Manhattan Associates Inc (MANH) 2004 Q4 法說會逐字稿

Good afternoon. My name is Corey and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates Q4 2004 earnings release. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. As a reminder, ladies and gentlemen, this call is being recorded today, February 8, 2005. I would now like to introduce Mr. Matt Roberts, Director of In Investor Relations. Mr. Roberts, you may begin your conference.

Thank you, Corey. This is Matt Roberts, Manhattan Associates' Director of Investor Relations. I'm going start the call with our cautionary language and then turn the call over to Pete Sinisgalli, our CEO. In our statement 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'll refer you to the documents that Manhattan Associates files from time to time with the SEC. In particular, our report on form 10-K for the year ended December 31, 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 Safe Harbor compliance statement for forward-looking statements, included as Exhibit 99.1 to the Company's annual report on form 10-K for the year ended December 31, 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 the future operating results. Thank you and I hand you over to Pete Sinisgalli.

Thanks, Matt. Welcome to our fourth quarter earnings call. Ed Quibell is here with me. As we announced in January, Ed will be transitioning from our CFO to our head of M&A and business process improvement and Steve Norton will take over as our CFO. For this call, I've asked Ed to provide the financial comments. Steve will assume this role for next quarter's call. I'll start the call by taking you through some highlights from the quarter. Ed will then get into the details of our financial results and I'll follow-up with additional details about our business and provide a view of 2005 and then we'll move to questions. We had a solid fourth quarter. License revenue was 13.5 million, an increase of 12 percent versus Q4 of last year.

Services revenues grew 8 percent in the quarter. Total revenue was 55.8 million, up 13 percent over the prior year. We delivered more than 14 million in cash from operations and we signed some very important new clients across our product suite. Moreover, our strategic mission to be the global leader providing technology-based solutions that optimize the supply chain continue to gain traction. I believe our results in 2004 provide proof that our investments and product line expansion and geographic expansion are beginning to pay off. I'd now going to turn it over to Ed to take you through the financial details.

Thank you, Pete. Good afternoon, everyone. Pete gave you some of the highlights. Let me now review the numbers in more detail. Some high level metrics are, as Pete mentioned, we had a good software license fee quarter of 13.5 million. That was up 32 percent over last quarter. We achieved adjusted earnings per share of $0.19 within our guidance of $0.17 to $0.21, and equal to the street's consensus. We generated 14.4 million cash from operations. The details are as follows. Software licenses and hosting fees for the fourth quarter of 2004 were 13.5 million. This was an increase of 32 percent over the third quarter of 2004 and an increase of 12 percent over the fourth quarter of 2003.

Services revenue totalled 34.8 million for the quarter. This represents a decrease of 5 percent over the third quarter of 2004 and an increase of 8 percent over the same period last year. Our hardware and other revenue was up an impressive 53 percent from the prior quarter and 43 percent from the prior year. Although we had excellent sales in the quarter, hardware 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 total revenue of 55.8 million, up 8 percent over last quarter and 13 percent over a year ago. Our international revenue contributed 22 percent of total revenue for the quarter compared to 24 percent last quarter and 22 percent a year ago. Our international business continues to be a growth opportunity for us and we are pleased with the progress we have made in our new areas of geographical expansion.

Europe continues to be slow and was responsible for the decline in the contribution percentage. Our total gross margin came in at 55 percent, down 2 percent sequentially and 6 percent from a year ago. Our services gross margin was 51 percent for the quarter, down from 54 percent last quarter and 58 percent a year ago. Our services margins continued to be challenge by our increased open system activity, competitive pricing pressure, and international activity. Normally our services revenue decreases sequentially from third quarter to fourth quarter by approximately 3 percent due to holidays. Our decrease was slightly higher at 5 percent due to some installation starts being pushed to the first quarter of 2005. This contributed to the margin decrease. We anticipate that our margins should move back towards mid-50s during 2005.

Expenses remained in line with our expectations for the quarter. Due to the reduced service margins, operating margin for the quarter reduced to 12 percent from 13 percent last quarter and from 18 percent in the fourth quarter of 2003. Research and development expenditure reduced to 13 percent of sales from 14 percent of sales last quarter and a year ago. The increase of $181,000 in actual expense relates to the expansion of our offshore development center in Bangalore, India, which continues to perform well and remains a key competitive differentiator for us. Sales and marketing expenses were 9.1 million or 16 percent of total revenue for the fourth quarter of 2004. This was an increase of 1.1 million or 13 percent over Q3 of 2004 and an increase of 1.4 million or 18 percent over the same period last year.

The main reasons for the increase this quarter over Q3 2004 are higher commissions on an increased license revenue, some additional headcount in sales and marketing, and increased marketing coverage. Sales and marketing will continue to be an area of focus going forward as our integrated logistics solution strategy unfolds. General and administrative expenses, excluding depreciation and amortization expense, came in at 9 percent of revenue, basically in line with the previous quarter in the same period last year. Actual increases in this area are due mainly to Sarbanes-Oxley. Interest and other income for the quarter amounted to $879,000, up from 586,000 last quarter and 377,00 from Q4 of 2003. This improvement is directly related to slightly improved interest rates.

We recognized the foreign exchange gain of 1.1 million in the quarter compared to a loss of 46,000 last quarter and a gain of 335,000 a year ago. This was due to the weakening of the dollar. Our income tax rate for the quarter was 39.7 percent as compared to 36.6 percent for the previous quarter. This brings our blended rate for 2004 to 36.2 percent. Our blended rate for 2003 was 34.3 percent. Variances are caused mainly by the changing mix of our international business, realization of foreign tax credits, and some adjustments to our R&D credits. We do not anticipate any further major variances from the annual blended rate in the near term. This increased tax expense more than offsets the foreign exchange gains we recognized in the quarter.

Adjusted net earnings for the fourth quarter of 2004 were 5.7 million, or $0.19 per fully diluted share. Adjusted net earnings excludes the amortization of acquisition-related intangible assets. This result compares to adjusted net earnings of 5.2 million, or $0.17 per fully diluted share in Q3 of 2004, and adjusted net earnings of 7.2 million or $0.23 per fully diluted share in the Q4 of 2003. I will now address our financial condition at December 31, 2004. Cash from operations during the quarter amounted to $14.4 million. During the quarter, we spent 12.1 million on stock buyback. We repurchased 511,900 shares at an average price of $23.55 per share. The board of directors had authorized $20 million available for buybacks as the opportunity arises, and after these transactions, we were left with 4.2 million available at December 31, 2004. The board replenished the float back to 20 million this month.

Our cash and investments at December 31, 2004 remained at $173 million. Deferred revenue consists mainly of maintenance revenue and was 22.7 million at December 31, 2004, an increase of 600,000 over the balance at September 30, 2004 and an increase of 4.8 million over December 31, 2003. Our day sales outstanding were 76 days at December 31, 2004, which is an improvement of two days over last quarter and in line with the previous year. We anticipate our DSOs remaining in the 70s going forward. This is well within industry norms and our overall customer satisfaction level remains excellent. Now, good license revenue quarter together with our strong cash generation bodes well for the future of Manhattan. We continue to position Manhattan for exciting long-term growth. As Pete mentioned, our new CFO, Steve Norton, starts this month, and I look forward to my new role within Manhattan, focusing on mergers and acquisitions and business process improvement across the Company. With that, I thank you, and I hand you back to Pete.

Thanks, Ed. For the fourth quarter, our license revenue grew by 12 percent over '03 and for the full year growth was 15 percent. We continue to take market share in our strongest market, Warehouse Management. Our Warehouse Management license revenue grew by 11 percent in 2004, which is about three times faster than analysts believe the overall Warehouse Management market expanded. Our non-warehouse products, or our newer products, grew even faster in 2004, climbing 19 percent over 2003. Adding market share in Warehouse Management systems and gaining real traction in our newer markets gives us great confidence about our ability to lead the overall $4 billion supply chain execution market.

We had a successful quarter, adding new clients and expanding our relationships with existing clients. During the quarter we added some exciting new customers, such as Blair Corporation, Borders, Bosch, DNSSA, Dick's Sporting Goods, Forzani, Novant Health, Party City, Tallly-Weijl, Carter's, Inc. and Wegmans Food Markets. We've also extended relationships during the quarter with Debenhams Retail, Deluxe Media, Halfords, Revlon, The Children's Place, Tibbett and Britten, TNT Logistics and Wolverine World Wide to name a few. Our integrated logistics solution strategy has proven to be successful in a variety of industries and markets. Let me share a few examples of these with you. The largest sporting retailer in Canada, the Forzani Group, purchased key components of our integrated logistics solutions, sourced the consumption suite in the fourth quarter. The Company will deploy our Warehouse Management, Labor Management, Slotting Optimization and Training Partner Management solutions in 2005.

We're also continuing to gain significant market share in Transportation Management, where a consolidation and financial stability issues have plagued many of our competitors. Our investment and development of our expanded transportation capabilities are getting us invited to a growing number of deals. A key Transportation win in Q4 came at the purchase of our solution by Wegmans Food Markets, a leading food retailer. Wegmans selected our Transportation Management solution to help optimize its inbound and outbound supply chain. The Company also purchased our Trading Partner Management and Performance Management solutions to further enhance its operation. Another key competitive deal in the quarter was our win at Party City. Not only did this mark a key distributed order management win, but our talented services team was able to complete the go live in just seven weeks.

Our integrated logistics solution strategy has also been responsible for uncovering reverse logistics management opportunities at companies such as Avon, which is already seeing significant savings. Perhaps one of the most exciting areas of growth for Manhattan Associates has been our Asia-Pacific region. In just one year, this region has more than tripled revenue to more than 9 million in 2004. Key to this success was the signing of major clients in Australia, such as the country's leading retailer, and in China, such as Shanghai Pharmaceutical, Sinopharm Logistics, ANJI-TNT, Nichicon, and expanded relationships with Burberry and Nautica. We will continue to place a major focus on this area of the world to support both our Asia-Pacific customers and our global clients with operations in the region. 52 percent of fourth quarter license fees were generated from new customers and the remaining 48 percent came from our existing customer base.

We've been delivering about half of license fees from new customers and half from existing clients for the past several quarters. We believe this is an ideal balance that allows us to continue to add new clients while delivering ongoing value to our large existing install base. We also believe this result, combined with a 90 plus percent maintenance retention rate, are solid statements about our customer satisfaction levels. About 80 percent of the quarter's license revenue was on open systems and about 20 percent on I series. The retail and consumer goods verticals were once again strong contributors to our license fees and combined for more than half of license revenue in the quarter. We closed four license deals in excess of $1 million this quarter. Our results in radio frequency identification market bounced back a bit in Q4. During the quarter we closed eight RFID deals and booked a total of about 1.2 million in RFID revenue. That compares with six deals and 700,000 in total RFID revenue in Q3.

We continue to view RFID as an enabling technology for business management and in particular, supply chain management and do not view RFID middleware as a long-term market in and of itself. We believe it's an important part of our integrated logistics solutions suite. While slower than originally anticipated, the momentum around RFID continues to build. We have modest financial expectations in 2005 from the impact of RFID initiatives, but we believe RFID will have a meaningful, positive impact on our intermediate to longer term results as more and more companies upgrade their supply chain execution solutions to leverage the benefits of RFID. Across our products and geographic markets, overall business activity remains solid and we continue to have a healthy sales pipeline. We continue to make strong progress taking clients live in Q4. 71 new client sites went live with our solutions this quarter. That brings our full year total to about 270 new client sites going live.

Our expenses in Q4 were up about 4 million versus Q3. Half of the increase is a direct result of the strong hardware sales in Q4. The other half is largely attributable to higher software sales in Q4 and investments in sales and marketing in Q4. I believe the Company has a unique opportunity to distance itself from all other competitors in the supply chain management space. But, when I looked at some of our competitive expense metrics, it was clear to me we were not investing enough in our future. In particular, we needed to increase investment in sales and marketing and product. Our sales and marketing expenses increased in Q4 by about 1.1 million over Q3. Part of that increase was due to increased commissions on higher software sales and part was due to hiring five additional quota carrying sales reps. We now have about 60 goalable(ph) sales representatives.

With the opportunities we see in front of us, we wanted to add staff in late 2004 to help capture market share in 2005. Our sales and marketing expense as a percent of revenue is 16 percent and is far and away the lowest in our space. But that probably is not the right metric, since we have higher than average services revenue. When you compare our sales and marketing expense as a percent of license fees, our Q4 result of 67 percent of license fees is still very competitive and in line with much bigger companies like SAP. I will cover our R&D area in detail in a moment, but we've made important investments in this area as well in '04 and believe our ratios are still quite impressive. In Q4, R&D as a percent of total revenue was 13 percent and as a percent of license fees was 55 percent.

Again, in line with much larger competitors. We now have almost 1,400 employees around the globe. That's an increase of about 100 since the end of Q3 and about 300 for the full year. About half of the growth over Q3 and over year-end 2003 is in our Bangalore Center. We now have about 350 talented people in Bangalore at a much lower cost per person than our average U.S. cost per employee. Our U.S. population is essentially unchanged since the end of 2003. In addition to Bangalore, the remainder of our head count growth is in our international operations. We now have about 60 people in Asia, up from about 10 at year-end 2003, which is a direct result of our launching operations in China and Japan.

In Europe, we have about 170 people today, an increase of about 40 since the end of last year. The growth in European headcount results from openings in France and Germany. Our R&D spending was up slightly from the third quarter and was about 13 percent of total revenue. We continue to gain economies of scale by leveraging about 500 R&D resources to help us deliver and improve the breadth, depth and quality of our solutions. About 40 percent of the R&D team is in the United States and about 60 percent in Bangalore. With about 500 people in R&D, yet limiting our R&D expense to about 13 percent of revenue, I believe we are managing costs quite effectively, yet clearly distancing ourselves from the competition in our ability to develop high quality, feature rich scalable applications for supply chain execution and optimization on proven market leading technology. A disappointment in our Q4 results was in our services business. Our services margin for the quarter was 51 percent, down from 54 percent in Q3.

We shared with you on our call last quarter the historical cyclical pattern of about a 3 percent sequential reduction of services revenue in Q4 from Q3 due to additional holidays in Q4. So we expected about a 2 percent sequential decline in our services margin. In fact, actual sequential services revenue declined by about 5 percent in Q4 versus Q3, driving the margin down to 51 percent. Our services margin declined throughout 2004 and will likely not return to the high 50 to 60 percent rate we enjoyed in the past. This is due to four factors. One, a shift in our product mix, two, a migration to newer, more complex technology platforms, three, more fixed bids services engagements, and four, one particularly challenging client relationship. As our product mix continues to shift from largely Warehouse Management to a source to consumption supply chain execution Company, our services margin will feel pressure. From a revenue generation and services margin perspective, one of the very attractive attributes of the Warehouse Management business is the general need for extensive services engagement to implement the product. Generalizing, for every dollar of license fees for Warehouse Management software, there have historically been about $2 of services revenue.

This two to one ratio makes it easier to assign and plan for the services work force, which increases productivity and services margin. For our newer products, this ratio is closer to one to one, which puts pressure on our historic services margin. The second factor is our customers' migration to new technologies. An open systems platform is more complex than an I series platform and therefore can create more challenges to an implementation. Both our customers and Manhattan Associates teams are still learning to optimize implementations on open systems platforms. The third factor is that more and more open systems customers are requiring fixed price services contracts to win their business. The complexity of open technology environments combined with fixed price services engagements places further pressure on our margins. In some cases, where we have entered fixed price arrangements, the actually time required to complete the agreed upon work is running higher than our original estimate and therefore our services margins are negatively impacted.

Fourth, we have had a particularly difficult time completing work with one client, who will remain nameless. We have expended significant effort at our cost to satisfy this client and we have not yet completed that assignment. We expect our services margins to improve in 2005 for three reasons. The first is our teams are now more experienced at implementing our software in so open systems environment. Second, due to our investments in R&D, the quality and ease of implementation of our solutions has improved significantly in the past year. This will contribute to shortening the time required to bring a client live. Third, thanks to the first and second points, we can now better estimate the time required to complete implementations and can plan accordingly.

Given our product mix shift to more and non-warehouse management sales, we will not likely ever return to services margins approaching 60 percent. But I am confident we can fix areas in our services business and improve margins from the current levels. Moreover, as we continue to take market share in the overall supply chain execution market and grow revenue, I believe a services margin in the low to mid 50 percent range on an increasing revenue base is a very attractive opportunity for Manhattan Associates. In early January, we announced the addition of several executives to our management team and the reorganization of parts of our Company. I'm pleased to report that these changes have gone well so far. Jeff Mitchell and Jeff Baum are off to fast starts as the heads of sales and services in our Americas and International operations respectively.

Pervinder Johar is moving quickly to drive quality and efficiencies in our global R&D organization. Jeff Cashman and Diane Tuccito are off to great starts as heads of business development, alliances and strategy, and head of human resources, respectively. I'm confident Steve Norton will make important contributions as our CFO and the rest of the senior team is meshing well. While I'm on this topic, this call will be Ed Quibell's final assignment as our CFO, so I would like to thank him publicly for all of his contributions as CFO and remind him we have great expectations of him as head of M&A and business process improvement. Looking ahead to 2005, we're excited about our plans for this year. The supply chain execution market continues to be highly fragmented with no competitor having dominant market share. And it is clear to us that customers want someone to fill that void. 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 of supply chain execution and optimization solution. We also believe we are well positioned to build on our momentum from 2004 to capture additional market share and Warehouse Management and to more firmly establish our presence in Transportation Management, Trading Partner Management, Distributed Order Management, Reverse Logistics and RFID. We believe the investments we've made over the past couple of years in product line expansion and market expansion are clearly beginning to pay off and we intend to build on that momentum in 2005. To do so, we will continue to invest in four key areas in '05. One, our integrated logistics solutions product suite. This strategic platform for logistics will allow us to address the marketplace desire for broad, deep, supply chain execution and optimization solutions that are easy to integrate with ERP solutions and other applications, are of high quality, eliminate the need to deal with multiple vendors and deliver a substantial return on investment.

Two, continued international market expansion, particularly in Asia-Pacific where we're experiencing strong results. Three, an expanded and better trained global sales force to communicate our value proposition of integrated logistics solutions and capture additional market share. As I mentioned earlier, we've added five quota carrying people to our sales force in Q4 and now have about 60 reps globally. We believe this will help us communicate our ILS message and close more business. And four, further penetration into vertical markets beyond our strong positions in retail and consumer goods, this includes areas such as food, life sciences, 3 PL, industrial wholesale and electronics, where we've already established key clients and vertical solution capability. Industry analysts estimate the supply chain execution market was about a $4 billion market in 2004. Further, analysts predict that this market will grow between 5 and 7 percent in 2005. We expect our 2005 revenue to grow faster than that and we expect to deliver full year adjusted earnings per share in the range of $0.88 to $0.94, an increase of between 10 percent and 18 percent over 2004. For Q1 2005, we expect to achieve adjusted earnings per share in the range of $0.15 to $0.19 per fully diluted share.

Each year in Q1, we pick up additional payroll taxes compared with Q4. Our bonus payout in 2004 was relatively low, so in Q1 we will increase our accrual for incentives compensation. The combination of increased payroll taxes and bonus accrual add to about $0.03 a share in additional costs in Q1. Consistent with previous years adjusted earnings per share results, we expect a strong second quarter sequential decline in Q3 from Q2 and a strong fourth quarter in 2005. To summarize, in 2004, we made important progress toward establishing Manhattan Associates as the global leader in our space. We believe we have plans for 2005 that balance the need for profit growth and investment for the future. I'm confident we have the talent in the Company to execute those plans and we're quite excited about our long-term future and the strong returns we will provide to our investors. Operator, we'll now take questions.

At this time, I would like to remind everyone if you would like to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from Philip Alling from Bear Stearns.

Just with respect to the service gross margins, could you give us a sense on, you know, your thinking about headcount there and, you know, if in fact you continue to see pressure here on the gross margins in the services area, you know, would you look to reduce headcount in area and really where is your comfort level with respect to that for the remainder of this year?

Sure, Philip. Thanks for the question. Over the past year, we've seen our services margin decline sequentially each quarter. Part of that decline was conscious on our part as we invested substantially in 2004 in customer satisfaction. I'm a big believer in the importance of reference ability of customers and for our future license sales revenue, so during the year we invested on our nickel in a number of cases in customer satisfaction to improve our customer's experience with our products. With the investment we've made in R&D in 2004, we believe we've done a very good job of improving the quality and functionality of our products and investing in substantial quality assurance processes before the products are released to insure that our new products are of high implementability. So we believe that moving into 2005, we're well positioned to begin to move up our services margin. Having said that, if services revenues demands don't increase during the year, we most certainly will be in a position to adjust headcount accordingly.

Is there any impact on the service gross margins there with your changing relationships with systems integrators?

Not really, Philip, no. We continue to do most of the services business ourselves. We continue to look for ways to expand our partnerships with the big 3 PIs. We continue to work with them, but for the most part, our services business, because of the complexity of certain customer environments, is largely done with our staff.

You know, you had a decline throughout the year in the license gross margin as well. What are the specific steps you're taking to improve those in calendar '05?

Well, the license gross margin is largely attributable to third party software and in a couple of cases where we have done some co-development work with clients, where we will be building product with input from a client and the R&D related to that is part of the cost of sale. So, that is a major contributor to the slight decline in software gross margins. Obviously that's still a very profitable business for us and we'll continue to look for opportunities to work with clients and prospects to continue to build out our solution. So we're confident we're on the right track there. Ed, anything you want to add to that?

I just think also don't forget in the software fees, we do have the hosting fees, which has the cost of sales adapted to it, so as that picks up and we get slightly higher volume there, we might-- mix might change slightly, although that's still a fairly small amount.

So I see a sequential increase in your RFID-related revenues. In prior quarters you made some mention with respect to pricing pressure on some middleware deals in the space. Can you give us a sense of sort of the competitive landscape out there as far as, you know, selling middleware solutions in RFID and has that changed and, you know, what is your view there?

The pricing pressure is still there. I wouldn't suggest it declined at all in Q4 and in some cases it got more severe. The good news is there is a lot of activity in the market. We're involved in many discussions with clients and 2005 brings additional retailers' compliance programs to the forefront, companies like Target, Albertsons, Best Buy and others will be rolling out their RFID compliance programs in '05 and Wal-Mart will extend its program to the next 200 companies and expand to additional sites for Wal-Mart compliance. So while the pricing pressure is still acute for middleware products, we believe activity and momentum is building and we're cautiously optimistic about the potential benefit for us in '05.

Good enough. Now, just final question, you know, with Ed now focusing more in the M&A and business process improvement area, should investors expect that, you know, acquisitions are going to figure more prominently in the growth story here and, you know, what can you tell us there?

Well, we have been and continue to be active in evaluating opportunities to expand our portfolio. We've been looking at a number of things over the past several quarters and are engaged in continuing to do so. We're all, within Manhattan, convinced though to do deals we have to do the right deal at the right time at the right price and we'll continue to be responsible in that regard. But we most certainly are continuing to look hard for those right combinations of businesses with our franchise.

Good enough. Thanks so much.

Thanks, Philip.

Your next question comes from James Friedman from Fulcrum Global Partners.

Hi, it's Jamie Friedman at Fulcrum. First, Ed, let me wish you best of luck in your new assignment.

Thank you, Jamie.

I'm going to stick with that same topic around the service margins if I could. Pete, you had mentioned there was a problem installation with one of the clients, I guess you phrased a problem client. Is that on open systems or is that on I series.

That's a subject, Jamie, unfortunately we're not going to get into. We're working hard with that client.

Maybe more generally, just so we can figure out, you know, the potential going forward. Is that a percentage completion or is that a time and materials?

Yes, again, Jamie, we're not going to provide any more detail on that other than to say that like all of our clients, we're committed to their success and we've invested a lot in that relationship and working very hard to bring that to a successful outcome.

Okay. Let me just try one more is there any revenue associated with the customer?

Yes.

Okay. And then, you know, just maybe more generally, I noticed the promotion of Jeff Mitchell in the quarter and it's interesting that you're blending that assignment, it sounds, for the first time, at least I remember, for the software and the services and an EVP for the Americas. You know, if you could talk tactically as to how bringing those hats together on the service and software side might maybe potentially give you a better inroads into the customer.

Sure. I'd be happy to, Jamie. One of the basic premises behind the reorganization was to get even closer to our customers. I think we have very high customer satisfaction. I believe we understand our markets reasonably well and have great domain knowledge within Manhattan Associates. But I also believe there's an opportunity for us to get even closer to our customers, to better understand their current needs and their emerging needs and by combining the sales and services organizations, I believe we'll have better coordination closest to the customer. So, as opposed to sometimes having a handoff from sales to services and customers are not always being clear on who is the point of contact, I believe with one point of contact, one organizational focus on customers success and customer satisfaction, we will improve our relationships, reference ability and profitability of our relationships with customers. So, Jeff Mitchell got the assignment in the Americas, and Jeff Baum has a similar assignment for our international operations. And under Jeff Baum we have separate approaches in the EMEA theater and the Asia-Pacific theater to make sure our sales and services teams are working very closely to drive customer satisfaction.

Great. I'll pass the baton to the next analyst. Thanks.

Thanks, Jamie.

Your next question comes from Robert Schwartz from Jefferies.

Thank you very much. I wonder if you could give us just a little more detail, or granularity, around the new products. Maybe some notion about how often they played in deals, what percentage of the deals were involved. Were they involved in any of our million plus deals and which ones in particular are growing and why.

Sure. I would be happy to. The answer to the questions you asked yesterday were involved in a couple of our big deals. We had a very nice Transportation wins in a couple of cases in Q4. In a couple of cases we're not yet permitted to disclose who the relationship is with, but we had some very nice Transportation wins in Q4, which we're excited about. We're very excited about the Party City relationship. It's a very important win for us in distributed order management that we believe will catapult us in that category, one where we're just starting to really gain some traction. If you recall, we made an acquisition about a year ago to get into that space, have invested during the year to build an appropriate product for our customer base and we're thrilled with the win at Party City. And in particular, how quickly and how easily that product was installed. For the quarter, Ed, my notes say that new products--

Non WMS was 60 percent.

Yes, a little more -- more than half of our overall product sales and it's been that way for several quarters.

That's been increasing slightly each quarter.

Would you say that again?

The non-warehouse management products accounted for about 60 percent of license revenue fees in the quarter. And for the past several quarters non-WMS products have accounted for more than half of our new business.

And could you talk about, getting back to the service, one of the explanations that you gave when you said complex relationships. I'm wondering why that wouldn't lead to bigger deals, more profitable deals unless there really is a substantial increase in fixed price contracts. I would think that the more complex the integrations, the higher the rates you could get and the longer the hours you build.

In some marketplaces, that's probably correct. In our marketplace because it's a very competitive marketplace, we and our competitors are fighting for deals and one of the basis for that competition is the cost of implementing the solution. So that's one of the major reasons why we're engaging in more fixed fee programs and the pricing year-over-year for our services has been about flat. So the average price at year-end '04 was about the same average price at year-end '03, so it's a competitive marketplace. We're very focused on gaining market share. We believe this is clearly a scale business and the greater scale we have, the greater our sustainable competitive advantage. So, we've been in the trenches slugging it out and that ends up as part of the services engagement.

And last question before I hand it off to another analyst, your work and success in Asia sounds very exciting and I was hoping maybe you could talk a little bit about sense of how fast the A/PAC market is growing and what verticals you see as being particularly strong and maybe a little more granularity on the opportunities there and then I'll hand it off.

Sure. Be happy to. We're, as you know, very early in our efforts in the Asia marketplace, launched the Shanghai office in the China market just a year ago and we're quite pleased in the pharmaceutical space. We've signed two of the 4 largest pharmaceutical companies to relationships with Manhattan Associates. We're having a lot of very interesting discussions with companies that export goods from China, as well as other global leaders across the verticals that we provide solutions for. So the marketplace, while very young and we still building out our capability there, we believe our focus on multiple verticals and having a global reach, and particular expertise in RFID gives us a very natural competitive advantage in the Chinese and entire Asia marketplace. So I wouldn't say it's any one particular area other than we've had very good early success in pharmaceutical and we've had reasonable success in retail as well. We believe there'll be real opportunities for us across the gamut over the next several years.

Thank you.

Thanks, Robert.

Your next question comes from Mark Verbeck from Citigroup.

Thanks a lot. Can you guys help me understand a little bit better the investment that you're making in sales and marketing. You talked about some new reps and I think some other programs. Can you tell me specifically kind of what you're targeting with that investment.

Sure, sure. We've added about five new reps since the end of the third quarter and we've also increased our spending in training those reps. As we migrate from being largely a Warehouse Management solutions Company to a source to consumption, supply chain execution Company, the message, selling message is more complex. And we're developing a sales team to be able to adapt to that complexity. In the past, we've largely sold our solutions to the head of the warehouse operation, or as today, in addition to the head of operations, the CIO and the CTO are also getting a greater vote in which vendor to select. So, we're investing in developing our sales team and expanding our sales team to be able to sell our ILS vision. We've had some good opportunities over the past year and frankly in a couple of cases, I thought we were spread a little thin with not enough sales reps chasing a lot of opportunities and not doing as great a job as we might have done closing those if we had a few more hands helping out. So believe, with the opportunities we see in front of us, with something of a void for leadership in the non-WMS supply chain execution markets, we believe incrementally staffing up in our sales area will give us a very attractive opportunity to capture more market share. But it's primarily in sales and sales training and getting our teams ready to fight the fights.

So are these people overlaid to just go after the ILS opportunities, or are you changing some geographies as you enter the new year? How specifically are you deploying the new folks?

We've actually taken the five and put those in a number of our groups. We generally have our major account group and several of the five went into the major account group. We also have a mid market group and have placed someone in the mid market group. Then we a specific vertical focused on retail and consumer goods, so we've added people to those groups as well. So a combination of size of customer, major accounts, as well as mid market, as well as focus on the two verticals where we've had very strong success.

Okay, and then you mentioned investing in product and sales capabilities. How do you think about your operating margins over the medium term? Are they likely to stay, you know, more or less stable at where they're at now? Just kind of generally how do you think about operating margins over the medium term?

Yes, we today, Q4, we were at about a 12 percent operating margin. We certainly expect over the next two or so years to see that move up towards the mid teens. We still have some transition work to do in getting ourselves well positioned to be the dominant player in supply chain execution, but look toward our business margin moving up to the mid to high teens in 3 or 4 years out, we're targeting at 20 plus percent operating margin.

Okay. Great. That's helpful. Thanks a lot.

Thanks, Mark.

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

Hi. I read your press release. You assumed next year the IT spending environment is going to improve modestly, and I'm just wondering, your process in talking to your customers what signals have you seen in the marketplace that give you the confidence that IT spending is going to pick up next year?

Well, I guess it's a number of things, Robin. When we talk with industry analysts, customers, business partners, there seems to be continued interest in improving supply chains. We've got a very healthy pipeline of opportunities. We're working a number of deals that we're optimistic about and it's a general sense. This is not going back to the late '90s where the environment will get quite warm, but we believe there will be a modestly improving environment based on our contacts with partners, customers, prospects, and industry analysts, and in fact, competitors as well.

Okay. Your pipeline is healthy. Can you give us some quantitative measures to compare today's pipeline as compared to same time last year and also third quarter?

Yes, Robin, let me get that to you in a second. I can give you a couple of high levels.

The pipeline is quite healthy. I'm not sure we've ever--

I don't think I've got an exact-- I've got one number here. This might help. Yes, we're looking at our pipelines growing in excess of 20 percent over the last couple of quarters, which is kind of in line with where we have been historically.

Okay. Historically, meaning 2003 or historically you go back to 2000?

If you go all the way back to even 2002, 2001, if you look at our pipelines have been growing at around the 20s to 30 percent type growth. And as we add more products and add more geographies, we're finding that trend continuing.

Okay, and how has the closure rate been in comparison to historical trend?

It hasn't been bad, Robin. As Ed suggested, the pipeline, we estimate has been growing about 20 percent. As you know, we just announced that in 2004, revenue growth was, on license sales was up 15 percent, which would suggest the pipeline is growing faster than we're closing. We do think the market is tough to close new business and will continue to be tough, hopefully a little less tough as we see a somewhat improving environment, but we believe that competitively, we're continuing to win the majority of deals and that we're closing business reasonably well. Nothing would please us more, though, than to improve that closure rate and our hope is, our expectation is, with the additional sales team that we've added and the additional training, we'll have a better opportunity to close more business.

Okay, and Pete, you mentioned that you expect operating margin to improve to mid teens over the next two years, so if I draw implication, plus you said that service margin looks like it's going to be more in line with '04 and you're going to invest more in sales and marketing, so does this mean for 2005 the operating margin is more likely going to decline from the 16 percent of all you did in 2004?

Well, Robin, I think the big issue there is don't forget the mix between license fees and services is changing as well and as we see that changing, that's going to help our operating margins, so, you know, I think that's a bit of a leap. I think that our operating margins will gradually increase as we work on our services and as the mix between services and license fees change.

Okay. So let's say, give it a best case scenario, the operating margin stays around a 16 into, let's say 17 percent. Does that mean to get to your target of 10 to 18 percent of EPS growth, you're going have to grow your revenue between 10 to 18 percent as well?

Well, Robin, we don't give out specific revenue guidance, but you may recall in my prepared comments, I mentioned that analysts expect the market to grow 5 to 7 percent and we expect to grow faster than that, so that's about as far as we're prepared to go, but we do expect to grow faster than the market and continue to take market share. Operator, we have time for one more question.

Okay. And your next question comes from Adam Holt with J.P. Morgan.

Just another question then on the margin to be clear. You talk about a mid teens target over a two year period. You had an 18 percent margin in 2003. Would you expect over a two year period of time to have a higher margin than that or kind of mid teens is sort of where you are right now?

Our expectation is to have a margin at that level or somewhat higher.

Okay.

Look back at the 18 percent, that was a very good performance and something we're committed to getting back to. Between now and regaining that margin level, we are investing in additional products and additional geographies. Those new products and new geographies are having a weighting effect on our margin, but we believe each of those investments will provide a handsome ROI and believe we'll get back to a very attractive operating margin in the next couple of years.

Just another question on the guidance. The implied EPS for the first quarter is down on a year-on-year basis at the midpoint of your guidance. Understand that you'll see payroll charges as well as incremental bonus accruals, but wouldn't you have seen those in the first quarter last year? Is there something else maybe from a revenue perspective that we should take into consideration to get to the midpoint of your EPS guidance for Q1?

Yes, probably, Adam. If you take a look at the other difference from a year ago, with the services margin. The services margin a year ago was higher and that's what you used the Q4 '04 numbers, the Q1 '05, that's a more practical transition point. If you go back a year earlier, you'll see we had a higher services margin in Q1 of 2004 than in Q4.

Okay, and just lastly, on that front, you've gotten a lot of questions about services and how you get to that improvement. You historically have given out utilization and billing, you know, billing rates for your services business. Maybe you could update us on where that is and if you expect either utilization rates or, you know, billable rates to improve to get to the -- back to sort of the low to mid 50s services margin.

Our utilization rate has dropped slightly, about 3 percent from last quarter and it's down about 4 percent. We expect that to go up again. That's what we call it utilization or availability. But it's still pretty high. Overall utilization is still 90 percent in the Company and our billability is in the mid 60s, so I don't think there has been a major change in that.

One thing I would want to point out, Adam, is our services business, even though the services margin has declined somewhat, it's still a very healthy business and an important part of our long-term strategy to deepen our relationships with our customers. As I said in my prepared remarks, having a mid 50s, low 50s percent services margin on a much bigger services business is something that I find quite attractive. So, as we're trying to build share and be competitive in the marketplace, we're looking at ways to differentiate ourselves from the competition and build a larger piece, or capture a larger piece of the $4 billion supply chain execution market and if we can grab a 50 percent margin on that business, I think that's quite attractive.

Great. Thank you.

Thank you, Adam. Everyone, thank you very much for joining us on the call. We look forward to speaking with you in about 90 days. Thank you.

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