware or RFID itself, it’s more of warehouse management system upgrades. When you talk to your customers, what is their attitude towards warehouse management upgrade because of RFID?

And along those lines, what we have heard in the industry is people are struggling to sign now (ph) to the ROI -- whole RFID project. So in your conversation with your customers, have anybody really dig (sic) into the RFID projects and start to look beyond just compliance and really look to corporate RFID back into their supply chain?

We’re running into the same information, same conclusions and concerns that you’re running into. In the near term, the ROI isn’t there for most folks. They’re looking at this as some kind of a short-term tack, and therefore, trying to minimize that short-term tack.

But we do believe most of the customers’ prospects we speak with clearly understand the potential opportunity for RFID to streamline, improve the efficiency and visibility of their supply chain. It’s just a question of when will some of the standards issues get resolved, some of the hardware and software issues get resolved, so that folks can move with greater confidence to deploy the technology.

But it is -- actually, it’s an important part of our overall selling proposition, a key component of our Integrated Logistics Solutions that purchasing from Manhattan Associates will give you the benefit of our market leadership position in RFID across the suite of our ILS products and services.

But we see a couple of customers today looking to do more with RFID than just meet compliance requirements, but we don’t see many folks yet investing significant money to get there yet. Greater clarity on market direction will be required, we believe, to do so.

Have you gotten indications from customers that they’re looking to upgrade their warehouse management systems. I mean the customers that have a packaged warehouse management system, not just the Excel spreadsheet.

Well, there are many customers that are going to upgrade in the near term solely because of RFID. But there are many that recognize that as something they’re going to need to do over time.

And again, it’s part of our broad supply chain execution and optimization selling proposition, and working with and partnering with Manhattan gets you that benefit. We don’t see many clients upgrading just for RFID, but for those that are in that cycle that haven’t upgraded in two, three, four years, it’s part of the value proposition.

Operator, we have time for one more question.

Your final question comes from Andrey Glukhov, Southwest.

Most of my questions have been answered. Maybe longer-term, could you speak to, do you have any ability to improve the services margin? I understand in the near-term you’re facing some pressure, but can you do anything with utilization or working increasingly with third party aside (ph) to bring the profitability back up?

Certainly, Andrey, we think over the long run there will be real opportunities for us to improve our services margin. As we continue to drive greater penetration within our client base for a broader suite of solutions, working with known customers improves our ability to deliver solutions more efficiently and therefore drive up our margin.

We also believe we’re building a broader suite of solutions, which gives us a more dependable competitive position in the marketplace, which can probably allow us to avoid some of the price concessions we’ve had to make to win deals where we want to be quite aggressive.

As we continue to firm up our market position, improve the integration of our products, deepen our success into vertical markets and global marketplaces, we believe there will be real opportunities for us to strengthen our margin position. It probably won’t happen in the next quarter or two, but certainly something that Ramesh Srinivasan and his team are very focused on improving.

So what is the long-term target?

We really don’t have a long-term target today that we’re willing to talk about. As a goal, certainly getting back to some of our historic margins in the high 50’s would be a good outcome.

I’d like to thank everyone for joining us for the call today. As I mentioned in my earlier remarks, we’re quite optimistic about the future of Manhattan Associates, and we look forward to speaking with you in 90 days.

This concludes today’s Manhattan Associates third quarter 2004 Earnings Conference Call. You may now disconnect.