Manhattan Associates Inc (MANH) 2005 Q1 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Manhattan Associates first quarter, 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to introduce Mr. Matt Roberts, Director of Investor Relations of Manhattan Associates. Mr. Roberts, you may begin your conference.

Thank you Melissa. 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 the 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 actual results may differ materially from those contemplated by such forward-looking statements..

I refer you to the documents that Manhattan Associates files from time-to-time with the SEC, in particular our report on Form 10-K for the year ended December 31, 2004, filed with the SEC on March 16, 2005. 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 statements for forward-looking statement, included as Exhibit 99.1 for the Company's annual report on Form 10-K. for the year ended December 31, 2004. Manhattan Associates undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions to current or unanticipated events or changes in future operating reports.

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

Thanks Matt and welcome to our first quarter earnings call. Steve Norton, our Chief Financial Officer , is here with me.

I will start the call by taking you through some of the highlights from the quarter. Steve will then get into details of our financial results. I will follow with additional details about our business and provide a view of the second quarter and the balance of 2005. And then we'll move to questions and answers.

We had a solid first quarter. Licensed revenue was a new record at 13.8 million, an increase of 12% versus Q1 last year, and slightly ahead of our previous record set in the second quarter of last year. Services revenues were also a record at 37.4 million, an improvement of 11% compared to last year. Total revenue of 56.3 million is also a new record, and reflects growth over Q1 of last year of 10%.

Our core revenues, which is our total revenue minus hardware and reimbursed expenses, was a new record at 51.2 million, up 12% from last year's fourth quarter. We achieved modest sequential improvement in our services gross margin in Q1 versus Q4 of last year. . Our adjusted earnings per share was $0.18, which was $0.01 above the mid-point of our guidance range of $0.15 to $0.19 . We signed some very important new clients across our Solutions suite, including four deals with license revenue of a million dollars or more. Most important, our integrated logistic strategy continues to gain momentum.

I will turn the call over now to Steve to take you through the financial details. Steve.

Thank you, Pete, and good afternoon everyone.

As Pete mentioned, we had a solid first quarter with license -- record license revenue, service and total revenue. Aggregate revenues increased 1% over the immediately preceding fourth quarter of last year. It increased 10% over the revenues of the first quarter of last year, while core revenues, which exclude hardware and other revenue, increased 6% over the fourth quarter and 12% over the first quarter of 2004.

Software licenses and hosting fees for the first quarter of 2005 totalled $13.8 million, again a Company record. This is particularly impressive given that it occurred in a quarter, which is typically not as strong as the second and fourth quarter. This was an increase of 2% over the fourth quarter of last year and a 12% increase over the first quarter of 2004.

Services revenue totalled 37.4 million for the quarter, representing an increase of 8% over the fourth quarter of last year, and an 11% increase over the first quarter of last year.

Our hardware and other revenue decreased by 32% from a strong fourth quarter, and by 6% of the first quarter of last year. As you know, hardware continues to be a service to our customers who require a single point of contact for their systems and is not considered strategic. All-in-all, as highlighted earlier, total revenue aggregated $56.3 million, up 1% over last quarter and 10% over a year ago.

Our international revenue contributed 19% of total revenue for the quarter, compared to 22% both last quarter and a quarter a year ago. Europe continues to be slow and we continue to invest in growing our Asia-Pacific operations.

Our total gross margin came in at 58%, an increase of 3 percentage points from last quarter and a decrease of 2 percentage points from the first quarter of last year. Our services gross margin was 52.4% for the quarter, an increase of almost two full percentage points from 50.5% last quarter, but down from 55.1% a year ago. We are pleased with the improvement in gross margin from the prior quarter and, as we discussed in our last conference call, we are working on moving the margins back towards the mid 50s during 2005.

We've gotten off to a nice start in the first quarter. Operating expenses increased 4% over the prior quarter and 12% over the first quarter of last year. Our total head count has increased by about 50 persons during the quarter. The increase in operating expenses over last quarter is related to the increase in bonus expense and employer payroll taxes. This is consistent with our comments from the fourth quarter conference call, where we said that the bonus accrual for that quarter was less as we did not meet our internal bonus targets for the year. And given the fact that our large percentage of work force had reached their FICA limits, the payroll taxes in the fourth quarter are always lower than in the other quarters. Our operating margin for the quarter increased to 13% for the quarter, from 12% last quarter and decreased from 16% in the first quarter of last year.

Research and development expenditures increased to a total of 7.7 million or 14% of sales, from 13% of sales last quarter and 14% a year ago. The increase of $427,000 over last quarter is largely the result of the increased bonuses and payroll taxes, combined with a small increase in head count. Sales and marketing expenses were 9.7 million or 17% of total revenue for the first quarter of 2005, compared to 9.1 million or 16% of sales last quarter and 7.9 million or 15% of sales in the first quarter of last year. The main reasons for the increases are additional head count in America sales personnel and increased bonuses and payroll taxes, when compared to last quarter. And also, increased sales personnel in the Asia-Pacific and additional marketing and alliances in the America's, when compared to the first quarter of last year.

General and administrative expenses, excluding depreciation and amortization expense, came in at 9% of revenue, basically in line with the previous quarter in the same period last year. Actual increases over the first quarter of 2004 in this area are due mainly to Sarbanes-Oxley, and also the roll-out of our Asia-Pacific operations in mid-2004.

Interest and other income for the quarter amounted to 915,000, compared to 879,000 last quarter and up from 404,000 in the first quarter of last year. This improvement is directly related to improved interest rates and higher invested cash balances.

During the quarter, we also recognized a $430,000 foreign exchange loss compared to a $1.1 million foreign exchange gain in the fourth quarter of last year. The gain in the fourth quarter was due to the weakening of the dollar, principally against the British Pound and the Euro. And the loss in the first quarter of 2005 is due to the slight strengthening of the dollar against the Pound and the Euro, related to inner-company balances between the U. S. and our European operations.

Our income rate was 38.9% for the first quarter of 2005, compared to 39.7% for the last quarter and 34 and a half percent for the first quarter of 2004. The higher-than-anticipated effective tax rate for the first quarter of this year is due to losses in certain foreign locations, where we were not able to recognize the future tax benefits of those losses for U. S. GAAP purposes. Adjusted net earnings for the first quarter of 2005 were $5.3 million or $0.18 for fully diluted share compared to $5.7 million or $0.19 for fully diluted share last quarter and 6.2 million or $0.20 for fully diluted share in the first quarter of last year.

Adjusted net earnings exclude the amortization of acquisition of related and tangible assets, net of the related income tax benefit. Cash generated from operating activities during the quarter amounted to $5.7 million. Our cash and investments at March 31st totalled one seven -- $175 million, an increase of 2.7 million over the prior quarter.

Deferred revenue consists mainly of maintenance revenue. It increased to 24.9 million at March 31st from 22.7 million at December 31st of 2004, an increase of 2. mil -- $2.2 million, resulting from significant renewals of maintenance contracts on or about the first of January. Our day sales outstanding were 79 days at March 31st of 2005, compared to 76 days at December 31st. The increase is primarily related to the growth in our international receivable,s where the typical collection period is longer than it is here in the United States. We anticipate DFO's remaining in the 70's going forward, although moving toward the mid-70's. The increase from 74 days at March 31st, 2004 is primarily the result of the $3 million outstanding receivable with a customer with whom we are continuing to struggle with in Europe.

Our DSL continues to be well within industry norms, and our overall customer satisfaction level remains excellent. During the first quarter, we did not acquire any of our stock. We currently have $20 million available, as approved by our Board of Directors, for buy backs, if the opportunity arises.

Lastly, I would like to thank Ed Capel, as he has made my transition into my new role as CFO here at Manhattan Associates very smooth. And I look forward to working with Ed moving forward, as we both strive to grow Manhattan, both internally, as well as through MA activities on which Ed is leading the charge.

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

Thanks Steve. The first quarter results were in line with the expectations. We experienced strong license sales in Q1 in the United States and Asia-Pacific, but similar to many tech companies, had a weak quarter in Amea. We are being impacted by the overall economic softness in Europe, which is delaying commitments for capital investments.

We had a successful quarter adding new clients and expanding our relationships with existing clients. We secured new wins with companies such as Ballantine, BDI Laguna, DealEasy, Innovative Logistics, ManTech Security, Mayo Foundation, Perfect 10, S. Abraham & Sons and Tuck.

We expanded customer relationships with companies such as AtomicBox, Bulova, Coles Myer, Electronics for Imaging, Ellis Hosiery, Exel, Kellwood, Limited., Performance Team Freight Systems, Genesco, Hudd, Olympus, Party City, Revlon., S.P. Richards, Tally-Weijl, Tibbett and Britten, Toys R Us and VF Corporation. Our Integrated Logistics Solutions footprint continues to gain traction. It has allowed us to attract new customers and continue to expand our relationships with our existing clients. I'm always pleased to see existing customers reinvesting in their Manhattan Associates relationships, and this quarter was no exception.

In fact, during the quarter we closed four deals with revenue in excess of $1 million, all of which were with existing customers. I believe that's a good indication of our customer satisfaction levels. More over, I believe it provides substantial support to our Integrated Logistics Solutions strategy and customers desire to have a single vendor supply their complete supply chain execution solutions. Here are a few examples of customers adopting our Integrated Logistics Solutions.

Coles Myer, the largest retailer in Australia, is undergoing a major transformation program, which includes its supply chain. They purchased our Warehouse Management Solution in Q1 of 2004. In Q4 of last year , they acquired our Transportation Management Solution. And in Q1 of this year, they bought our Trading Partner Management Solution. This is a good example of how customers view our Integrated Logistics Solutions suite. It's an suite of solutions that can be purchased and implemented as modules, but integrated and optimized as a comprehensive supply chain execution solution.

Party City is another example. After purchasing our Distributed Order Management Solution in the fourth quarter of last year, Party City purchased our Warehouse Management, Transportation Management, and Trading Partner Management Solutions this quarter.

VF Corporation has been a long-standing partner with Manhattan Associates. In Q1, VF purchased our Warehouse Management, Labor Management, Sliding Optimization, Performance Management and Trading Partner Management Solutions for a new facility they're opening.

The Limited, as part of its supply change transformation project, purchased the remainder of our Optimization Solutions, adding to existing Warehouse Management functionality they already have in place. With our Trading Partner Management, Labor Management, Sliding Optimization, Load Management and Warehouse Management Solutions, the Limited will be able to merge operations of some of its multiple distribution centers.

Revlon, in order to improve both its in-bound and outbound processes, Revlon signed a deal with Manhattan this quarter for our Warehouse Management, Transportation Management, Trading Partner Management, Labor Management Solutions. This is another example of the appeal of our Integrated suite of Solutions and the opportunity it provides us to deepen and expand our relationship with customers.

Another part of our growth plan is to develop cost-effective ways to offer solutions to smaller companies. During the quarter, we signed an agreement with Microsoft to become one of the first global ISV's selected by Microsoft Business Solutions to become part of its Axapta® Industry Builder initiative. The initiative provides Manhattan Associates with an expanded global reach through the Microsoft Business Solutions channel network, with more than 1,000 channel partners to customers around the world.

In Q1 we signed our first client through this relationship, Perfect 10, and have more in the pipeline for this quarter. We're excited about this relationship, as we believe it provides us with a cost-effective way to reach a segment of the supply change execution market that we could not profitably reach with our direct sales force.

About 30% of first quarter license fees were generated from new customers, and the remaining 70% came from our existing customer base. This quarter's result is somewhat off the roughly 50/50 split we've experienced over the past two years, due to the four large deals this quarter to existing customers. Similar to the results over the past two years, license fees for Warehouse Management Solution were about 50% of our total license fees and about 50% was from non-Warehouse Management Solutions. More than 80% of the quarter's license revenue was in open systems, and the balance on I Series. The retail and consumer good verticals were once again strong contributors to our license fees, and combined for more than half of license revenue in the quarter.

During the quarter, we closed six RFI deals -- RFID deals, and booked a total of about $1 million in RFID revenue. That compares with eight deals and 1.2 million in RFID revenue in Q4. As we have said for more than a year we view RFID as an enabling technology for business management and, in particular, supply change management, and do not view RFID middleware as a long-term market in and of itself.

We believe much of the market now agrees with us. Many industry experts are now stating that RFID middleware will not likely survive as an independent technology layer, but will end up either in operating platforms, like IBM's web (inaudible) or Microsoft's .net platform or in applications like Manhattan Associates Integrated Logistics Solutions suite.

Whether the middleware ultimately ends up in operating platforms or applications really doesn't matter to us. Most important to us, and we believe our customers, will be the ability of applications to utilize RFID data to optimize effectiveness and efficiency across the entire supply change. We are developing our entire Integrated Logistics Solutions suite to fully leverage RFID and electronic protacode data. 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 Solution to leverage the benefits of RFID.

We now have about 1,450 employees around the globe. That's an increase of a -- nearly 50 since Q4. About 25 of the additions are in our Bangalore center. We now have about 375 people in Bangalore, at a much lower cost per person than our U. S. average cost per employee. We added about ten billable service people in Asia pack to support growth in that market. The balance of about 15 was in the United State,s with about ten additions in billable service roles and five in other positions. To maximize the impact of our investment dollars, we are currently looking at ways to improve the financial performance of our international markets.

As you know, we began new investments in early 2004 to expand global reach in Germany and France, in Amea (ph), and in Japan and China in Asia. As expected, in the early stages, these new markets are investment areas and are generating operating losses. These losses negatively impact our consolidated metrics We believe there are opportunities to continue to gain traction in these markets, while also reducing the losses. Moreover, we believe there are opportunities to improve performance in some of our established international markets and are already implementing plans to do so.

As discussed in our last call, we continue to struggle completing work with one client. We sold software to this Amea-based client in the first quarter of 2003, and have been working to complete the installation of the software since that time. The project overall was complex and there were multiple components in the implementation. Some of the components were completed successfully, but others have now been halted. We are working with that client to resolve the matter. We currently have approximately $3 million in outstanding accounts receivable with this customer, which we are working hard to collect.

For the last several months we evaluated a fairly large acquisitions opportunity. We were informed in mid-April that we were out bid for that company. We presented a fair offer for the business and worked hard to complete a transaction, but at the end of the day another party was willing to pay more than our offer. While disappointed that we were not able to acquire that business on acceptable terms, we will continue to be disciplined in our approach to acquisitions and will not overpay for a business. Because we had gotten fairly far down the path on this transaction, we incurred costs in April for legal and financial due-diligence. These costs total about $1 million, which we will expense in the second quarter. We will expense these costs as acquisition related, nonrecurring charges and , therefore will not be included in our adjusted EPS results for the second quarter.

Our first quarter results were in line for our plans and our outlook for the remainder of the year continues to be positive. Our license fee pipeline continued to grow and has never been larger. It is up nicely from last quarter and strongly from a year ago. Our services pipeline and backlog are also solid. While we are somewhat concerned with the number of other software companies that struggled in the first quarter, we expect to post strong revenue and earnings results in the second quarter. For Q2, we expect to achieve adjusted earnings per share in the range of $0.22 to $0.26 per diluted share. For the full year, we expect to deliver adjusted earnings per share in the range of $0.88 to $0.94.

To summarize, I believe our first quarter performance was solid and positions us well to achieve the first year financial objectives. I believe we have plans in place to further improve our performance over the balance of 2005, and I'm optimistic about our ability to build our Company to increase shareholder value.

Operator, we'll now take questions.

[OPERATOR INSTRUCTIONS] Your first call comes from Phillip Alling of Bear-Sterns.

Thank you very much. Just wanted to get more of a sense here with respect to the improvement that we saw in service revenue, in service gross margin. Given the more diversified mix of software products that you're selling away from sort of core (inaudible), which historically had more of an implementation component going forward. How should we look at the growth in that area going forward with sort of more (inaudible) sales? And how do we reconcile that with the stronger performance that we saw on that line in this quarter?

Thanks Phillip. As we mentioned over the last quarter or so we would expect, over the balance of 2005, to continue to see some modest improvement in our services gross margin. We won't get back to the levels we saw a year or two ago, when we were largely a Warehouse Management Solutions company with gross margins approaching the high 50s and, potentially, low 60% gross margin area. But we do believe some of the improvement programs we've put in place over the past couple of quarters are beginning to bear fruit.

Some of the improvement in our services training, in our product saturation, in our understanding of some of the international markets where we are doing business, I think the compilation of all of those programs are leading to a somewhat improved services gross margin. Now, we are not satisfied with the 52% services gross margin, but we do think it's a solid step in the right direction.

What can you tell us with respect to the Amea region and, sort of, what assumptions are you making there when you indicate you expect the solid performance again in the second quarter? How do we reconcile that with the weakness that you've seen in that region, in particular? Has there been a change since the end of the first quarter and how should we be looking at that going forward?

For the second quarter, we are not expecting much of an up-tick in the general economic climate in Amea. In the first quarter, we saw strong results in the United States and Asia-Pacific and, for the second quarter, we expect that we'll see similar rulings for the United States and Asia-Pacific. And unfortunately for the near term, similar weak results from the Amea region.

What about the software license gross margin targets, those came in a little below what we had been looking for in the first quarter. What should the investor expectations be going forward as far as license gross margin?

Those will shift a little bit, Phillip, quarter to quarter based on the product mix and whether or not there's any so-called co-development work that goes into that quarter's license revenue results. So that will tend to bounce a little bit based on product mix, but I would think we will continue to support services software gross margins comparable to what we have over the past several quarters.

One final question is acquisitions, can you give us any color as far as the likelihood for the remainder of this year that you would be adding, boosting your growth really through acquisition? Have you sort of stepped up your efforts there, given competition in the marketplace from some of the firms you are competing with on a daily basis.

Well, we continue to be quite active in evaluating acquisition opportunities. Our acquisition strategy is unchanged. We're looking to improve shareholder value by acquiring companies in supply change that can either give us additional functionality or scale advantage. And we believe there are a number of potential opportunities in the marketplace to do that. And we're actively evaluating opportunities, but the likelihood of something happening is not predictable at this point. But we are quite engaged. We are disappointed that we weren't able to consummate the transaction we worked hard on over the past couple months, but believe that it does not negatively affect our market position. And we'll continue to be aggressive looking for the right opportunities, but at the right price, to increase shareholder value.

And the guidance range you gave for the year, it does not include any MNA activity, is that correct?

That's correct. Thanks, Phillip..

Your next question comes from James Friedman of Fulcrum.

Thank you. Let me echo my congratulations. Pete or Steve, I'm not sure if you have it there, but the four seven figure deals that you signed in the Q1, how does that compare to Q1 of '04?

That's a great question, we are pushing around a little bit of paper here to see if we've got that number available. I don't have it off the top of my head.

I know that was before your tenure.

I snuck in right under the wire there, so I was here for the last two weeks. And I know off the top of my head of at least one I was involved in helping a little bit on one of the deals that was a million dollar deal, but I'm not sure if we did more than one.

We're scrambling here, Jamie. Why don't we get back to you on that?

Okay that sounds good. With regard to the mix between open systems and I series, if you could, if I could trouble you to re-explain what that means and does the dot net or Microsoft Axapta® revenue, does that get classified as open systems?

Yes, it would.

So I Series, I guess, is IBM, right?

Pretty much IBM, but only on the I series architecture.

What has the -- what would you anticipate the mix shift will be as you go forward? I guess with Microsoft's increased reach we should expect open to grow as percentage of revenue.

Well, you know what's interesting, Jamie, we have had very good success over the years in the retail vertical segment. The retail industry has historically had an affection for the AS-400 platform, the I Series platform, and it continues to. For the past couple of quarters we have had about a 20/80 mix, 20% I Series, 80% open, and retail continues to be a strong vertical force and we continue to sell (inaudible) applications on that platform. So, for the foreseeable future, we do certainly expect dot net platform to gain some traction, or more traction, but certainly the I Series is not going away and we continue to make appropriate investments in strengthening our solutions on that platform.

Got it. And then, Steve, I'm not sure if you have thought this through yet, if you had the chance, but in terms of that $3 million receivable, what would the next milestones be or what could we anticipate from an analytical point of view of how that is going to get journalized over time?

Sure. We currently, as you know, we have about a $3 million receivable from this European customer. We have not currently reserved for that. We believe we have a very valid legal claim for the receivable, and we performed and completed the services from which this receivable arose. And we intend on pursuing collection vigorously.

However, as you also know, there's always uncertainty in issues like this. For U. S. GAAP purposes, a receivable is required to be reserved, when the amount is -- which expected to be uncollectible is estimable and probable. And, at this point in time, that amount is not -- the amount that is uncollectible, if any, is not estimable or probable and, therefore, we have not reserved anything against it. We will continue to pursue the collection. If we get to the point, at some point, that we believe that there's an amount that's uncollectible and it's estimatable and probable, then we will record the reserve at that time..

And just a last housekeeping detail. I know Ed was always real religious about this, but you have the big users conference coming up in the Q2. I want to make sure that you accrued for the expenses related to that, and how should we think about that as an important event.?

Jamie, that is being included. The expense for that event is forecasted, included in our second quarter guidance.

Thank you.

Thank you, Jamie.

Your next question comes from Adam Holt of J P Morgan.

Hi guys. The first question on the license revenue, this is the second year in the row you have actually been sequentially up in the first quarter from the fourth quarter. Can you talk about whether or not there's some kind of shift from a seasonal perspective in your business? And, secondly, how much license revenue might have fallen out of the fourth quarter that you were able to recapture on closed deals in the first quarter?

Adam, we're in a little bit different business model, I guess, than some of the software businesses. Q1 tends to be a pretty good quarter for us, primarily because of our retail customer base. Retail customers tend to like to start software projects right after the end of Q4, and for that reason we have historically tended to have a decent Q1. So that's the largest reason.

There's always a little bit of business that slips from one quarter to the next. I wouldn't suggest there was any unusual proportion that slipped from Q4 into Q1. I think we're beneficiaries of a client-base, where we have a large retail client-base that tends to move right after the Christmas holiday season to get started on the next cycle.

Quickly, on sales and marketing, you noted that one of the reasons it was up as a percentage of revenue was due to new sales ads. Could you quantify that and talk about your hiring plan for the next couple quarters on the sales front?

Sure. On the sales front we, as we mentioned on the last call, added to our sales staff in the fourth quarter of last year to give us a full contingent of salespeople for 2005. We wanted that team in early to get trained, get some experience, get up to speed, and get ready to run to help us deliver on our ILS Solution platform. We don't have intentions to add any staff to the sales force over the balance of 2005.

And just last question, I want to make sure I understand the deferred revenue. It looked as if the change, or the rate of change in deferred revenue actually decelerated this quarter versus the last couple of years. Am I reading that right and was there any change in renewal rates with maintenance revenue?

No, we continue to have over 90% renewals. It could have been related to somebody paying at the end of December versus the beginning of January, but the renewal rate continues to be consistent with what it has been in the past.

Great, thank you.

Thanks, Adam.

Your next question comes from Peter Coleman.

Thanks gentlemen. Just a couple quick questions. I was wondering if you could give maybe a little bit more color on the other non-warehouse products. I know you said 60% of the business was from non-warehouse. I was wondering if you could comment more directly on the transportation set and maybe if that was related to the larger deals.

We had a solid quarter for Transportation component part to one of the larger deals, but we had a solid quarter for Transportation. But we also had a very solid quarter for our Trading Partner Management Solution. Collaboration across the supply chain obviously is a hot topic for everyone in this space, and our Trading Partner Management Solution enables our customers to deal efficiently and effectively with their extended supply chain We have seen over the past couple of quarters continued momentum behind our Trading Partner Management Solution. So feel quite good about the performance of TPM, as well as our Transportation offering in Q1.

Since you have now had a little bit more experience with those partner areas, are you able to kind of quantify at all, sort of , what the margins look like in that business? If you can't give an exact number, but sort of give us an idea that relates to your traditional Warehousing business, is doing the Trading Partner Management a higher margin product, less services, more services, just kind of give us a little color what those products look like from the profitability perspective?

Sure, we will give you some general sense. One of the challenges we do have, especially when we sell bundled offerings, on the software fee side it's hard to, with great confidence, allocate revenues to each of the products. But, as a general rule, from a software perspective the profitability of our non-Warehouse products is similar to the profitability of our Warehouse products. On the services side, generally speaking, Warehouse Management tends to have two or three X-services revenue for each dollar of license revenue, where the non-Warehouse products tend to have about one-to-one services revenue to license revenue. Because of that, obviously, the dollar gross margin on the services side would be less than for the (inaudible) side. But our belief is, by cross-selling a broad suite of solutions to our partners, we can capture a much larger share of the overall supply chain execution market and drive total shareholder value and profitability up substantially.

Okay, perfect. Let me just -- one additional question here. On the SI front, are you seeing sort of, at this point, more or less involvement from the SI community as it relates to generating business. This quarter, obviously, you had a fair amount of business from existing customers, so I'm kind of wondering if that's changed at all the relationship whereby the relationship whereby you know how much you use the Si channels as a means to generate new business.

It's been pretty much constant, Peter, for the last I'ld say for the last four or five quarters. We do have our partners helping influence deals. I'm not sure they provide as much influence as they suggest they provide. We're redoubling our efforts to gain greater support, visibility, and partnership with some of the bigger SI's. But I think the business climate is similar, was similar in Q1 to what it's been recently.

Okay. And, then just finally, on the new hire front you talked about the sales new hires, I'm wondering if there's any, as you look at your senior management team, if there's any sort of plans for additional changes or are you pretty well set now that you kind of been on for almost a year, I guess.

Yes, Peter. I'm quite happy with the senior management team. I think Steve Norton's off to a great start as our CFO, and the other additional folks we brought on the outside are making a great initial impact on our Company. And the existing senior management team is a very seasoned, accomplished, domain-rich organization and I'm pleased with the way our group works together. Now, we've got lot to accomplish over the next three quarters, we're not under-estimating that at all. But certainly believe that we've got a pretty good team and believer we're up to the challenge.

Great. Well, thanks a lot and wonderful quarter.

Thank you.

Your next question comes from Terry Tillman of SunTrust Robinson Humphrey

Thanks. Hey, Pete. In terms of the strength you saw in the U.S. side of your business, can you maybe talk a little bit more? Is there an improvement in closer rate, is it greater sales coverage, can you dive a little deeper there?

Sure, Terry. I think it's probably a couple things that are contributing. Certainly having expanded the sales team, giving them additional training. I believe it's making a difference. Probably making a bigger difference in developing our pipeline, than in developing the actual results for Q1. But certainly believe the additional feet on the street are helping.

I would also suggest one of the reasons why I think we saw very good performance in license sales in Q1 is our Integrated Logistics Solution message is really starting to resonate We only offer our suite of products in those markets in which the primary language is English. So we offer that suite of solutions primarily in the U.S. Offer it in Australia, as well, and the United Kingdom. Do not yet have it available in our markets where English isn't the primary language.

I do think the market is responding well to the integrated suite. The idea of getting your full supply chain execution needs met by one vendor, with a high quality, functionally-rich solution, low total cost of support in ownership I think is resonating well. I think, between having more feet on the street and then integrated platform for logistics to sale, is making a difference.

Okay. Then, Pete, in terms of -- you know, one of the questions is if you look at the large deal pipeline, I know four deals is pretty impressive compared to prior quarters, is this kind of a new base we're setting here where we're talking two, three deals kind of a minimum per quarter? Any kind of commentary on that?

We're feeling pretty good about the second quarter pipeline visibility into second quarter results. We expect a million dollar deal or two, or maybe more in Q2. But really not setting a precedent yet on that.

One of the things that I think will be interesting for us to continue to manage is certain clients will buy multiple products at once and implement them as part of our ILF platform. Other clients may buy one product this quarter, another two quarters later, a little bit like the Coles Myer story I mentioned in my prepared remarks, buying one product in Q1 of '04, another product in Q4 of '04, third in Q1 of '05. So, in instances like that, you may not have million dollar deals with them each quarter, but the cumulative benefit is certainly well over a million dollars. So I think we are getting great visibility. We'll probably see million dollar deals with a little bit greater frequency. But certainly aren't betting the ranch that we will require those to meet our expectations.

I know you mentioned there's seasonality, or some amount of seasonality with your license revenue. Could you actually -- could we see license revenue pick up sequentially in the second quarter?

At this point, we would expect license revenue to be stronger in Q2 than Q1.

Okay. And then a question for Steve. In terms of tax rate assumption,n what should we be looking at for the second through fourth quarters?

I think it'll range -- it's going to depend on how the foreign operations do, but I would say in the 36 to 39% range.

And then, just lastly, will you be back in the market buying stock in the quarter, because I know you didn't buy in the first quarter

The reason we didn't buy any stock is was we were saving our cash for the acquisition candidate we were considering. We had continue to have authorization from the Board to invest up to $20 million to buy back shares and we will look at opportunities to do so.

Okay, that's all I have. Thanks Guys.

Thanks Terry.

Your next question comes from Audrey Glukhov of Southwest Securities.

Yes, thanks. Most of the questions have been answered, but a couple more. On the services revenue, it actually was somewhat stronger than I had thought. Are you guys having fewer, over on the fixed price projects, are you having better utilization? Kind of, what are the underlying drivers for that?

We're seeing modestly better utilization. I think the comments I made earlier about some of the focus we've had over the last quarter or two to improve training, improve product quality, and get our teams up to speed is beginning to have a positive impact. I think we are getting better at estimating services engagements and, therefore, have somewhat less overruns on fixed services contracts. So all of those things, I think, combine to give us better results in Q1 than we had in Q4. We're still pushing hard to have further improvement , and I think our services teams here are extraordinarily talented and will deliver on continued improvement and results.

Thanks. And the second question I had, some of the other software vendors in the retail vertical actually saw substantial deterioration of their results sequentially to Q1. What are you guys seeing, you had strong numbers from retail, I mean what are you seeing in that vertical in terms of spending?

We saw a solid quarter from retail in Q1 and the outlook for Q2 and the balance of the year for retail, at least in supply chain execution, continues to be positive. We are, like you suggested, a little nervous with the number of software misses in Q1 and certainly are staying very close to all of the deals to make sure we're doing what we need to do to close activity in Q2. But we see a solid pipeline for retail and are confident we'll have a successful '05 with that vertical.

All right, that's all I have. Thank you.

Thank you Audrey.

Your next comes comes from Prudential.

Thanks. Question on head count growth rate. It's running double the Company's actual annual revenue growth rate and it has been for the last couple years. I'm just wondering, you mentioned that you're not going to be hiring any more sales teams this year, you feel set. When do you reach a point where you feel like you've got the right infrastructure across the Company that you can start as to utilize the investments for a stronger payout for your shareholders?

We feel we are pretty close to that level today, with the exception of services staff. Services business continues to grow. We'll need to continue to add staff to fulfill the requests of our clients. But we believe, as far as our non-services related positions, sales and marketing, R&D, G&A, and so forth, we're about where we need to be to succeed with our plans.

He would like to point out though as you correctly noted that our head count has grown above our revenue growth rate, but the vast majority of that head count growth has been in our Bangalore Center, where our cost per employee are dramatically less than the cost per employee in the U.S. We are looking for that group to continue to improve its quality, productivity and domain knowledge to continue to improve the value of our investment in that R&D Center. Over the past two years, we have gone basically from zero employees in Bangalore to today, we have about 375.

We believe that group is quickly coming up to speed in domain knowledge on our application suite, industry knowledge, and making a substantial contribution to the quality depth and breath of our Integrated Logistic Services offerings. We believe we've built the infrastructure and investment platform service for the foreseeable future.

And if you could just give us a sense of the competitive landscape with that same team now? How does Oracle with Retech reshape? Retech did have an offering, it didn't seem to be as directly overlapping, but what's your view in terms of that acquisition.

For the near term, we think Retech will probably have zero impact on us. We do partner on some occasions with Retech, Retech on the merchandising side and ourselves on supply chain execution. We'd expect that to continue. We did not bump into Retech at all in '04 or the first quarter of '05 from a Warehouse Management perspective. They have a product. I don't know that they have offered it in well over a year. We've been in no competitive situations with Retech.

Obviously, Oracle has a suite of applications in supply chain execution. We generally don't bump into them a lot. We believe the reason for that is, if a customer wants to standardize on Oracle across all products, applications and databases, we're probably not invited to the dance. If if the customer has sophisticated supply chain needs, even though they use Oracle applications or the Oracle database, we will likely get invited to that request for proposals. So we don't see that shift changing a whole lot in the next period of time.

We do know Oracle has announced a plan to offer so-called product fusion in the 2007, 2008 timeframe that will bring together the Retec and the PeopleSoft, and other products into one product suite Time will determine whether or not that's an increased formidable competitive threat to us.

And, Steve, if you could just address, what was the largest license transaction in the quarter? I don't know if you have that detail.

We don't quantify it. We did indicate we had four contracts over a million dollars. That's as much as we would disclose.

All right, thanks.

Thanks, Brett.

Your next question comes from Mark of city group.

Thank you. Can you help me understand how the growth of your services head count would impact margins while you're doing that? Maybe if you have some kind of quantification of how long it takes people to be productive? Is the head count (inaudible) or front end or back end loaded in quarters?

Yes, that's a great question, Mark. A couple of data points for you. Over the past year, as I mentioned in my prepared remarks, we opened several new international markets The productivity of our services staff in thos markets obviously will be lower than the productivity of service staff in established markets. Add complexity to those markets as non-English is the core language, and the productivity gets dampered -- dampened a bit further. Generally speaking, we don't try to have bench trained. We try to have our teams basically fully deployed and productive. As we are starting up markets, obviously that's a harder thing to do.

So the general rule, we try to add staff once we've seen the whites of the customer's eyes and have commitments to implement our solutions. We believe, at this point, we do need to add a few more services people in Q2 to meet the demands of our clients. General speaking, we try to hire people with technology skill sets and some services experience, so they can be productive quickly. Generally speaking, it requires a minimum of four weeks of training to get services staff ready to begin activity on a client engagement

Okay, and then in the quarter is hiring fairly (inaudible)?

Yes.

Okay. And then a little more clarification on this troubled project. You said the work halted. Does that mean you are no longer performing any services there?

That's correct.

And what's the aging of that AR?

It's probably six months or so. It occurred over a number of quarters during 2004, so

Approximately it would be about -- Half of it would have been in the most recent quarter and about half in the prior quarter. Probably the majority of it in Q4, in Q3, but not much in Q1.

Okay, great, thanks a lot.

Your next question comes from Robert Schwartz of Jefferies.

Thank you, I'm really down to just one question. Maybe you could give us a little insight into which verticals have been particularly strong this quarter? When you look in the pipeline, who do you see that's strong? Are you seeing an up-tick around spending in retail, in particular, and what's driving it, maybe some more granularity around it? A lot of people are expecting a retail up-tick and don't know what parts of it you're seeing?

That would be -- your observation would be consistent with our experience in the first quarter and what we expect to see over the balance of the year. We had a solid first quarter in the retail vertical and we expect retail to be solid for the balance of the year. You may recall, in our fourth quarter call., Q4 was also a strong retail quarter.

Like everyone else, I think we are benefiting from the leaner years from retail in '02 and '03, where little was spent in capital investments, and now is an opportunity for folks to upgrade their infrastructure to be more competitive and deliver better value. So, in the quarter, we had very strong retail and consumer goods quarter and would expect that to continue over the balance of the year.

What's strong in Asia? What's working in Asia?

Yes, WMS, Transportation and Trading Partner Management have all been solid for us in the Asia market.

Are those mostly to new customers or is it to existing customers who are expanding operations in Asia?

A combination of both. We have had nice success, as I mentioned, with Coles Myer in Australia. We have additional clients that we're adding in Australia. And seeing good initial success in China and Japan. Again, China and Japan are new markets for us, start-up markets. And we're getting up to speed after we've seeing initial receptivity that we think is encouraging.

Given your comments about Oracle, I'm wondering who you see on the ILS. When people say we're interested in ILS solutions, are there usual suspects that you see that are trying to compete with you?

Generally, on the ILS footprint, we believe we're the only vendor of the so called best-of-breed vendors that has an integrated suite of solutions. If you go back two or three years ago and you wanted to put together what Manhattan can offer you today, you'd probably have to go to four or five different best-of-breed vendors. We believe we're the only organization that has this integrated suite and logistic solutions. The competition from that could potentially come from the Oracle's or the SAP's that has a common technology stack. The opportunity for us, we believe, is that our domain knowledge and functionality of our products, we believe, are much superior to what a prospect or customer could gain today from some of the ERP's. So ILS, we believe, is our opportunity to clearly differentiate ourselves and create a sustainable advantage in this (inaudible) market.

And I promise this is my last. You had a great quarter in Q1, but several of the competitors talked about a softening at the end of March. And outside of retail, what sounds like it was very strong, I didn't know if you saw it? Clearly, overall, you didn't see that. I'm wondering if you saw any evidence of it whatsoever and where you might have seen that?

We saw softening throughout the quarter in Europe. But in the United States, which is our largest market obviously, 80% of our revenue or so, we saw a solid momentum during the quarter that we believe is carrying into Q2. At this point we are cautiously optimistic.

Thank you so much.

We have time operator for one last question.

Your last question comes from Brad of CIBC World Market.

Great, thanks a lot. Pete, during your prepared commentary you talked about operating losses internationally and opportunities to improve performance there. Is that predominantly internal or are you looking at external things as well? maybe give us some color around that.

Well, we look -- Two fold. Internally, we're looking at becoming more productive. We are looking at trying to better manage our investment in newer markets to the near-term revenue opportunity, to limit some of the negative financial impact those investments might have. But also looking at channel partners as a way to gain velocity in some of the markets. So, we're looking overall at the productivity throughout the newer markets, as well as our more established markets to drive business performance. And also talking with, looking to extend and expand channel opportunities within the international market space.

Could you quantify at all what the magnitude of the losses are coming from international?

Well, I can give you some sense in the four start-up markets that we participated in. Market that were begun early part of 2004. In Q1, we had operating losses of over a million dollars. We don't break out market-specific results. But as a -- just a guide post for you, in those four markets we had operating losses in Q1 in excess of a million dollars.

Great, thanks a lot.

Thank you Brad. 'd like to thank everyone for joining us on the call. We look forward to speaking with you in about 90 days. Thank you.

Thank you for participating in the Manhattan Associates first quarter 2005 earnings conference call. You may now disconnect.