Manhattan Associates Inc (MANH) 2005 Q2 法說會逐字稿

Good afternoon. My name is Christie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates second quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during that time simply press star, then the number one on your telephone keypad. If you would like to withdraw your question press star, then the number two. As a reminder, ladies and gentlemen, this call is being recorded today, July 26th, 2005.

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, Christie.

Good afternoon, everyone. I am going to start the call with our cautionary language and then turn the call over to Pete Sinesgalli, 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 that actual results may differ materially from those contemplated by such forward-looking statements.

I refer you to the documents that Manhattan Associates files from time to time with the SEC. In particular, our report on Form 10-K for the year ended December 31st, 2004 filed with the SEC on March 16th, 2005. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections. Additional factors are set forth in 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 31st, 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 the future operating results.

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

Thanks, Matt.

And welcome to our second quarter earnings call. Steve Norton, our CFO, is also here with me. I’ll start the call by taking you through some of the highlights for the quarter. Steve will then get into details about our financial results. I’ll follow with additional details about our business and provide a view of the third quarter and the balance of 2005, and then we’ll move to questions.

We had a solid second quarter. We set new Company records for license revenue, services revenue, and total revenue. We also set a new record for adjusted earnings per share. For the quarter we achieved adjusted EPS of $.25 which was $.02 better than the previous record and $.01 above the midpoint of our guidance range of $.22 to $.26. We achieved notable improvement in our services gross margin after we posted a 56% margin in the quarter. Cash flow from operations was almost $15 million. We signed some very important new clients across our solution suite, including four deals with license revenue of more than $1 million. Most important, our Integrated Logistics Solution strategy continues to gain momentum.

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

Thank you, Pete. And good afternoon, everyone.

As Pete mentioned, we had another solid quarter, with continued record license, service, and total revenues. Aggregate revenues increased 10% over the second quarter of last year, and increased 9% over the revenues in the first quarter of this year while core revenues which exclude hardware and other revenue increased 12% over the second quarter of last year and 9% over the first quarter of 2005.

Software licenses and hosting fees for the second quarter of 2005 totaled 14.6 million, another quarterly Company record. This was an increase of 6% over both the second quarter of last year and the first quarter of 2005.

Services revenue totaled $41.3 million for the quarter, representing an increase of 14% over the second quarter of last year, and a 10% increase over the first quarter of the current year.

Our hardware and other revenue increased by 8% over the first quarter of this year, but was down 7% from the second quarter of last year. As you know, hardware continues to be a service to our customers who require a single point of contact for the systems and is not considered strategic.

All in all, as highlighted earlier, total revenue aggregated $61.4 million, up 10% over a year ago, and 9% over last quarter.

Our total gross margin came in at 61%, an increase of 3 percentage points over last quarter, and a 1 percentage point increase over the second quarter of last year. Our services gross margin was 56% for the quarter, an increase of over 3 full percentage points from 52.4% last quarter and up from 55% a year ago. We are very pleased with the continued improvement in gross margins from the prior quarter, and we continue to believe that a targeted services margin in the mid-50’s going forward is appropriate.

Operating income for the current quarter includes $4.4 million of other charges. The $4.4 million charge includes three items. The first item is $1.1 million in severance and other costs associated with the consolidation of our EMEA operations in the Netherlands, U.K., and France. As part of the European restructuring we eliminated 17 employee positions throughout Europe, which were split between sales and professional services. Also included in the charge is a $2.8 million bad debt provision for the entire amount of the accounts receivable due from a large customer in Germany with whom we have had a challenging relationship, as discussed in previous quarters.

We still believe that we have properly billed the customer for legitimate professional services and are legally entitled to payment, so we intend to continue to pursue full collection. However, based on ongoing discussions with this customer and the customer’s sizable presence in Germany we determined that it would be prudent to fully provide for this receivable. After consulting with our external legal advisors and our insurance carrier we believe that our exposure over this dispute is limited to the $2.8 million that we’ve provided for during this quarter.

The last item is the write-off of $500,000 of acquisition related costs associated with the attempted acquisition that we discussed in our first quarter conference call. Including the $4.4 million charge operating income for the quarter was $6 million or 10% of revenue. Exclusive of the charge, operating income was $10.4 million or 17% of revenues in the second quarter, compared to $9.8 million and 17.45 percent of revenues in the second quarter of last year, and $7.3 million and 13% of revenue in the first quarter of this year. The increase in the dollar amount of operating expenses is the result of increased salaries from annual raises and increased bonuses and commissions from improved operating results.

Research and development expenditures decreased from 14% of sales in the first quarter of this year to 13% of sales in the current quarter and compared to 13% of sales a year ago. Sales and marketing expenses were $10.5 million or 17% of total revenue for the second quarter of 2005 compared to $9.7 million and 17% of sales last quarter, and $8.9 million or 16% of sales in the second quarter of last year.

The current quarter increases are caused by increased bonuses and commissions and annual salary increases that were effective in May, and the increases over the prior year also include the increase in global sales and marketing personnel.

General and administrative expenses excluding depreciation and amortization expense came in at 9% of revenue which is in line with the previous quarter and an increase from 8% in the same period last year. Actual increases over the second quarter of 2004 in this area are due mainly to Sarbanes-Oxley and the resulting increased annual audit and quarterly review fees, and also the rollout of our Asia-Pacific operations in mid-2004.

Interest income for the quarter aggregated $1.1 million, 0.5 million and 0.9 million for the second quarter of 2005, the second quarter of 2004, and the first quarter of 2005, respectively. Average returns increased to 2.76% in the current quarter from 2.31% in the first quarter of this year. Partially offsetting these amounts were foreign exchange losses resulting from the strengthening of the dollar against the pound and the Euro on inter-company balances between the U.S. and our European locations, which aggregated .5 million and .2 million and .4 million for the same respective periods.

Our effective income tax rate for the second quarter of 2005 was 58.2% compared to 34.5% for the second quarter of last year and 38.9% for the first quarter of 2005. The significantly higher effective tax rate for the current quarter is due to the inability to recognize much tax benefit from the 4.4 million of other charges due to the recent losses in the foreign locations where most of these charges occurred. The effective tax rate for the quarter excluding the other charges and related tax impact was 38.9% which is consistent with the first quarter of 2005.

Due to the change in the geographic mix of business from our original plan we anticipate that our tax rate for the remainder of the year will be about 39%, which is approximately 3 percentage points higher than anticipated at the beginning of the year. To the extent that future operating results in those foreign locations improve and we generate taxable income, our effective tax rate in those periods will be lower as we begin to recognize the tax benefit of current period losses. For calendar 2005 we anticipate that this increased effective tax rate will have a $.04 per share negative impact on earnings per share when compared to our original guidance.

Adjusted net earnings for the second quarter of 2005 was $7.5 million or $.25 per fully diluted share compared to $7.2 million or $.23 per fully diluted share in the second quarter of 2004, and $5.3 million or $.18 per fully diluted share in the first quarter of this year.

Adjusted net earnings excludes the amortization of acquisition related intangible assets and for the second quarter of 2005 also excludes the $4.4 million of other charges, both net of income taxes.

Cash generated from operating activities during the quarter amounted to $14.7 million compared to $9.7 million in the second quarter of 2004, and $5.7 million in the first quarter of the current year. Our cash and investments at June 30th, 2005 totaled a little over [$168] million, a decrease of $7.2 million from the March 31, 2005 balance. This decrease is attributable to the repurchase during the quarter of $20 million of our outstanding common stock at an average price of $20.46.

As announced previously, the Company’s Board of Directors approved the repurchase of up to an additional $20 million of common stock at its January 2005 Board meeting. At the most recent Board meeting that occurred last week the Board of Directors approved the repurchase of up to an additional $50 million of our outstanding common stock.

Deferred revenue consists mainly of maintenance revenue and increased to $25 million at June 30th, 2005, compared to $24.9 million at March 31st, and from $22.7 million at December 31, 2004.

Our days sales outstanding were 69 days at June 30th, 2005 compared to 79 days at March 31, 2005 and 76 days at December 31, 2004. This improvement is due to strong cash collections during the quarter, improved operating results, and also the write-off of the $2.8 million accounts receivable from our German customer which had a positive impact on DSO of 5 days. Our DSO continues to be well within the industry norms and our overall customer satisfaction level remains strong. We anticipate our DSOs going forward to be in the mid 70s. I mean in the 70s, excuse me.

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

Thanks, Steve.

Our second quarter results were in line with our expectations. We experienced strong license sales in the second quarter in the Americas and Asia-Pacific, but once again had a weak quarter in EMEA. In the Americas license revenue increased by more than 30% versus Q2 of ’04. We’re pleased with this result as it is by far our largest market, and more importantly the place where we are aggressively marketing our integrated logistic solution.

In Asia-Pac our license revenue increased by about 70% from Q2 of last year. In fairness, Q2 of ’04 we were just rolling out our Japan and China operations, making this comparison easier. Our EMEA license revenue in Q2 was down over 50% versus a year ago.

As Steve mentioned in his remarks, and I’ll elaborate on further later in my comments, we have taken actions to address the weakness in our EMEA results.

We had a successful quarter, adding new clients and expanding our relationships with existing clients. I won’t run through the long list of new customers and expanded relationships as the major ones are listed in our earnings release.

Similar to the last two quarters we signed four deals this quarter of $1 million or more in recognized license revenue. Last quarter all four large deals were sold to existing customers. This quarter one of the large deals was with an existing customer and three were with new customers.

In two of these new deals customers have requested we not use their names at this time in public. But these deals were key strategic wins for us, and we look forward to expanding these relationships in the future. Moreover, one of these key strategic deals was for our transportation management solution, as we continue to build momentum in the transportation space.

Last quarter I highlighted Coles Myer as a great example of the power of our Integrated Logistics Solutions. You may recall that Coles Myer is the largest retailer in Australia. Coles licensed our warehouse management solution in the first quarter of 2004. In the fourth quarter of 2004 they added our transportation management solution, and as we announced in last quarter’s call in Q1 they added trading partner management to the solution suite.

Well, our progress with Coles Myer continues. In the second quarter of 2005 Coles Myer licensed our loads management solution to complement the other Manhattan Associates’ solutions as an integrated suite to drive supply chain efficiency and effectiveness. We believe Coles Myer is a good example of the power of our Integrated Logistics Solution, and is partnering with Manhattan Associates for a complete supply chain solution.

We also saw progress in the quarter with our Microsoft channel partners, closing a deal in the United States, and a deal in Belgium. We offer what is known as a supply chain execution for Microsoft Exacta Solution as part of Microsoft’s industry builder initiative.

In addition to the channel partnership, we are also having early success with our Microsoft solutions around the globe and in particular within China and Japan. While very early in the relationship we continue to be quite optimistic about the potential for a Microsoft partnership.

About 60% of the second quarter licensees were generated from new customers, and the remaining 40% came from our existing customer base. The quarter’s result is roughly in line with a 50, 50 split we’ve experienced over the past two years.

Similar to our results over the past two years, licensees for our warehouse management solution were about 50% of total licensees, and about half was from our non-warehouse management solution. More than 80% of the quarter’s license revenue was on open systems, and the balance on iSeries. The retail and consumer goods verticals were, once again, strong contributors to our licensees and combine for more than half of licensed revenue in the quarter.

During the quarter we closed 11 RFID deals and booked a total of about $1.5 million in RFID revenue. That compares with six deals and 1 million in total RFID revenue in Q1 of this year, and 10 deals and 1.2 million of revenue in Q2 of ’04. Things are starting to pick-up a bit as companies prepare for the next round of compliance deadlines at Wal-Mart, Target, Albertson’s, Best Buy, the DOD and others. We now have more than 50 RFID customers.

Our professional services organizations around the globe did an outstanding job this past quarter. Our services financial results were quite solid in Q2, but as important the team did a very good job increasing customer satisfaction. We now have about 1,475 employees around the globe, that’s an increase of about 25 since the end of the last quarter. The additions are primarily in our professional services groups.

In May we hosted our Annual Momentum Customer Conference. Customer attendance was up by more than 40% from the prior year, and we believe the conference was a big success. At this year’s Conference we publicly unbound our technology roadmap. As you may recall, we launched our Integrated Logistics Solutions roadmap at the Momentum Conference in 2004, and this year we added the launch of our technology roadmap.

While Integrated Logistics Solutions offers the functional business process capabilities to drive supply chain excellence, our Logistics Event Management Architecture, or LIMA will provide the business process platform to deliver that functionality. Together, Integrated Logistics Solutions and our Logistics Event Management Architecture create our platform for logistics.

Let me provide a little color around LIMA. While Logistics Event Management Architecture is a business process platform on which package solutions for supply chain management can be built and implemented in an integrated fashion, it leverages industry leading technologies and offers a service oriented architecture, or SOA, for exposing functions within solutions as web services. Six of our solutions are already leveraging our Logistics Event Management Architecture platform. So far, the reception to our technology roadmap and LIMA have been quite positive.

As discussed on our last two quarterly conference calls, we’ve struggled completing work with one client. As Steve mentioned in his comments, during the quarter we wrote-off the receivable balance for this client. In addition, because the relationship with this client is not progressing we’ve decided to reduce our presence in Germany and consolidate our EMEA operations in the U.K., France, and the Netherlands. We continue to support customers in more than 15 countries throughout EMEA, including Germany.

Also, on the last call, I mentioned that our financial results were suffering from the overall economy in EMEA, and that we did not expect the economy to improve in the near term. I also remarked that we were reviewing ways to better match expenses with revenue opportunities. To address the softness in the European economy and lessen our presence in Germany during the quarter we took actions to reduce our headcount in EMEA by 17 people or about 10%.

We have also reassigned some of our EMEA professional services personnel to projects in other parts of the world where we have high demand. We believe these actions balance the near-term opportunities in EMEA with the need to retain a strong team in EMEA to service existing clients and capture market share when this market rebounds. We believe the EMEA marketplace is an important one for Manhattan Associates and believe we have now right-sized our Team for the opportunities we see in front of us.

Our second quarter results were in line with our plans, and our outlook for the remainder of the year continues to be positive. We expect our overall full year 2005 consolidated revenue and operating earnings to be about in line with expectations. However, for the year-to-date and we expect for the balance of 2005 the geographic mix of business from our global operations will be different than we originally budgeted. Our profitable markets will do better than our initial expectations, and our investment markets will incur larger losses than originally planned.

Because these higher losses are not deductible for tax purposes in our profitable markets we will book a higher effective tax rate in 2005 than we had anticipated. As Steve mentioned, we estimate that higher planned taxes will cost us about $.04 per share in 2005. We believe we can offset a portion of the higher taxes for about all of it.

As a result, we’re modifying our full year adjusted EPS guidance. We currently expect to deliver full year 2005 adjusted EPS of between $.86 per share and $.90 per share, compared to our original full year guidance that is $.02 lower at the bottom end of the range and $.04 at the top end of the range.

For Q3 we expect to achieve adjusted earnings per share in the range of $.18 to $.22 per fully diluted share. Our sales pipeline is bigger than ever, and our services commitments are solid. However, over the past two years Q3 has been a challenging quarter for us and our Q3 guidance reflects the cyclical nature of our business.

To summarize, I believe our Q2 performance was good. Sure, we have areas that need to improve, and we’re focused on improving those areas. But we feel good about our Company. with our Integrated Logistics Solutions roadmap, our Logistics Event Management Architecture technology roadmap, a strong collaborative customer base, and the most talented supply chain solutions team on the planet we believe we can continue to compete effectively with anyone and increase shareholder value over the long term.

Thanks. Operator, we’ll now take questions.

[OPERATOR INSTRUCTIONS.]

Your first question is from [Mark Burbeck] of Citigroup.

Hi. Thanks a lot. Can you guys tell me a little bit more about just trying to understand the European situation a little bit better, why the difference? If ILS is going well in the U.S. should you be making a push there? And then, also, on the European front, given that the Microsoft [Exacta] presence is very strong in EMEA, are you doing anything to address that opportunity specifically there?

Thanks, Mark. This is Pete. I’ll try to provide a little more color about our experience in Europe, what we’re doing about it and how ILS and Exacta relate to our go-forward plans.

Our overall nonperformance in EMEA is disappointing to all of us. The Management Team in EMEA has taken some aggressive actions to correct that. The downsizing in staff, certainly, is one step. Reassigning additional staff to other markets to better balance costs is a second step. We’re aggressively working to upgrade our sales execution in that marketplace, as we believe sales execution has not been up to our standards, so we’re working hard to correct and execute from an execution perspective in that marketplace, as well.

At the current time, for the most part, all we offer in the EMEA marketplace is our WMS solution, our trading partner management solution. And in the U.K. some components of our other solutions.

In our non-English speaking markets, France and previously Germany, we do not offer the remainder of our ILS suite. The purpose for that, frankly, is to build up more experience, confidence in our product solutions and teams in the U.S., and then be able to leverage that around the world.

So, at this point we offer ILS for the most part in the United States and to a degree in the United Kingdom. Obviously, we also offer it in Australia where Coles Myer has been a very good partner of ours. But in the non-English speaking markets, Japan, China, Germany, France we have not offered ILS. We most certainly hope to do that in the not too distant future, and better leverage our investments that we’re making in ILS.

In terms of the Exacta partnership, we have a very high optimism about that being leveraged in the EMEA marketplace. As you know, we announced the Microsoft Exacta partnership last quarter, and we’re just starting to initiate discussions. But as I mentioned in my prepared remarks, we have already signed our first client. We signed a client in Belgium in this quarter, and we’re quite optimistic about the ability to leverage Microsoft’s 1,400 plus business partners around the globe to help us attack that part of the marketplace where our direct sales force doesn’t invest time.

So, net net while we’re disappointed in the results for EMEA in Q2 and what we experienced in Q1, during Q2 we took aggressive actions to try to better size our organization to meet the opportunities we see in front of us and refocus on areas where we can be successful. And believe over the longer term both the ILS product suite and the Exacta Microsoft relationship will add to the success we have in that market.

Okay. How far along are you with the kind of buttoning down the things you need for the Microsoft relationship in terms of how you engage with the channel and the relationships and how commercially it works with Microsoft?

Yeah, well, we’re still pretty early in that relationship, Mark. As you know, they’ve got 1,400 plus channel partners. We’re working with the channel. Also, working with Microsoft to make sure we’re leveraging our internal resources, but not diluting them by so much that we lose focus on the direct channel.

So, we’re working with the Microsoft Team and their top channel partners to walk then run, and believe we’re making some good progress. We have a team internally, exclusively focused on making that relationship work, both with Microsoft and the partners, and believe we’re on a good path, but we’re still early in that relationship.

Okay. And then one final point of clarification. Earlier in your prepared remarks you, I think suggested that most of your important customers were included in the press release. And then later it sounded like maybe some of the real, maybe some of the larger wins in the quarter weren’t included in that list. Is that correct?

I’m sorry. Yes, that is correct, Mark. I wasn’t going to read – the last couple of quarters I’ve kind of taken the names out of the press release and repeated them on the call. But in the interest of time didn’t think it’d be worthwhile to read the names that are in the press release. But as you correctly captured a couple of the most important strategic wins that we had in the quarter are not yet ready for us to announce their names publicly, but we’re quite thrilled with those two key strategic wins.

Great, thanks a lot.

Thanks, Mark.

Your next question is from Philip Alling of Bear Stearns.

Yeah, thanks very much. Pete, it’s one of the – you know, just quickly back on Europe, again. You had indicated, you know, earlier this year that you had not expected a recovery there. What you saw in the second quarter was that worse than you had expected earlier this year, or was it in line with your expectations, and certainly you’ve taken some measures to try to remedy the situation there. But, you know, based on what you had said previously, you know, was not expecting any sort of improvement in that region. So, can you give us a little bit of color there?

The results in the second quarter were probably a little bit worse than we expected. We weren’t expecting dramatic improvement in Q2, but we were not satisfied with the results we did get in Q2.

Were there any 10% customers in the quarter?

No.

Okay. Could you give us a little more color about what was driving improvements in the service gross margins in the quarter?

You know, I commented on this the last couple of quarters that over time we expect our services margin to move back to the mid-50s and our Services Team just accelerated the clock.

Our Service Team did an outstanding job in Q2, just an outstanding job, around the entire globe. While we were disappointed in our license revenue in EMEA in Q2, I will tell you our Services Team really did step-up and drive performance in the services area in that market. But the Services Team around the globe did a tremendous job in driving services revenues, profitability, and, as I mentioned in my prepared remarks, improved customer satisfaction.

And we will reinforce, as Steve mentioned, that over time our expectation is that our long-term services margin, for all of the reasons we’ve said previously, will be in that mid-50s range. I would also like to comment that you may recall from previous years Q2 is historically a strong services quarter. Q3 generally fairly similar to Q2. And then Q4 primarily because of the holidays in Q4 and the focus of many of our customers on meeting the Christmas shipping season business requirements is generally a weaker services quarter.

But generally speaking, 56% services margin in Q2 we were quite pleased with and hats off for our Team. We expect a somewhat lower services margin in Q3, a percentage point perhaps two, lower than we experienced in Q2. And then a further, probably about a percentage point reduction in the services margin in Q4, all reflecting the cyclical nature of the services business in our industry.

Just wanted, a final question on acquisitions. Should we interpret sort of the share repurchase and the additional authorization met sort of the use of cash maybe, the priorities in the near term then are sort of like repurchasing shares as opposed to buying businesses that could supplement your growth profile and broaden your product footprint?

No, actually Philip, that’d probably be a misclassification. We have about 170 million in cash. We’re generating somewhere around 10 this quarter, almost $15 million in cash from operations, so we are quite profitable and cash flow positive.

We believe we can spend up to the $50 million and still have a substantial cash balance for M&A activity. So, we don’t believe we’re limiting our ability to be active in the M&A world at all. My repurchasing shares of course we’ll continue to monitor that to make sure we’re well positioned to take advantage of M&A opportunities as they present themselves. But we continue to be quite active in evaluating opportunities, and are pushing hard.

Great, thanks much, Pete.

Thanks, Philip.

Your next question is from [Terry Tillman] of SunTrust Robinson Humphrey.

Hi. Can you hear me, guys?

Yes, sure can, Terry.

Hey, Pete. In terms of, you know, your plan for the third quarter, based on that plan do you anticipate overall license revenue being down sequentially?

Generally speaking, Terry, Q3 license revenue is down from Q2, has been for the last couple of years, so we would expect to see that in Q3.

Okay, and then in terms of the Americas, I think you mentioned that license revenue was up 30% YOY? Can you talk about maybe the mix on a granular level in terms of what was WMS and what was non-WMS in that market?

Terry, generally been – well, since the Americas makes up about three-quarters of our revenue most of the trends that we talk about in broad terms apply directly to the Americas, so the 50, 50 warehouse to non-warehouse, and the 50, 50 to existing customers and new customers is directionally correct for the Americas, as well.

As I mentioned in our remarks, we were quite pleased with the 30 plus percent license revenue growth rate in the Americas, since that’s the area we’re really driving our ILS strategy, seeing that kind of a response in the marketplace gives us a lot of encouragement. So, the Teams are working very hard to continue to move that ball forward, and we think that response from the marketplace is pretty encouraging.

Do you see this growth rate as achievable? And I guess the last part of that question would be, you know, where do you stand with your direct sales reps in the Americas? I mean have you thought about maybe accelerating hiring, or hiring more folks? Thanks.

Thanks, Terry. You may recall, the call we had back in January, we talked about the additions to sales staff, that we added primarily in the Americas. We added about six or eight salespeople in Q4, one of them in Q4, so that we could get them fully trained the latter part of last year and the first part of this year, so they could help us drive success with our product strategy.

And believe we’re starting to see some of that benefit. We believe we’ve got a good sales team. We believe today that we’re about appropriately staffed in the Americas, and believe that’s helping to drive good results for us over the next couple of years. So, I think we’re appropriately staffed in sales and marketing, and continue to try to improve our ability to execute around the globe.

Your next question is from Adam Holt of JP Morgan.

Good afternoon. A follow-up question to the question about the third quarter guidance, if you look at the midpoint of the earnings guidance it looks like a little bit more seasonality than usual, notwithstanding last year’s results which were obviously in themselves a little unusual. Should we expect to see a bigger sequential decline on the revenue side than we usually might, or is there an expense issue for the September quarter?

Yeah, at this point our guidance does not reflect an expense issue. Our guidance reflects about the normal seasonality we’ve seen over the last two years, and we believe that’s about right. I believe if you look at our full year guidance and our Q3 guidance, we believe that those about follow from a revenue perspective the cyclical nature of our business, and believe that we’ll manage expenses aggressively to deliver results somewhere in the range of guidance that we’ve given, both for Q3 and for the full year.

Okay, and, Pete, if you could go back to the comments that you made about Europe? Obviously, you’re doing a number of different things to try and revitalize that region. But when would you expect to see that region be flattish to even start to grow, again? In other words, when do you expect to see the results from some of the moves you made this quarter?

Yeah, we don’t expect to see those until 2006. We won’t, we don’t believe we’ll see noticeable improvements in the second half of this year, like we’re firing up a team to improve performance in the second half of the year and drive noticeable improvements in 2006 and beyond. But we’re not expecting any appreciable improvement in the second half of this year.

And just, lastly, a question on the RFID numbers. You had another good quarter in terms of new RFID business. Can you talk a little bit about the pipeline going forward, and also what your success has been, you know, thus far, converting RFID lead-in customers to broader WMS and, or LIS up sales?

The pipeline looks pretty good for RFID deals. Most of the deals that we’re signing in RFID are to new customers. It gives us an opportunity to cross-sell additional Manhattan Associates’ products into those customers. As I mentioned, we’ve got about 50 RFID customers overall, and believe we’re making good progress in that space competitively within the broader RFID marketplace. But, importantly, building opportunities to sell our suite of ILS solutions into those customers.

So far, a couple of customers have added other modules of Manhattan Associates at purchased RFID, but it’s still early in the game. As we’ve said for awhile, most of the purchases of RFID solutions are still the compliance type of implementations where they’re trying to meet the major retailers’ requirements. Most of those are short-term implementations. The old lick-and-stick kind of approach, not looking for dramatic benefit beyond that.

But one of the things that we’re starting to see is further leveraging investments made in RFID to other parts of the supply chain. Wal-Mart has been reasonably aggressive in providing RFID data to their partners through retail links, and we believe others will begin to do that, as well. So, we see this group of 50 or so RFID customers as a real nice opportunity for us to leverage into the future. Not a lot of it, so far, but we do not expect a fast ROI on this investment, we expect this will be a very important long-term part of our strategy.

Great, thank you.

thanks, Adam.

Your next question is from [Robert Schwartz] of Jefferies.

Thanks, just a couple of questions. It seems that sales and marketing the first half of this year is trending over 500 basis points more than last year, and I’m wondering if you’re intentionally trying to improve, increase the amount you’re spending on sales and marketing? If so, if you could tell us where that money is going?

Yeah, Robert, it is a conscious investment on our part. We increased staff the last part of 2004 to be in a position to have more feet on the street, trained feet on the street in 2005. As I mentioned a little earlier, while we were investing in our product suite we wanted to make sure we had talented sales force out there, being able to communicate that message to the marketplace.

We added a good chunk of that staff in Q4, so for the first, second, and third quarters of this year it’ll be a little bit of an apples-and-oranges comparison. The headcount increase really didn’t begin to materialize until Q4. But it’s very conscious effort on our part. I’d like to think the 30% growth in Americas’ quarterly license sales reflects some success in that investment plan.

I just want to be clear. You mentioned that you’d added, you know, a few heads in Q4. I’m wondering if you could bring us up-to-date where your headcount is and feet on the street? And I think I understood you to say that you think you’re fully staffed? Is that where you think you are for the year?

Yeah, we believe we’ve got the right headcount to be able to drive sales success around the globe. Today, let me pull out some of the statistics – yeah, today we’ve got a total of about 69 people in our sales team with a little over 50, 53 of those are direct quota carrying sales reps.

Okay. And lastly, you know, you had a big deal with the, with your transportation product you mentioned. Maybe you could talk a little bit about where you’re seeing demand for transportation, and that particular product set? And characterize the non-warehouse demand? You’ve got a bunch of new products you’ve added over recently, and how they’re doing and faring?

Sure, we’d be happy to.

Including LIMA, if you would?

Yeah, sure. Well, one of the nice things that we were excited about the new customer win that we talked about in transportation, we believe will give us a very nice opportunity over the next several years to sell additional Manhattan Associates’ applications into.

A couple of the wins that we’ve had in the last 12 months on transportation were to entirely new Manhattan Associates’ customers. We believe that’s opportunity to cross-sell our strong WMS solution. It brings real positive benefit to creating long-term shareholder value. So, seeing a lot of activity in the TMS space, obviously in part driven by higher fuel cost, hours of service regulations, the need for companies that transport goods to try to drive more efficiencies throughout their transportation component of their supply chain. So, we’ve seen a lot of increased interest in our transportation solutions.

And, frankly, to all of the information we can capture we believe we’re garnering the vast majority of the market share as being captured in transportation. We believe our win, loss rate in that space has been quite good, and are optimistic about what the next several quarters have to hold for us within the TMS space.

Within WMS, after a couple of years of tough economic market prices we see a number of market segments coming to market to upgrade their supply chain capability, supply chain transformation projects, including operating their warehouse management solutions. In some cases, there was a legacy home grown solutions, in some cases they’re competitors of Manhattan Associates’ legacy products, but in many cases companies are continuing to get quite serious about driving efficiencies through their extended supply chain and believe our WMS solution really helps us.

I do believe one of the most important competitive differentiators we have in the marketplace today is our Integrated Logistics Solutions, and now it’s complementing Logistics Event Management Architecture. Most companies are looking for a supply chain expert with deep domain knowledge, rich functional expertise that will also be able to provide a complete suite of solutions. So, high product capability, low total cost of ownership from a vendor, they have confidence in, we’ll be here in two years, five years, and 10 years, and believe that’s really helping our marketplace momentum.

Obviously, the ILS strategy and the LIMA strategy are integral to that, as well as our broadening our geographic footprint and expanding some of our sales capability to make sure we have the appropriate feet on the street.

So, we believe a lot of that momentum is built around our product strategy, our technology strategy, and continue to expect that to pay dividends for us.

Thank you very much.

Thanks Robert.

Your next question is from [Mark Shapel] of [Keybank Capital Markets].

Hi. Good quarter. I wasn’t really sure what the foreign exchange was in the quarter. Steve, could you review that, please?

The foreign exchange loss in the other income section was about $500,00) for the quarter.

What was the impact on currency on the top line?

It had a negative impact of about if you compare it to last quarter, a negative impact of about $200,000.

Okay. And then, Pete, just going back to Europe here, don’t want to beat a dead horse, but do you think you need to purchase a European logistics vendor overseas to get traction in that market?

We’ve been spending some time on our Manhattan Associates activities, focusing on global opportunities for M&A. Quite frankly, we haven’t seen any that make very good sense for us. Believe at this point there probably aren’t that many opportunities for us to build a scale through acquisition in Europe, but we are continuing to look at that as a potential way to do so, but at the moment with that market being relatively soft, some of the opportunities we have in the rest of the world we’re prioritizing higher, opportunities in our product suite, our technology stack, and other geographies over the EMEA marketplace in the near term. But we are trying to design ways to build greater scale advantage in the EMEA marketplace.

And then with respect to international operations, we’ve talked a lot about EMEA for obvious reasons, could you just speak a little bit about what you saw in Asia, the Asia-Pacific Region in the quarter?

Sure, be happy to. We believe we’re doing okay in Japan and China, and we’re doing well in Australia, reinforced by the Coles Myer relationship. The Japanese economy is tough. We’re trying to be as efficient as we can be in that marketplace with streamlined operations, and believe we’ve got a good solid team in there matching near-term opportunities and investment level with the long-term opportunities. But Japan is a tough economy, but we believe we’re creating some nice future potential for ourselves in that market.

China has unlimited potential, but it’s still a very early market. We’re losing money in China, as we expected to. We’re losing a little more money in China than we had originally planned, but we do believe that that can be a very lucrative market, both in and of itself, but as part of a global supply chain network for global companies. So, reasonable success so far in Japan and China, very good success in Australia.

Okay, thanks. And then one final question on JD Edwards, excuse me JDA’s software conference call, the Company remarked that they’re seeing increasing competition from SAP in the retail industry. I was wondering if you could comment on that with respect to what you saw from SAP this quarter?

In the past quarter we didn’t see anything materially different. Certainly, over the long run SAP will be a meaningful competitor in the supply chain space. Obviously, they and Oracle are focusing on the retail space, but more so in the merchandising side than in the supply chain execution side. And that’s why JDA would pump into them more so than we would.

We do expect that they’ll be a meaningful competitor over the long run, but we do believe we’re building some very sustainable competitive advantages that will allow us to compete effectively.

Thanks, that’s all for me.

Thanks, Mark.

Your next question is from [Alan Weinfeld] of [Offman Brothers].

It’s [Kaufman Brothers]. Hi, guys.

Hi, Alan.

Just wanted to see what you thought about the competitive forces now, while EXE is kind of back as part of the SSA global and, you know, [Francisco Partners] gobbled up one of the, of your biggest competitors. And I’m not sure what the story from HighJump is. How is it looking out there in both North America and globally for what you’re doing?

You know, the competitive battles haven’t changed a whole lot the last couple of quarters. This past quarter we had an improved win, loss ratio around the globe so we feel good about that. Think we’re gaining more momentum, but I wouldn’t suggest the competitive environment has changed appreciably.

We bump into Red Prairie in a few deals every quarter. We’ll expect to continue to. And WMS deals, we’ll run into EXE in a couple of deals. Primarily in Asia, we primarily bump into EXE in Asia. We saw HighJump in one or so deals this past quarter, and we’d expect that to continue.

On other components of our Integrated Logistics Solution, in transportation, we’ll see occasionally Manugistics, i2, and Glog and in the distributed order management space we’ll bump into Yantra and Ecometry occasionally, or [FID], [Oats], Kinecta and some others. So, there are a number of best-of-breed solutions that we compete with depending upon the applications.

The good news for Manhattan Associates, though, is we are the only company that provides deep, rich functionality across the entire suite of supply chain execution solutions.

How about the healthcare vertical? I didn’t hear much about it, but I know that there are a lot of new regulations in it, and it seems that there should be a bigger opportunity as time goes on for you guys there. Have you seen anything moving?

Yeah, well, you know, in the very near term healthcare and other folks call it life sciences, is getting a lot of attention from RFID companies, and their need to be able to track pharmaceuticals throughout every step in their supply chain. There’s been a lot of good activity in that space. We’re participating in some of that activity, and are optimistic about our ability to play an important role with pharmaceutical companies, particularly as it relates to RFID and then throughout their supply chain, whether it’s warehousing or other components of supply chain execution.

It’s one of our vertical markets, we’ve got to focus on it. To date it has not moved well up the revenue contributing scale, but we have a good team focused on it and believe that the marketplace really focuses on how to improve the distribution of pharmaceuticals and the benefits RFID could play in that component, they can be a much more valuable vertical market for us.

Thanks. Good quarter, guys.

Thank you.

Thank you.

Your next question is from [Yong Kim] of AG Edwards.

Thank you. It seems like the company is doing very well, closing * deals so far in the year. Can you just give us a little more color on whether we can continue to expect a healthy number of seven-figure deals to close every quarter, or based on your pipeline do you foresee where one quarter, where you might have normally a large number of * deals, and the next quarter where it’s * deals? Or do you see fairly consistent number of seven-figure deals closing every quarter?

Yeah, the first part of your question broke-up a little bit, but I think we’ve got the essence of your question. It relates to our expectation of the number of $1 million plus deals that we see in the future several quarters.

Our pipeline for big deal activity is pretty good at the moment. It’s about as good as it was looking back over the last couple of quarters. For now, I guess it’s three quarters in a row we’ve delivered four million, million plus deals in the quarter. So, it’s suggesting our pipeline for larger deals looks pretty good, it looks about as it did the last couple of quarters. So, for the near term we see things being about as they have been. We’ll see how that plays out, but that would be our general expectation at this point in time.

Okay, thank you. And then if I may ask more questions around * in your transportation model, can you expect more standalone seven-figure deals with your TMS product in the near future? And then, also, can you just talk about the competitive landscape for your transportation module? Specifically, regarding SAP? I mean I know you just mentioned * there.

Yeah, in terms of where the seven-figure deals are likely to come from, we’d like to over the next year or two expect to continue to win large TMS deals, no predictions for the next quarter or two, but we do think we’re positioning ourselves to win more than our fair share of the large TMS deals.

So far, we don’t bump into SAP much in transportation deals. My understanding is that their product still has material room for improvement, and that we’ve got a pretty meaningful functionality lead. We’re going to try to make hay while we have that lead and continue to invest in the product and build-out the product. In the nearer term the general competition we bump into for larger transportation deals is generally i2, Manugistics, and Glog, and as I mentioned, our win rate in that space has been quite good.

Okay. And, Steve, can you give us some clarity on how to split the higher than expected tax expense between Q3 and Q4? Shall I adjust two pennies’ worth each quarter?

Well, I would assume a 39% tax rate, effective tax rate for the next couple of quarters.

Okay. And then in terms of the restructuring charges around European operations, are all of the expenses reflected in the Q2 results, or are you expecting more?

They’ve all been reflected in the second quarter results, in that other charge line.

Okay, great. Thank you very much.

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

Your final question is from Michael Wong of ThinkEquity.

Hey, guys.

Hey, Michael.

Hi, Michael.

Hey, a couple of questions for you. So, concerning the issues over the German customer, is there anything that makes you guys feel comfortable that this was a one-off too? Maybe you can tell us some of the things that you’ve learned from that work over there?

Yeah, well, we’re quite confident that this is a one-off issue. It was several years ago we sold a complex solution to the customer. We tried to implement a solution that needed substantial modifications. We needed to do so in Germany with German speaking people, and had a difficult time finding those qualified people. The customer, in this case, did not, in our opinion, have the right quality, caliber, or number of people on their side. So, for a whole host of reasons we believe this is a quite unique experience and have no intentions of repeating it.

And maybe you can, a quick clarification on sort of the large customer where you sold the standalone PMS, you had mentioned that there were some cross-selling opportunities there? Is there an opportunity to sell core WMS into that account?

Well, we’d like to believe so. You know, the customer has to decide that, but we’d like to believe there’s opportunities to sell basically all of our ILS solution into that customer and, frankly, many others.

I see. And in terms of your kind of expectations in the Americas over the next couple of quarters, I think that you had mentioned that was the reason where you were seeing some improvement. Just curious, I mean is that driven by a better macro environment, or, you know, seeing competition on the margin, or maybe just a few details on that?

Hey, Michael, I think you just probably summed it up pretty good there. I think it’s a combination of more enthusiasm in the marketplace, particularly in the retailing consumer goods marketplace. They had not invested much in 2000 and 2001, 2002, 2003, so built-up a demand that is freeing up. And I do think, frankly, as I mentioned earlier, our market position as the leading supply chain execution company. It gives customers more confidence that investing with us is a good long-term investment. And so I think for both of the reasons you identified we’re gaining market share.

Great. And one last question, so when you look at your pipeline of large deals, I was curious, I mean would you expect to see the same type of breakout between new and existing customers over the next couple of quarters, or do you think that, you know, three new to one existing is probably more of an anomaly than what we might expect over the next couple of quarters?

Yeah, Michael, that’s a little too hard for us to predict. In Q1, we had four million plus deals, and all four went to the installed base. This quarter four, 75% were new. We’re a little bit more focused on building the business and getting deals, and we believe over the long run the 50, 50 relationship that we’ve been achieving over all of these quarters will play out as well in large deals, but in the short-term that’s a little too fine for us to try to predict.

Got you. Okay, and thanks very much.

Thank you, Michael.

Well, we’d like to thank everyone for joining us for our second quarter conference call and look forward to speaking with you again in about 90 days. Thank you.

This does conclude today’s conference call. You may now disconnect.