Manhattan Associates Inc (MANH) 2005 Q4 法說會逐字稿

Good afternoon. My name is Derek, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Manhattan Associates fourth-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. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today, February 7, 2006.

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

In our statements during 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're cautioned that any such forward-looking statements are not guarantees of future performance, and involve risk 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 31, 2004, filed with the SEC on March 16, 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 statements for forward-looking statements, included as exhibit 99.1 to the Company's annual report on Form 10-K for the year ended December 31, 2004. Manhattan Associates undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in future operating results.

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

Thanks, Matt, and welcome to our fourth-quarter 2005 earnings call. Steve Norton, our Chief Financial Officer, is on the call with me.

If you've had a chance to read our press release, you know that in it, we announced that due to prior-year tax accounting issues, we will be restating our results for 1999 through 2004. Steve will walk you through the details of that in a couple of minutes.

I believe for investors, the net of the restatement is likely to be the fact that the restatement has no impact on our revenue for any year, and no impact on our 2005 adjusted operating results, including adjusted EPS, that we have reported this year. Moreover, it will have no impact on future period revenue and adjusted results.

Steve will get into the details of the restatement in just a minute and then cover the details of our financial results. I'll follow Steve with additional comments about our business, and provide a view of the first quarter and full year of 2006. And then we'll move to questions.

But before I ask Steve to explain the restatement, I'll start by taking you through some of the highlights for the quarter and the year.

We had a solid fourth quarter. License revenue for the quarter was a new record at 16.1 million, which represents 19% growth over the prior year. This included about 1.8 million of license revenue from the former Evant supply chain planning solutions. Excluding the contribution from Evant, license revenue growth for the quarter was 6%.

Services revenue was also a new record at 43.8 million, up 26% versus Q4 of last year, and without Evant's contribution of about 3.2 million was up 16%. Our services margin for Q4 with and without Evant was a solid 53%.

For the quarter, we achieved adjusted EPS of $0.24 a share, which includes $0.01 of dilution from Evant. And if you exclude the penny of dilution from Evant, adjusted EPS was $0.25.

For the year, we finished with adjusted EPS of $0.88. The $0.88 includes $0.02 of dilution from our Evant acquisition. So excluding Evant, we achieved full year adjusted EPS of $0.90 a share. The $0.90 is within the original full-year 2005 adjusted EPS guidance range we gave your last February of between $0.88 and $0.94.

We signed some very important new clients across our solutions suite during the quarter, including three deals with license revenue of 1 million or more. And our broad, deep supply chain management solution strategy continues to gain momentum.

I'll now turn the call over to Steve.

Thank you, Pete, and welcome to another solid quarterly earnings call from Manhattan Associates.

Before I begin discussing the comparative financial results for the fourth quarter, it is important to explain the restatement of our prior years' financial results, as this topic will be discussed in connection with several other financial comparisons to previous quarters.

During our third quarter of 2005, we made some changes to our internal tax accounting function, which included engaging one of the big four firms to assist us in the accounting for the income taxes at Manhattan Associates. As a result of these changes, we have uncovered certain prior-year tax accounting items which requires us to restate those financial statements. However, the adjusted earnings per share for 2005 and each of the previous quarters in 2005 is unchanged by these matters.

There are two primary factors causing this restatement. We discovered that an election to change the method of computing our research and development income tax credit was not filed in 1998 following a very small acquisition. This has resulted in the overstatement for financial reporting purposes of the income tax credit and net income for each of the years between 1999 and 2004.

Although we fully intend to seek retroactive relief from the Internal Revenue Service back to 1999, the likelihood of success is not high enough to allow us to recognize the benefit in our previously filed financial statements. If the retroactive election is accepted by the IRS, the benefit of the tax credit will be recognized and realized in future years. The financial statements for 2005 are unaffected by this, and have had no cash impact.

In addition, the receipt of a final report from a recent sales tax audit has indicated to us that we are required to collect and pay sales tax on services and maintenance in a number of states. All customer contracts dating back to before 1999 state that the customers are responsible for sales tax, if any. However, due to the services occurring prior to 2005 on which sales taxes were not collected or paid to the state and which we have not yet billed our customers, the likelihood of collection from our customers is not probable at this point. Therefore, operating expenses for previous years will be adjusted to reflect the sales taxes that should have been recorded in previous years, assuming no collection. Any collection of the sales taxes from our customers or any benefit from the expiration of state sales tax statutes will be recognized as a reduction to expense in the period collected.

U.S. GAAP net income for the fourth quarter of 2005 and for all of 2005 has been positively impacted by $0.01 per share and $0.03 per share, respectively, as a result of the expiration of the statutes in certain states for certain years, resulting in the reversal of the sales tax accrual that had been recorded in previous years as part of the restatement. U.S. GAAP net income for the fourth quarter of 2004 and for all of 2004 was impacted by only a very small amount, resulting in $0.00 per share as a result of the expiration of certain statutes. Please refer to the reconciliation of adjusted earnings per share and U.S. GAAP earnings per share, and also the reconciliation of our 2004 figures before and after the restatement in our press release for more details.

As mentioned previously, we will be required to restate those financial statements via an amended 2004 Form 10-K, which will be filed within the next few weeks prior to our filing of the 2005 Form 10-K. The aggregate amount of the restatement is estimated to be approximately $7 million. We are still in the process of finalizing the impact of the restatement, and the auditors are still auditing the figures. Therefore, the aggregate amount of the restatement and the impact on 2005 and 2004 in each of the fourth quarters is still subject to change.

As Steve mentioned in his high-level summary comments, license revenues totaled $16.1 million for the quarter, and represented an increase of 19% over the fourth quarter of last year, and a 29% increase over the third quarter of 2005. Aggregate revenues increased 19% over the fourth quarter of last year, and 7% over the revenues recognized in the third quarter of this year, while core revenues, which exclude hardware and other revenue, increased 24% over the fourth quarter of last year and 7% over the third quarter of this year.

Excluding the $1.8 million of license revenues and $3.2 million of service revenues of Evant that were recognized in the fourth quarter, license revenue, services revenue, and aggregate revenues increased 6%, 16%, and 9%, respectively, over the fourth quarter of last year.

Our international revenue contributed 19% of total revenue for the quarter compared to 24% last quarter and 22% a year ago. License revenues in EMEA increased 42% over the same quarter a year ago, and were consistent with the revenues in the third quarter of this year. We are seeking continued improvement in performance of our sales team from the restructuring done earlier in 2005.

Asia-Pacific revenues for the quarter amounted to only about $150,000 as we near the go-live dates for our two primary customers in China. We continue to believe that this is a strategic market for us. However, given the newness of the markets, we will continue to see fluctuations in revenue on a quarterly basis.

Our services gross margin was 53% for the quarter, and consistent with our expectations of the low- to mid-50% range. This compares to 51% in the fourth quarter of last year, and 54% in the third quarter of 2005. We are very pleased with the performance of our consulting group during the quarter, where we typically see a 2 to 3% point drop in service margins due to the holiday season. We continue to be pleased with the stronger gross margins and we continue to believe that a targeted service margin in the mid 50s going forward is appropriate.

Operating income for the current quarter includes $2 million of acquisition-related charges, including amortization thereof. Of those charges, $800,000 consisted of nonrecurring severance and other compensation-related charges resulting from the acquisition of Evant. Amortization for the quarter aggregated $1.2 million, and is expected to aggregate approximately the same on a quarterly basis going forward.

Exclusive of the acquisition-related charges, an amortization of $2 million and the impact during the quarter from the recapture of transaction taxes previously expensed of approximately $500,000, operating income was 10.6 million, or 16% of revenues in the fourth quarter of this year compared to 7.5 million and 13% of revenue in the fourth quarter of last year, and 9.3 million and 15% of revenue in the third quarter of this year.

Aggregate companywide headcount increased by approximately 25 during the quarter, bringing our total headcount to slightly over 1,600 at December 31.

Our operating expenses in the fourth quarter of 2005, defined as including sales and marketing, R&D, and G&A, but exclusive of the $500,000 transaction tax expense reduction mentioned previously, increased 20% over the fourth quarter of the prior year, primarily due to the acquisition of Evant, increased incentive compensation, and increased R&D headcount in India. In addition, G&A has increased due to increased audit, tax, and Sarbanes-Oxley-related fees.

For simplicity purposes, I'd like to clarify what is meant when we refer to adjusted earnings and adjusted earnings per share. I will do it once here, and this will apply to all subsequent discussions of adjusted earnings.

Adjusted earnings per share is defined herein as net earnings per share according to accounting principles generally accepted in the United States of America, excluding the impact of certain items, if applicable in that period, including acquisition-related costs and the amortization thereof; the recapture of previously recognized transaction tax expense; stock option expense under FAS 123R; and the severance and accounts receivable charge recorded in Q2 of 2005, all net of income taxes when referring to net earnings.

Adjusted operating income for the fourth quarter of 2005 totaled 10.6 million or 16% of revenues compared to 7.5 million and 13% of revenues in the fourth quarter of 2004. This represents an increase of 42% over last year.

Interest income aggregated 800,000 in the fourth quarter of this year compared with 900,000 in the fourth quarter of last year and about 1 million in the third quarter of this year. Average returns for the fourth quarter were approximately 3% compared to 2% in the fourth quarter of last year and 3% in the third quarter of this year.

Net foreign exchange losses of $244,000 were recognized in the fourth quarter of 2005 compared to a foreign exchange gain of approximately $1.1 million in the fourth quarter last year, and foreign exchange losses of about $100,000 in the third quarter of this year.

Our respective income tax rate for 2005 is 40%, excluding the restructuring charge recorded in the second quarter of 2005, where we wrote off the $2.8 million receivable from a large European customer, from which there was no income tax benefit. The effectively rate for the fourth quarter of 2005 was 41%, and is the result of adjusting to the full year effective tax rate and the provision for income taxes on certain exposure areas.

Adjusted net earnings for the fourth quarter of 2005 were $6.7 million, or $0.24 per fully diluted share, which includes the $0.01 dilution from the Evant results for the quarter. This compares with adjusted net earnings of $5.1 million or $0.17 per share in the fourth quarter of last year, or an increase of 43% over the prior year. Excluding the $0.01 dilution from Evant, adjusted earnings per share increased slightly over 50% for the fourth quarter of last year.

Cash generated from operating activities during the quarter aggregated approximately $3.9 million. The decrease from the $13.8 million of cash generated during the fourth quarter of 2004 is primarily due to the payment of income taxes of almost $5 million during the current quarter and increased accounts receivable.

We exhausted our tax and net operating loss carryovers in 2004, and we are required to pay taxes in 2005 for the first time in a long time. The amount of cash we will be required to use for tax payments in the future is dependent upon a number of things including the quantity of stock option exercises, which are dependent upon our stock price.

Our cash and investments at December 31, 2005 totaled $94 million compared to 106 million at September 30, and 173 million at the end of last year. The decrease is attributable to the repurchase during the quarter of almost $20 million of our outstanding common stock at an average price of 22.47 per share. For the 2005 year, we've repurchased a total of $61 million of stock at an average price of 21.53 per share.

As of December 31st, 2005, we have approximately $9 million of the $50 million which was approved by the Board in the July Board meeting remaining to repurchase additional shares as deemed appropriate. Additionally as you will remember, we paid $50 million in cash during the third quarter for the acquisition of Evant.

Deferred revenue consists mainly of maintenance revenue collected in advance of performing the maintenance services, and was 27.3 million at December 31, 2005, down from 29.1 million at September 30, 2005 and well above the 22.7 million mark at December 31, 2004. The decrease during the fourth quarter is the result of maintenance being earned to a larger degree than the renewal of maintenance contracts, of which the majority occur in the first quarter of the year. The increase over the prior year is the result of the deferred maintenance from Evant acquisition and also the overall license growth during the year.

Our days sales outstanding was 81 days at December 31, 2005 compared to 80 days at September 30, 2005 and 76 days at the end of last year. The increase in DSO during the fourth quarter is principally from the Evant acquisition, as was the case in the third quarter, and also the signing of several large license deals right before year end, the cash for which was not collected until after the beginning of the year. We continue to anticipate our DSOs going forward to be in the '70s.

With that, I thank you very much, and hand you back over to Pete.

Thanks, Steve. Our results for Q4 were solid, and I believe position us well for 2006. License revenue growth for the quarter was 19%. If you exclude the contribution from Evant, license revenue growth was 6%.

We were somewhat disappointed with our license revenue growth in the quarter, excluding Evant. A number of deals we thought could close in Q4 did not. While some deals slip every quarter, in Q4 we experienced a somewhat higher proportion of deals that didn't close than what we have normally experienced. The good news is we are currently engaged in each of those relationships.

For the year in total, we achieved global license revenue growth of 14% including Evant, and 10% if you exclude Evant. 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 many of those are noted in our earnings release.

We signed three deals this quarter of 1 million or more in recognized license revenue. Two of the large deals were with existing customers and one was with a new customer. Two of the deals were warehouse management deals, and one was for our labor management solution. The labor management deal was to a new customer, and demonstrate our competitive strength in the labor management market.

One of the large warehouse management wins in the quarter is very strategic to our long-term success. Early in 2005, this client chose SAP as their ERP solution. But during 2005, they also chose Manhattan Associates as their supply chain management solutions partner. In Q2, they selected our transportation management solution, and in Q4, our warehouse management, labor management, and slotting optimization solutions.

We firmly believe our suite of market-leading supply chain management solutions combined with ERPs make those ERPs better. And we're thrilled that a global leader has reinforced our belief by partnering with us for supply chain management.

Our Microsoft Exacta partnership continue to gain traction this quarter with the signing of four key deals, two in the United States and two in EMEA. We've completed seven deals overall in 2005 with our new Microsoft partnership.

About 30% of our fourth quarter license fees were generated from new customers, and the remaining 70% came from our existing customer base. For the year, the ratio was 40% new customers and 60% existing customers. The trend over the past two quarters of a higher proportion of license revenue from existing customers than from new customers is probably going to persist for a while, as our customer base is now large. And with a broader product footprint, our opportunity to cross-sell into this space is better than ever.

License fees for our warehouse management solutions were about 60% of our total license fees, and about 40% was from our non-warehouse management solutions. For the year, our warehouse management solutions grew by about 20% over 2004, with most industry experts estimating global 2005 warehouse management systems growth at about 5%, our 20% growth was four times the overall market rate, and clearly indicates we took substantial market share from others in 2005. Our non-WMS products grew by 9% over 2004.

I-Series deals accounted for about 20% of the quarter's license fees, with about 80% being on open systems. The retail and consumer goods verticals were once again strong contributors to our license fees, and combined to more than half of license revenue in the quarter.

The Evant products are now called Manhattan Associates Integrated Planning Solutions or IPS. They complement our supply chain execution suite which, as you know, we call our Integrated Logistics Solutions or ILS. So IPS plus ILS make up our integrated supply chain management suite.

We closed four planning deals for about 1.8 million in license revenue in Q4. Three of the deals were in the U.S., and one in EMEA. Three were to new customers, and one was an existing customer. We're pleased with our success so far with the acceptance of our planning solutions.

As I mentioned on the call last quarter, in 2006, we will no longer break out Evant's results, as the company is now completely integrated into Manhattan Associates, and we can no longer accurately separate the results.

During the quarter, we closed three RFID deals, and booked about $800,000 in RFID revenue. That compares with eight deals and about $1 million in total RFID revenue in Q3, and about eight deals and 1.2 million of revenue in Q4 of '04. We're satisfied with our progress in RFID, and work to be sure we are well positioned as this data capture technology continues to gain acceptance. Also, as I mentioned on the last call, we will no longer provide RFID stand-alone results for 2006.

Our professional services organizations around the globe continue to perform well. Our services revenue result was a new record in the quarter, but as important, the team did a very good job increasing customer satisfaction. We posted a services gross margin for Q4 of about 53%, which is about 2 percentage points better than Q4 of last year, and quite strong given the number of holidays celebrated in Q4 and the resulting lower number of work days.

Our maintenance retention rate for 2005 was quite strong at over 90%.

During the quarter, we released the latest version of our supply chain management solutions, offering an expanded footprint that includes our Integrated Logistics Solutions plus our Integrated Planning Solutions. Our R&D teams continue to deliver on aggressive plans for enhanced functionality, ease of use and integration, and superior quality.

Our fourth-quarter results were in line with our plans, and our outlook for 2006 is positive. While we do not provide revenue guidance, I did want to give you some insight into our view of revenue growth for 2006. Market analysts project the supply chain management market growth rate for 2006 to be similar to that experienced in 2005, which they estimate at about 5%. In 2005, our organic revenue growth was 11%, or slightly more than twice the market growth rate.

We expect a similar result for 2006 -- that is, we will take substantial market share and grow organically by about two times the market growth rate. Plus, in 2006, we will have the benefit of 12 months of contributions from Evant versus four months in 2005. The added eight months of Evant results will likely add about 10 million of revenue to 2006 over 2005.

For 2006, we are expecting to see improved operating leverage, and expect about a 50 basis point improvement in our consolidated operating margin to about 16.5%. For the full year 2006 adjusted EPS, we are expecting a result in the range of 1.01 to 1.05 per share. The midpoint of the range represents growth over the $0.88 we delivered in 2005 of 17%.

We believe the seasonality we experienced for financial results in 2005 will be similar in 2006. As a result, we believe adjusted EPS for Q1 will be in the range of $0.19 to $0.23 per share, with the midpoint representing about 17% growth over the $0.18 we posted in Q1 of 2005.

To summarize, I believe our Q4 performance was good, and we are excited about the opportunities ahead of us in 2006 and beyond. There are areas of Manhattan Associates that need to improve, and there are always competitive threats in the marketplace. But we're confident that our strategy is defendable and will create substantial shareholder value. We'll continue to differentiate our solutions by offering the deepest, most comprehensive suite of supply chain products that deliver the best return on investment. And we'll provide these solutions on our logistics event management business process platform for a low total cost of ownership and relatively easy integration into ERPs and other systems. Essentially, we make ERPs better.

Importantly, our professional services organizations and our R&D team will continue to distinguish us from all of our competitors. I believe the combination of great products on proven market-leading technologies delivered by the world's leading experts will win Manhattan Associates a substantial piece of the supply chain management marketplace.

Thank you. Operator, we will now take questions.

(Operator Instructions) Philip Alling, Bear Stearns.

I just was wanting to get more of a sense about what the expectations are as far as out-of-pocket expense on the restatement, and when you expect to really have that all concluded?

The out-of-pocket expense from the income tax items is minimal. To date, we really have had very little out-of-pocket expense. It's been about $1 million, of which some of that has come back. So going forward, we don't expect it to have a significant impact on cash. But it really depends on our customers, and how much we collect from them and how much actual tax we have to pay.

Okay. (multiple speakers) As a follow-up, I just wanted to get a little more color as far as the demand environment for the different product categories that you have -- you know, your non-WMS not growing as well as your core WMS. Pete, what can you say really on the demand environment there in the non-WMS area going forward, as well as the sort of -- trading partner management, and TMS in particular?

We are actually quite excited about the pipeline we have for both our WMS products and our non-WMS products. We had a very strong 2005 with WMS growing by 20% year over year, and that did require a lot of our sales team's attention to deliver that result. During the second half of the year, WMS really started to pick up, and we see that continuing into 2006. But similarly, and in particular looking forward for 2006, the pipelines and the interest in our products beyond WMS has been quite strong -- in particular, transportation and our planning products.

We had a strong contingent of Manhattan Associates team at the recent National Retail Federation conference in New York -- NRF, and the energy at the conference around our planning solutions was quite exciting. That and the fact that our transportation solutions continue to gain customers in very visible market-leading organizations encourages us about the opportunities for our solutions in 2006.

So while 2005 was a strong year for WMS, and 9% growth for non-WMS was certainly below the 20% we achieved in our WMS space, we are cautiously optimistic about the opportunities for our full suite of integrated planning and integrated logistics solutions for 2006.

Any change in what the goals are really in terms of your international revenues as a percentage of total? Because at one point, you certainly were -- the goal was to get sort of north of 20% of total revenues. Any change there? What can you tell us?

I think that those goals are still in place. And over the next five years or so, we'd like to see our international revenues contribute closer to 30% of total revenue. One of the near-term challenges we'll have in getting to that goal is that we do not offer all of our products in our international markets. We're taking a focused approach to introducing our newer products in markets where we have substantial mass, so we can ensure success in implementation and support for our customers.

So for instance, our transportation products are only available at the moment in the United States, Australia, and the United Kingdom. Similarly, our planning solutions are only available in those same markets. As we fully finish those products and get referenceable customers live in those markets, we fully expect to be able to offer those products in additional international markets. But in the very near term, we are going to stay quite focused on building great products, building great customer references, and then leveraging that into additional market opportunities for us.

So while we expect over the next five years or so for international to continue to increase its relative contribution towards total revenues, probably for 2006 that will improve somewhat, but probably not by a large amount.

Okay. And one final question from me then is -- you've been using cash, buying back your stock. If there any change in view with respect to acquisitions as a possible use of cash, or is it -- what can you tell us on that score?

We continue to be quite interested in finding appropriate supply chain management acquisition candidates for Manhattan Associates. We believe with about $100 million cash on the balance sheet, we've got the opportunity to make cash acquisitions and still have ample cash on our balance sheet -- obviously, dependent upon the size of the acquisition. But we believe we have a reasonable war chest of cash to be able to run our business and look for solid acquisition candidates.

James Friedman, Soleil Securities.

2005 -- you had a good year on the services side. I was wondering if you could speak to some of the trends with regard to -- just in general terms, utilization and bill rates and how you managed to prop up the gross margin so successfully in '05 on the services side. And after that, I'll have a follow-up.

Hats off to our services teams. I think they really were focused on both customer satisfaction and financial success in 2005, and I think the leadership in those groups did a hell of a job for us in 2005.

I also think we benefited to a degree by the reorganization that took place early in the year, putting sales and services together in each marketplace to get closer to our customers, to better understand customer needs, issues, and drive improvements and customer satisfaction.

During the year, billable rates were about flat in 2005 versus 2004. But we were able to continue to improve the effectiveness of our teams and drive a solid gross margin for our services business in 2005. So strong performance by our teams, focused execution, and I think a good marketplace to which to offer our services.

Okay, thanks, that's helpful. And then in terms of how we should think of services supporting the license organization, as you are selling a suite or you're selling and architecture based on I-Series or based on a [product to] the Microsoft architecture, what are the service component characteristics of each of those sales -- if you could talk to at least qualitatively, how we should wrap a services estimate around the license sales?

Sure, sure. Well, generally speaking, it has as much to do with the platform as it does the product. Implementations on I-Series and Microsoft tend to be less complex from a technology perspective, since the technology is generally an integrated technology stack, more complicated on open systems. So generally speaking, open systems will be a little more effort to implement a solution than on I-Series or Microsoft.

But product differentiations make a difference in the effort required for an implementation. As we've mentioned for some time, WMS tends to be rolled out to multiple locations, and as a result, tends to have more implementation effort wrapped around that solutions implementation, whereas transportation, planning, and some of our other products have more of a centralized implementation, and therefore, have a lower proportion of services revenue to license revenue.

So I think what we've said in the past is the non-WMS products as a general rule are something close to a dollar of services revenue to a dollar of licenses revenue for the implementation. And warehouse management is closer to a 2-to-1 ratio of services to license revenue.

Andrey Glukhov, Stern AG.

Pete, maybe you can talk about the assumptions you make on the European performance next year. I know that the restructuring seems to be helping Europe. But are you expecting the geography to make money in '06? And what kind of growth are you looking for?

Our growth expectations are, I believe, reasonably modest for 2006 in both EMEA and Asia-Pac. We are looking to improve the profit contributions from those markets in 2006. And we'll be looking to move both of those global entities -- EMEA and Asia-Pacific -- into the black.

But we are not expecting strong rebound in the European economy or gangbuster growth in either of those markets. As I mentioned earlier, we have strong product sets available in those markets, but not our full suite of products -- so we have, I think, reasonable expectations for those market contributions to our overall success in 2006.

Just so that I'm clear -- given that you had pretty solid performance in Europe in Q4, did you get that geography to at least breakeven?

Yes. (multiple speakers) Yes, we did.

Okay. And then I don't know if you have that [sad], but as far as the Evant deals are concerned, what are -- the deals you closed, what percentage was done by what you would consider core Manhattan salespeople versus actual sales guys you got from Evant?

The correct answer for that is there's in my mind no such thing any longer as a core Manhattan person or a core Evant person. Our teams for the last four or five months have been intermingled and working very closely together.

So I would say in each one of the transactions, teams from both organizations were involved. Obviously, the people from the previous Evant company have some more detailed knowledge of some of the products, and had already been starting to work some of those relationships. But at the same time I would tell you that Manhattan's market presence, credibility, and some of our team's ability to explain our broader supply chain management suite of solutions vision was also helpful in closing the deals. A number of our senior execs attended some of those meetings, myself included. And we were quite impressed with how well the teams had worked together so far and looking forward to that building in 2006.

Okay. And then lastly, any comments on the anticipated tax rate next year?

Our tax rate should be approximately 39% next year.

Mark Burbeck, Citigroup.

Peter, can you comment on the deals that didn't close in the quarter? Was there any commonality in the product or the platform or geography?

No, I would suggest that overall, our teams work very hard in the quarter. We had a few deals -- you know, we have deals slip every quarter, as every software company does. And we have deals that we thought might close in Q4 that didn't across all geographies and across basically all products. It just was a little bit higher proportion than we probably experienced in most other quarters.

As I said earlier thought, the good news is in every one of those deals that we had been optimistic might close in Q4, we've lost none of those, and all are still ongoing discussions with those prospects.

Is Oracle having any impact on you in the TMS space in terms of the pace at which deals can get close?

You know, at this point, we've not seen any impact on the TMS market space from Oracle's acquisition of GLog. Frankly, so far, I think there's a lot of work that Oracle is doing in its own organizations. And so far, we've not seen any meaningful impact from that in the deals in which we are participating.

Okay. Can give us an update, Steve, on the 123R expense that you're expecting in '06?

Sure. We will be expecting approximately $0.05 a share of compensation expense on an after-tax basis to hit each quarter. So for the year, anywhere from around $0.20 for the total year to about $0.05 a quarter. And that's for all of the unvested options that are outstanding today.

Terry Tillman, SunTrust Robinson Humphrey.

Pete, in terms of some of these slipped deals, is there any assumption that some of these transactions, or at least a portion, will close baked into the guidance for '06?

Sure. Every quarter, we have some deals that slip from one quarter and close into the next quarter. So we certainly have that same presumption for Q1 versus things that slipped out of Q4. But we did not increase our expectation in Q1 for the added contribution of deals that slipped from Q4 to Q1. We basically believe that some of this happens each quarter and, over the long run, evens itself out. So we believe a number of those deals will close in Q1, and also expect a number of other deals that we had forecast for Q1 will also close.

Okay. In terms of ILS sales, can you talk about -- as you may get involved in more opportunities with a broader suite of solutions in any given deal, how do you offset potential sales cycle volatility around some of that? Because I would think those could end up being larger deals; thus, potential deal slippage becomes more meaningful or more impactful --?

So far our message about our integrated suite of both ILS logistics or execution solutions and the planning solutions is a very good long-term product strategy in at least the customers-that-I've-been-exposed-to's minds so far.

But for the most part, most clients are buying one product or so at a time from us. So while they buy the long-term strategy or the integrated suite of supply chain management solutions on a market-leading technology, business process platform, what they are buying in the near-term is an application or two with the full expectation of adding to that.

So a great example of that would be a deal that I mentioned earlier, the Company of which I could not give you their name -- that chose one of the big ERPs for their ERP backbone, but in Q2, chose our transportation solution. But part of that -- I believe that commitment to Manhattan was based on a longer-term supply chain management product strategy, and then added to that in Q4 by adding WMS labor and slotting.

So I would expect that we will have that kind of pattern at least for the year or two. In some cases, we may get a big, integrated supply chain management deal. But for the most part, I think there will be folks that will buy the long-term vision as a concept, but purchase one of our applications at a time.

Okay, fair enough. On the stock buyback program -- Steve, you mentioned there's 9 million left. Is there any thought of reinstituting a new stock buyback for a larger amount?

We haven't had any of those further discussions. We still have 9 million available, and we'll look at that opportunistically.

Okay. And then in terms of the guidance for the first quarter, $0.19 to $0.23 -- I believe the Street was at $0.24. Can you walk us through the guidance assumptions, particularly on the license side? Because I've been under the impression that first quarter still is a solid license quarters for retailers and suppliers to retail putting license dollars to work. So I was looking for almost flattish license revenue. Should we be looking at a down sequentially license quarter?

I think as you know, you don't provide either revenue guidance or license revenue guidance. But I will tell you -- two comments. Firstly, for the year, we expect adjusted EPS growth of about 17%. And as I suggested, we think the seasonality of our business will be similar in 2006 as it was in 2005. So for planning purposes, 17% growth each quarter in adjusted EPS is sort of a way to think about our projections for 2006.

And secondly, as I suggested, we don't give license revenue guidance. But if you look back at history for Manhattan, you will see that in most cases for the past couple of years, Q1 license revenue was similar to Q4 license revenue. And as I suggested earlier, we think the seasonality of 2006 will be similar to 2005.

Adam Holt, JPMorgan.

Just a follow up on the guidance, if I could -- and I'm not trying to pigeon-hole you into giving specific numbers. But if you do extrapolate out that comment about license revenue and the other line items, would you expect to see the operating margin in the March quarter up or down year on year?

That's a little bit more specific than we are comfortable answering at the moment. As you know, it's a challenging business, with license revenue and 80 percent-ish gross margins to nail that precisely. So we are comfortable giving an overall EPS guidance range for the quarter and an annual EPS guidance range. But getting any more particular than that, specifically for a quarter, is precision than we are not prepared to share at this moment.

Okay. And if I could also revisit the comment that you made about the ILS vision and the way that clients are purchasing the product suite, in aggregate -- I know you don't give a specific number for average deal sizes, but what has the trend been in average deal sizes?

Overall, I think the average deal size has been about flat, probably declining a little bit like it has with most software companies. Competitive environment has been making the software industry quite price competitive. I think our strategy has a long-term benefit for us that was to demonstrate value to a client by way of improved performance in their organization, higher customer satisfaction, higher revenue and lower cost for a solution, and then to return to the client with a second, third, fourth, or fifth application to build out a broader relationship and help support the value of our solutions, and therefore an average selling price.

So I think our experience is probably similar to most vendors to a degree --And really haven't seen any appreciation in average selling price, but I think we probably have been a little bit better off than most in being able to defend the value of our solutions.

Okay. And just a follow up then on the WMS business. The 20% growth in 2005 was, per my notes, the fastest growth in quite a number of years. Is there something that you think has fundamentally changed from an end-demand perspective in the marketplace? Do you think you're executing better? What in particular is behind that acceleration in the WMS market?

I would guess it's a couple of things. One, we certainly believe part of the explanation for Manhattan's success is our broader product suite -- that certainly, we are recognized as the global leader in WMS solutions, and that certainly helps in the WMS point solution sale.

But I believe many of the people who are buying solutions today are looking to consolidate vendors and choose a vendor who's going to give them substantial strategic advantage over the next three to five years, and because of that, I think in 2005, we took meaningful market share.

Again, the market probably grew something like 5% in 2005, which is quicker than most people thought it grew in 2004 or 2003. But our growth of four times that is substantially greater. So I believe certainly our reputation as the global leader in WMS invites us to almost all WMS deals, but the added value of our broad suite of solutions and the potential for customers to work with a strategic partner for supply chain management I believe gives us a substantial competitive advantage.

Brad Reback, CIBC World Markets.

Pete, you touched on this briefly, but given the fair amount of consolidation in the market over the last couple of quarters, is there any expectation that pricing might firm or actually move up?

You know, I'm not really sure. We're going to have to watch that. Obviously, we pay close attention to that every quarter. My belief is that over time, that will probably be the case. And it will probably be the case for market leaders like Manhattan Associates that can demonstrate a strong value proposition to customers.

In the near-term, a concern that we all have is that this consolidation takes place, and the weaker players in the space get even weaker, that their desperation could make in certain instances proposals quite unattractive to competitors. So there are a few particularly distraught WMS vendors out there that probably will be dropping price dramatically to try to get deals, and we believe most buyers see through that and won't be fooled by that, but could put some price pressure on the marketplace in the near term.

As I said, I believe over time market leaders, will strengthen their market position and hopefully will be able to defend the value of the solutions they bring to market.

Got it. And on the competitive front, with i2 finally getting its financial house in order and new management there, have they become more of a competitive issue for you on the planning side?

So far they have not, Brad. That may change over the next couple of quarters. Generally speaking, Manhattan Associates and the Evant products are quite strong in vertical markets, where i2 is not very visible and vice versa, that the i2 products are quite strong in vertical markets where we have less of a presence.

Now, over the next couple of years, is it likely that we will broaden our solutions suite? Probably. And is it likely that they will? Probably. So there could be more competitive battles between we and i2, but so far we've not seen much.

Brent Thill, Prudential.

This is [John Byun] for Brent Thill. Actually, I think the only questions I had were metrics related or clarification. On the tax restatement, if you assume not collecting anything from customers and no IRS relief in '05, how much could be the potential cash payment?

And then [sort of pick one] -- just CapEx amount in Q4? And also, when you talked about the [interesting formal] revenue outlook in your guidance, was that the total revenue or license? Thank you.

I'll take the total revenue one first. The guidance was for total Company revenues, so it includes software and services.

With regards to your question on the cash impact on the sales tax and the IRS issue, the only way to estimate the amount of cash to be distributed by us is dependent upon discussions that we have with independent local authorities. And at this point, we don't know what those will result in. So it's very difficult to determine at this point what cash outlays there will be, if any, going forward.

And the Q4 CapEx amount?

Our Q4 CapEx was $1.2 million.

Operator, we have time for one more question.

Mark Shappel, KeyBanc Capital Markets.

Just one or two questions. Pete, going back to the financial restatement, did the financial restatement grow out of the material weakness issue that was identified earlier in the year, or was this just something totally separate?

This is totally unrelated to that. This has nothing to do with -- the material weakness that existed at that time was the fact that we did not have an internal control in place to monitor revenue. That was fixed within 36 hours of [that] control.

In this situation, we have specific controls in place. We've got appropriate professional firms assisting us in evaluating our tax positions. We had these people in place for the last six months. The chances are, and there -- most likely this will result in a material weakness as a result of having a restatement.

The PCAOB typically takes the position that if you've got a restatement, it results in a material weakness. I could argue that it really should not be, given the fact that we have strong internal controls in place. It's our internal controls that identified the issue. So it's not as though it was uncovered by somebody outside of our organization.

And then Steve, any movement on the written-off accounts receivable from a couple of quarters ago?

No, it's still stays the same. We continue to discuss with that customer and our legal counsel, and continue to look at what our next steps are. But no significant progress one way or the other in that area.

Thanks, Mark, and thanks, everyone, for attending our call. We look forward to speaking with you in 90 days. Good night.

This concludes the Manhattan Associates' fourth-quarter 2005 earnings conference call. You may now disconnect.