Manhattan Associates Inc (MANH) 2006 Q1 法說會逐字稿

Good afternoon, my name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates first quarter 2006 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 I reminder, ladies and gentlemen, this call is being recorded, today, April 25, 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, Lynn. Good afternoon, everyone. This is Matt Roberts, Manhattan Associates' Director of Investor Relations. I'm going to start the call with our cautionary language and then turn the call over to Pete Sinisgalli, our CEO. In our statements during this call and during the question-and-answer session, we may make forward-looking statements regarding future events or the future financial performance of Manhattan Associates. You are cautioned that any such forward-looking statements are not guaranteed of the 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 31, 2005 filed with the SEC on March 15, 2006. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections. Additional factors are set forth in the Safe Harbor compliance statement for forward-looking statements, included as Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2005. Manhattan Associates undertakes no obligation to update or revise forward-looking statements, to reflect changes, assumptions, the occurrence of unanticipated events or changes in the future operating results. Thank you and I hand you over to our CEO, Pete Sinisgalli.

Thanks, Matt. And welcome to our first quarter 2006 earnings call. Dennis Story, our Chief Financial Officer, is on the call with me. For those of you who haven't met Dennis, he joined us as CFO in March and is an important addition to our team. Earlier this month, we issued a press release stating we would not achieve our EPS guidance for the quarter due to delays closing software sales. In the prerelease, we reset the first quarter guidance for adjusted EPS to $0.14 to $0.16 a share. We achieved $0.16 a share. Also in the prerelease, we said that while disappointed we didn't close more software sales in Q1, our services businesses continued to perform well and overall our business is healthy. We also reiterated our full year EPS guidance. We'll expand on those statements in our remarks this afternoon. Let me cover some highlights for the quarter, Dennis will then walk you through the financial details for Q1, and I will follow Dennis with additional comments about our business and provide a view of the second quarter and full year of 2006, and then we will move to questions.

License revenue for the quarter was 11.1 million, which was down 20% versus Q1 of 2005. We closed only one deal with license revenue of $1 million or more in the quarter, compared with 2005 when we closed 3 or 4 million plus deals each quarter. Services revenue was a new record for the quarter at 45.2 million, up 21% versus Q1 of last year. Our services margin for Q1 was a solid 52%, the same as last year. Even with the disappointing license revenue result, overall revenue grew 12% versus last year. And while we missed our Q1 license revenue goal and as a result our earnings goal, the other metrics we used to monitor the health of our business registered solid gains in Q1. I will now turn the call over to Dennis.

Thanks, Pete. And good afternoon, everyone. Overall we delivered a solid first quarter performance, even though, as Pete mentioned, software sales came in below our expectations. We delivered consolidated revenue growth of 12% over the prior year quarter totaling $62.8 million, driven by record services revenue. Currency reduced total revenues $833,000 or 1% in the quarter. License revenue in the quarter totaled 11.1 million, decreasing 20% from the prior year quarter due to delays in closing some software sales. Traditionally, license revenue as a percent of total revenue runs at about 25%, while in this quarter we came in at 18% of total revenue.

The Americas generated 8.6 million of license revenues falling short of expectations, delivering only one license deal in excess of $1 million. Our services revenue totaled 45.2 million for the quarter, increasing 21% over 2005. The Americas continued its strong momentum with six consecutive quarters of growth. Asia-Pacific also had a solid quarter, nearly doubling its service revenue over 2005. Our international units delivered 11.6 million in total revenues with top-line growth of 22% over 2005. Excluding the negative currency impacts, our international revenues grew 31% over the prior year quarter. EMEA revenues increased 5% over 2005, while Asia-Pacific revenues grew 61% to a record 4.7 million for the quarter driven by growth in services revenue. We continue to grow our market share through key wins and our international markets. We also completed our first "go-lives" in China with two customer, WM Open Systems implementations. As you know, our international markets are strategic growth channels for us, however, we are in the early stages of generating meaningful market penetration, so we do expect to incur some potential fluctuations in revenue on a quarterly basis. That covers revenue.

Now operating income. Consolidated GAAP operating income in the quarter was 3.1 million, which includes 3.3 million of costs associated with acquisition-related costs, including purchase amortization, stock-based compensation expense under FAS 123R, and sales tax recoveries. Today's press release and our 8-K filing provide a full reconciliation of the first quarter GAAP results with non-GAAP results, which exclude these costs. We refer to our non-GAAP measures as adjusted operating income and adjusted earnings per share, which exclude the impact of certain items, if applicable in that period, including acquisition-related costs and amortization thereof, the recapture of previously-recognized transaction tax expense, stock-based compensation expense under FAS 123R, and the severance acquisition and accounts receivable charges recorded in Q2 of 2005. All net of income taxes when referring to net earnings. Our treatment of these non-GAAP adjustments is consistent with past earnings reports. The balance of my comments will focus mainly on adjusted operating income and adjusted earnings per share performance, excluding the aforementioned costs. Today's earnings release and our 8-K earnings release filed with the Securities and Exchange Commission contain full reconciliations between GAAP and non-GAAP measures, which should be read in addition to this call.

On a non-GAAP basis, adjusted operating income decreased 22% to 6.5 million on lower software revenue. Adjusted operating margin in the first quarter of 2006 was 10.3%, compared to 14.7% in the prior year first quarter. The 440 basis point decline was primarily driven by revenue mix, attributed to lower software revenue in the quarter. With 90% license margins, a significant shift in revenue mix has a dramatic impact on consolidated operating margins, as reflected in the Americas' first quarter margin of 10.9%, compared to 20.7% in Q1 2005. On a positive note, our international units were profitable in Q1, delivering a combined operating margin of 7.6% in the quarter, versus a negative 15.1% margin in Q1 2005. Our services gross margin for the quarter was 52.4%, holding the line with first quarter 2005. Q1 is typically a lower margin quarter for Manhattan. Our services employee base increased a total of 144 employees over the prior year quarter, delivering zero margin erosion, a solid performance. We continue to be pleased with the strong gross margin profile of our Company.

Operating expenses in Q1 defined as including sales and marketing, R&D and G&A, were 28.1 million, an increase of 3.8 million over the prior year quarter, primarily due to the Evant acquisition, and increased India R&D headcount. Total company-wide headcount at quarter-end was approximately 1700 employees, up 300 employees over first quarter 2005 and approximately 75 employees sequentially. 85% of this growth over the prior year is coming from investment in our services and R&D functions. Interest and other income totaled $846,000 in the quarter, compared with $485,000 in the prior year quarter. Average interest returns for the quarter were 3.3%. Net foreign exchange gains of $130,000 were recognized in the first quarter, as well. Our effective income tax rate for the first quarter of 2006, on a non-GAAP basis, was 38.5%. We expect to maintain this rate for the remainder of the year, on a non-GAAP basis. Our GAAP effective tax rate for the quarter was 42.2%, the higher effective rate is driven by the adoption of FAS 123R and should approximate this rate for the remainder of the year, as well.

GAAP net earnings for the quarter was 2.3 million or $0.08 per fully diluted share. On a non-GAAP basis, adjusted net earnings was 4.5 million, with adjusted net earnings per share of $0.16, down $0.02 from the first quarter of 2005, driven by the lower software revenue. Average diluted shares outstanding totaled 27.6 million shares, an 8.7% reduction from the prior year first quarter. Thus far, there have been no stock repurchases in 2006. Our remaining available share repurchase authority is approximately $9 million. As you are aware, we adopted FAS 123R, stock-based payment in the first quarter of 2006, using the modified perspective transition method. This means we began expensing stock options in the first quarter of 2006 on a perspective basis with no restatement of prior years. Today's press release contains a pro forma comparison to 2005 first quarter stock option expense amounted to $0.04 per share. The full year 2006 impact is expected to be approximately $0.20 per share on a fully diluted basis. Today's press release contains detailed data on the income statement impact of FAS 123R, accounting, including its effect on segment results.

Now on to cash flow. Cash flow from operations in the quarter nearly doubled to 9.9 million on strong receivable collections. DSOs dropped nine days from Q4 2005 to 72 days in Q1. We anticipate our DSOs going forward to be in the 70s. Capital expenditures in the quarter totaled 2.2 million. At March 31, 2006, our cash and investments totaled $103.2 million, compared to 93.7 million at December 31, 2005. Finally, deferred revenue, which consists mainly of maintenance revenue billed in advance of performing the maintenance services, increased to 31.4 million at March 31, 2006, from 27.2 million at December 2005, and from 24.9 million at March 31, 2005. The increase is driven by maintenance renewals and reflects the strength of our growing licensing base. We're pleased to note, also, that our maintenance retention rates continue to track at over 90%. Thank you, and I will turn the call back to Pete.

Thanks, Dennis. License revenue for the quarter was down 20%. We experienced good license sales growth in Q1 in our international markets, but the Americas was well-below our expectations and last year. EMEA posted about 1 million in license revenue, almost 50% above the Q1 2005 result. Asia-Pacific achieved license revenue of about 1.6 million, an increase of about 10% over last year. Overall, international license revenue grew 21% over Q1 of '05. The Americas posted license revenue of about 8.6 million, which was down 27% versus last year.

As I noted on the call last quarter, we're no longer able to accurately break-out the revenue and earnings contributions from our acquisition of Evant since the business is now fully integrated within Manhattan Associates. But our best estimate license revenue from Evant in Q1 was about $500,000, all in the Americas. So, without the incremental contribution of license revenue from the acquisition, license revenue in the Americas was down about 30% versus the prior year. We weren't expecting much license revenue from Evant products in Q1 as our Integrated Planning Solutions are expected to have solid second and fourth quarters for license revenue and seasonally weaker first and third quarters. Most of the deals that slipped in Q1 were the Americas. As I mentioned earlier, we had only one $1 million deal in the quarter. For comparison, we had four million dollar deals in Q1 of last year and three each in the second, third and fourth quarters of last year. With a gross margin of about 90%, not closing large deals has a significant impact on our quarter's results. Given our share count at about 30 million -- 27 million shares, about $500,000 of license revenue translates into $0.01 impact on EPS. So, one way to reconcile the $0.06 difference between our Q1 adjusted EPS result of $0.16 per share, compared to the original Wall Street consensus of $0.22, is about $3 million of license revenue. For better or for worse, the big deals make a big difference.

We had a successful quarter, adding new clients and expanding 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. About 35% of first quarter license fees were generated from new customers and the remaining 65% came from our existing customer base. License fees for our Warehouse Management solutions were about 60% of total license fees and about 40% was from our non-Warehouse Management solutions. Warehouse Management license revenue was down 5% versus Q1 of last year and our other solutions license revenue was down about 30% versus the prior year. iSeries deals were about 20% of the quarter's license revenue and about 80% for unopened systems. The retail and consumer goods verticals, once again combined for more than half of license revenue in the quarter. Our Microsoft Exacta partnership continued to deliver this quarter with the signing of three new deals. So, let me summarize our overall license revenue results for Q1. We did not miss our license revenue target in the quarter because of lost business to competitors. We lost a few small deals during the quarter, but if anything, our already strong win rate was better than usual in the quarter. And I don't believe there were meaningful sales execution issues. There were some things we would have done differently with the benefit of hindsight and we'll make minor adjustments to our sales execution programs going forward. But in the end, deals just didn't close as we planned.

Our Professional Services organizations around the globe continue to perform well. Our services revenue result was a new record. We posted a margin on services of 52%, which is the same as last year and we were pleased about that. Our maintenance retention rate was a strong 90-plus percent. During the quarter, we were pleased to receive recognition from influential industry experts regarding our market position. Gartner Group is a leading industry analyst firm that has meaningful influence over buying decisions in the software and technology space. They are well-known for their magic quadrants that divide vendors into four categories based on the vendor's ability to execute and their vision for the future. Gartner recently released their Warehouse Management "Magic Quadrant" and once again Manhattan Associates has been recognized as the global warehouse management solution leader. Importantly, Gartner positioned our Warehouse Management on Open Systems as the leader of all warehouse management solution providers. Here's a quote from the Gartner report: "Manhattan Associates has one of the most coherent strategies for helping users through the transition to a business process platform strategy." We're very pleased to receive this recognition from Gartner. Additionally, Forrester Research released its first Transportation Management Solutions report. Manhattan Associates scored the highest-ranking of all competitors regarding product functionality. Forrester also scored us as one of the largest in market presence and highlighted our transformation to an overall best-of-breed supply chain management provider to reflect our broader planning and execution offerings and vision to become the best supply chain management leader.

Let me now shift to our view of the second quarter and full year. Our outlook for the second quarter is solid. We expect to make up some of the license revenue and EPS shortfall from the first quarter in Q2. It's unlikely we will make up for all of the shortfall in the quarter, but we expect to make progress. The deals that slipped from Q1 will help in Q2, plus, we have a solid pipeline of second quarter deals. Because it's difficult to accurately predict the exact timing for closing software deals, we're widening the range of our EPS guidance for Q2. For the second quarter, we expect adjusted earnings per share to be in the range of $0.26 to $0.34. For the full year, our outlook is essentially unchanged from that we provided 90 days ago. Our overall revenue expectation is unchanged and we continue to expect adjusted earnings per share in the range of $1.01 to $1.05 per share. Obviously the delay in closing license sales in Q1 makes this more challenging, but we believe we have the sales activity to achieve our license revenue goals and the rest of our business is performing well.

To summarize, while disappointed in sales of software in the Americas in Q1, I believe overall our business is performing well. We're confident in our strategy to become a global leader of supply chain management solutions and that our success will create substantial shareholder value. Unfortunately, there will be some bumps in the road to achieving our long-term objectives. Being in the software and solutions business, this comes with the turf. But we'll stay focused on our long-term goals and earn Manhattan Associates a substantial piece of the supply chain management marketplace. Operator, we'll now take questions.

[ OPERATOR INSTRUCTIONS ]. Your first question comes from the line of Mark Verbeck with Pacific Growth.

Hi, thanks a lot. Peter, it looked like the non-WMS business was substantially below where you were expecting. Is that some kind of seasonality you weren't anticipating? Is there anything that you can point to to help us understand what happened there?

Yes, Mark, I wouldn't limit the comments just to the non-WMS. From quarter-to-quarter we will have some variability in the percentage of license revenue from Warehouse Management Solutions in our non-Warehouse Management Solutions, yes, being down substantially versus the prior year is cause for some concern. But I think overall we saw deals, in general, push from Q1 out and I don't think there was any particular waiting, one product category or another. So, I wouldn't read much into the percentage, growth or lack of growth, in non-WMS sales. We expect the remaining three quarters of the year to show strong performance from our non-WMS products.

Okay. Can you tell me, given what you saw is there anything that you're changing in terms of how you're forecasting other than just widening your EPS margin?

Well, we put in a couple of process editions to make sure that we're all coordinated around the globe with more distinct visibility to the component parts of closing each of the larger software deals. I think we have historically done a good job of that, but given some of the delay in Q1, we thought it appropriate to put in an extra process or two. I've gotten great cooperation from the sales leadership around Manhattan Associates focused on delivering in Q2 and the balance of the year. I think our team is very strong and very motivated to bounce right back and demonstrate to the world that we are a very capable sales company and we'll have a strong next three quarters. So I think by and large, some strong modifications to the process, but I think we've got a good team that's focused on delivering.

Okay. And then just finally, have you changed your assumption in terms of what your license mix in this business is going forward?

Okay, and can you be a little bit more specific, Mark? You mean license versus soft --?

Yes, as a percentage of your total revenue?

Yes, no, that should -- we expect that to be in-line with historic trends over the balance of the year and for the full year.

Great, thanks a lot.

Thanks, Mark.

Your next question comes from the line of Adam Holt with JPMorgan.

Good afternoon. My first question, Pete, and I apologize if I -- if this is difficult to answer, but is it possible to identify any common denominators around the transactions that fell out of the quarter, other than that they were large -- any product sort of consistencies? Or any mechanics around those particular transactions that might be similar? Number one. And number two, have you seen any of those transactions close in the second quarter that gives you that level of confidence that you're going to see a rebound that quickly?

Sure, Adam. Great question. I wish I had a more definitive answer for you on the trends or specific activities that missed in Q1. The deals that slipped in Q1 were for various reasons. There wasn't any one particular pattern. If so, clearly, we would have addressed that. I think for a number of different reasons, feel that we had planned on closing, didn't close. Some of the usual suspects, the surprise approval level or something happened within a company that altered their decision process, but we believe while that is recoverable and we'll move forward from there. So, no particular issues in that regard, Adam.

In terms of overall trends, we expect over the next several quarters for us to get right back on the horse and have continuous support among our customer base for strong performance across our product categories.

And along that line, have you actually seen some of the transactions that fell out of Q1 already close in the second quarter that might give you some visibility on a better number?

Yes, Adam, I won't get into much detail there, but I will tell you that some of the business that slipped from Q1 has already closed in Q2.

Okay. And then just two last questions, if I could, you actually saw a real positive reversal in Europe. I wanted to get your comments as to where you think we are in the, sort of the restructuring process there? And then secondly, you mentioned that you had three transactions coming out of the Exacta/Microsoft relationship. Could you talk about the impact you think Mendocino will have, if any, on your relationship with Microsoft?

Sure, I would be happy to. In terms of the European restructuring, if you remember in the second quarter of last year, we made some changes to our organization and centralized some operations in Europe. I think we've made some smart, solid progress in improving our ability to execute in that market. Steve Smith, who runs Europe for us, has done an excellent job of repositioning our operations there for a long-term success. And I think the results we've seen Q3, Q4 of last year, and Q1 of this year are a step in the right direction. Now we're nowhere near ready to declare that we're operating well on that marketplace. We see some real opportunities to improve there and quite, frankly, some of the comparison points for prior year are not the strongest quarters, so, the growth rates, while impressive, still have room for improvement. But I think we were making good progress there. Probably one of the areas that I'm most pleased with is our customer reference ability, that's improved substantially in the last 12 months in Europe. And I believe that will add to our momentum in that marketplace over the balance of '06 and beyond.

In terms of our Exacta relationship, just to remind everyone, that is a relatively new relationship for Manhattan Associates with Microsoft Exacta, ERP, and their channel partners. In 2005, we had some very nice initial success with that relationship and in the first quarter we signed three additional Exacta deals. We expect over the next couple of quarters and years that that channel will continue to develop for us. We will be able to service the low end of the market through the Microsoft Exacta channel partners and have a profitable business for those organizations that probably aren't large enough to justify a cost of a direct-sale presences from Manhattan Associates.

And regarding Mendocino, we do not expect that to have a meaningful impact on Manhattan Associates. We think we have a very strong relationship with various parts of Microsoft and look forward to continuing to build on that.

Great, thank you.

Thanks, Adam.

Your next question comes from the line of Terry Tillman with SunTrust Robinson Humphrey.

Thanks, guys. Pete, in terms of the challenges in the first quarter, is there any maybe philosophical change on maybe you just don't have enough feet on the Street and maybe you need to actually accelerate more hiring to improve the sales coverage? I mean could that be one of the challenges that you faced in the first quarter, there's just not enough sales coverage?

Well, Terry, we do plan to add to sales coverage over the balance of this year, as I mentioned on the call 90 days ago. We are working our sales team awfully hard and if we had had perhaps a little bit additional capacity, maybe some of that business might have closed in Q1. But we are also very focused on finding the right sales talent to join our Company. We do believe these are fairly complex sales propositions to present to prospects and customers and, therefore, are looking for very capable people.

There aren't many of them out there. And I know our recruiting teams and our sales leadership teams are working hard to find them. But certainly if we had a few more talented people in the sales organization around the globe, I think we could make some additional progress. But we're focused on adding to our sales leadership team over the balance of '06.

And where did your sales customers or sales-facing headcounts stand at the end of the first quarter? You usually give that update.

Yes, sure. Sure, Terry. We finished the quarter with about 50 quota-carrying reps. We began the quarter with about 56 bad-carrying reps, so we were down about six reps in the quarter for various reasons. So, it is certainly our intention to try to get back towards the 60 number, which is our targeted rep population. But we'll only do so if we can find those folks that we believe who will really make a critical difference.

Okay. And then in terms of your typical seasonality, with the challenges in the first quarter and the assumption you're making that you can close a meaningful, if not a significant amount of this business that slipped, does the seasonality kind of aspect in the license line kind of go out the window for this year? What I'm really getting at, clearly the second quarter should be up, I would think, but in the third quarter, that's typically your low point in license revenue. Could the typical seasonality not play out because of some of those slip deals catch up?

Terry, I would expect the typical seasonality will probably be maintained in 2006. I would expect we will see a little bit of a better bump in Q2 because some of the business that slipped out of Q1 to help Q2. But by and large, I think we will see similar seasonality over the balance of the year.

Okay. And then just lastly, usually you do give updates on ILS. You didn't mention ILS at all earlier, I don't think. But can you give us an update on any exciting or strategic wins in the quarter, maybe not necessarily giving company names? And related to that, could the idea that you tried to push the ILS strategy also have some sort of play and maybe increased volatility because some of those deals are larger and more strategic? Thank you.

Sure. No, I did not, you're right I didn't mention any of the bigger deals in the quarter. We had one big million-plus deal in the quarter. It was to an existing customer to expand our relationship with that customer. It's a great customer that uses multiple Manhattan products and we're quite pleased about expanding that relationship.

During the quarter, as I mentioned earlier, we received some very good general industry accolades for our position in the market. We were thrilled with the feedback we got from Gartner, both about the market leadership position of our WM Open Systems product, and importantly, about the whole strategy behind our product road map and technology road map, our business process platform. As you probably know, Gartner can be a pretty tough audience and to win their support for our broad integrated suite of solutions on a common technology platform, we thought was a huge win. And we think that message continues to resonate well in the marketplace.

The conversations that we've had during the quarter regarding our product direction with both large and mid size companies, played very well in the marketplace, and that's part of the reason why we continue to be quite optimistic about the balance of 2006. Certainly in some cases, as deal size gets larger, sometimes those larger deals require additional levels of support, documentation and approval and that can complicate the timing of closing those deals, and some of that was prevalent in Q1. But I think our sales team is quite focused on differentiating our capabilities from the rest of the market, winning our fair share of the large deals, and continuing to get the message out that if you're ever looking for a strategic partner for supply chain management solutions, Manhattan Associates is the company to deal with.

Your next question comes from the line of Brad Reback with CIBC World Markets.

Hey, Brad. Operator, I think we might have lost that question.

Your next question comes from the line of Mark Schappel with KeyBanc.

Hi, good evening. Just a couple of questions. Pete, are you seeing anymore aggressive behavior from some of your competitors, particularly Oracle, now that they have a G-Log under their belt?

We're not seeing any additional aggressive behavior so far. G-Log was a capable competitor prior to being acquired by Oracle, and we suspect that Oracle will throw some of its weight behind that, but it was a viable competitor prior to being acquired by Oracle. We do compete with them in a number of deals and believe, especially given the enthusiastic support we got from Forrester about the depth and breadth of our Transportation Solution, that we can be quite competitive in that space.

But we have bumped into G-Log a bit in Q4 and a bit more in Q1 and would expect to see them more regularly going forward. They continue to have the challenges, how does the G-Log transportation product fit into the overall Oracle Fusion strategy? We certainly think our integrated suite of solutions on a common business process platform give us a competitive advantage, but definitely do expect that Oracle will put some muscle behind the G-Log franchise.

And then with respect to G&A, it spiked up a little bit this quarter, especially with respect to the previous quarter. Is this a one quarter phenomena or should we expect these levels as a baseline going forward?

I think we had one or two small things in there that were one-time. We had some severance costs in there for the quarter that likely won't repeat. If you strip that out, I think you would find that our G&A costs were in-line with the previous trends.

Okay. And then just finally here, any update on LEMA?

We continue to make good progress on our technology road map, for those that are new to the call, LEMA stands for our Logistics Event Management Architecture, and it is Manhattan Associates' business process platform for our broad suite of supply chain management solutions. We continue to build-out that solution and the feedback we're getting in the marketplace, in customer bases where we've rolled out LEMA-based products continues to be quite positive. And we think we're building momentum. We have got a long way to go, but we feel quite positive about the direction and the track we're on at the moment.

Thank you. That's all for me.

Thanks, Mark.

Your next question comes from the line of Brad Reback with CIBC World Markets.

Try it this time. Can you hear me?

We got you, Brad.

Okay, good. Pete, on the share repurchase any reason why the Board hasn't reauthorized an additional amount here given the cash on the balance sheet and where the stock price is?

Frankly, Brad, we haven't asked for additional authorization. We have authorization of about 9 million at the moment and we think until we burn through that we probably shouldn't ask for additional authorization. So as I think we mentioned on a previous call or two, we won't comment on the call about our intentions for share repurchases because it has complications for potential M&A activity this quarter or any other quarter, so we'll generally not comment on it. But with 9 million of additional repurchase authority we will hold on that until we've probably burned through that and then determine if it's an attractive time to move forward.

Since you brought up M&A activity, can you give us an update of what you're seeing out there? What type of opportunities there may be? How pricing is?

Yes, it continues to be a trend where there is sort of a mixed bag there, more than a few, more mature companies looking to be consolidated. No question the consolidation within the entire software segment, and including the supply chain management segment continues, and in many regards accelerates, as evidenced by last night's announcement that JDA and Manugistics are emerging. So there is certainly a lot of activity. I think most for the most part our targets fall into either the more mature category where there is cash flow benefits from combining companies or in a fewer number of instances, more strategic application capability that would broaden the footprint.

There continues to be a lot of activity in the marketplace, but there isn't a lot of, in my opinion, very attractive activity. So we continue to be quite focused on looking for those opportunities that will expand our product footprint and give us sustainable competitive advantage, but really focus on how do we leverage our strategic market position, being the supply chain management company and avoid getting caught up in some of the cash flow roll-up kind of activity that probably doesn't lend itself to becoming a more important strategic partner. But there is a lot of activity going on, as I suggested, though the majority of it is not all that appealing at this point.

Got it. And finally, there's been a fair amount of scuttlebutt out there about some headcount turnover in the service division, some other aspects of the organization, can you address any of that and maybe put that in perspective?

Sure. For all of 2005, we had attrition, company-wide of about 17%. From every data point I can capture, people I can speak with, best practice seems to be in the technology and services space somewhere in the 15 to 20% range. So 17% will certainly -- we're not happy with that, we'd like our attrition rate to be lower than that, though we believe we're pretty close to best-in-class. We have had some attrition in our services team and a couple of folks with many years of experience with the Company have decided that they'd like to do something else, having been with Manhattan for a period of time. So there's been some attrition for people, in particular, four or five people, that have been with us for quite a period of time in our services organization, and we were quite disappointed to see them go. They're very capable, important team players.

At the same time, I'm quite thrilled with the response we've gotten from their teammates. Many folks in those organizations, and it was primarily in the [ISO use] services group, have taken this as a great opportunity for them to advance their careers. We've got very talented deep bench strength in that organization and that group has certainly stepped up. So while it's always disappointing to lose some capable people, it's great to have the opportunity to promote others within that organization who are, in my opinion, equally capable and give them the opportunity to demonstrate their leadership skills.

Excellent. Thank you very much.

Thanks, Brad.

Your next question comes from the line of Philip Alling with Bear Stearns.

Thanks very much. Pete, just wanted to circle back, you made some comments about the merger announcement last night of Manugistics and JDA, certainly JDA is a former alliance partner of yours now. Certainly a firm that you're competing more directly with. Any changes in the go-to-market strategy, in particular, say on the TMS application that you have, given what they're going to be incorporating into their products with JDA with the TMS offering from MANU? Maybe you could give us a sense about the degree to which in the past you have really seen that application out there in terms of some of the competitive deals that you've been participating in?

Sure, I'd be happy to, Philip. JDA and MANU for an extended period of time had been partners with Manhattan and continued to in some cases partner with us on deals where we complement one another. And in other cases, we compete directly and we compete fiercely for businesses where we overlap product categories. I would expect that to certainly continue. They're both capable companies. We've competed with them both successfully over the past couple of years, and frankly, my opinion, I'm not -- I don't believe the combination of the two is anymore of a competitive threat to Manhattan than each of them individually.

Having said that, directly on the TMS question, I mentioned earlier Forrester's recognition of our TMS product as the functional leader in the market space, we think getting that kind of recognition is a very cool thing for our team that's been working very hard to develop market leadership in that space. We've said on a number of these calls over the past year that we believe we are winning the majority of the important strategic TMS deals and we continue to believe that to be the case. In a couple of those cases, those wins were -- Manugistics' replacements. When we look at the market opportunity out there we do see some very nice transportation opportunities for us and so think that part of that opportunity will be to replace some of our competitors' products, including Manugistics.

At this point I'm not sure what JDA's plans are for the transportation segment. That's essentially new space for them. So they will have to go back and regroup and determine how best to try to re-energize the Manugistics/TMS product. But I do believe we have competed very well against them in the past and we will continue to do so.

Okay, that's helpful. With respect to large deals, you did mention the importance of them in terms of reaching your financial goals, could you give us a sense on a going-forward basis your pipeline in terms of large deals, are they factoring more prominently in your pipeline and is -- what could you tell us there?

Sure, I would be happy to. We're trying very hard not to be dependent on large deals and trying to move those -- the closing of those earlier in the quarter to avoid that last week of the quarter challenge. There's only so much we can do about that, though, but the teams are very focused in trying to be more aggressive about getting those larger deals closed. The pipeline for larger deals for Q2 looks better than normal, primarily because several of the Q1 deals slipped into Q2, but we do have a robust addressable pipeline of Q2 deals in the million-plus range. Now those require a lot of work and the team is focused on getting them closed, but we're focused on being successful at that in Q2.

So, the pipeline for Q2 looks solid and the pipeline for the full year looks strong. Now I say that with a little bit of hesitation in that I shared that same comment with you 90 days ago and we didn't achieve our Q1 license expectation. But I do think Q2 is historically a better quarter for companies to make capital investments and I believe that we're well-positioned to complete that.

Pete, is there any sense that going forward with some larger deals that you may be recognizing license revenue over multiple quarters on some deals going forward? Or is it your sense that most of the large deals you're going to be recognizing all the license revenue in the quarter once you close those deals?

No, Philip, there's very specific revenue recognition accounting rules that we, of course, abide by. Generally speaking for Manhattan, while customers, we believe are excited about our broad product suite and our technology road map, they generally tend to buy one or two products at a time with the view of adding to that platform as their ability to implement those solutions freeze up.

So for the most part we tend to recognize revenue from license sales at the time we complete them, but with the opportunity to cross-sell into that install base, additional applications over time. So we do very much look forward to closing million-dollar plus deals, but particularly with the opportunity to go back to that customer base once they've successfully implemented a solution and are thrilled with the results and add to that product suite.

Final question from me, just with respect to services, you had a higher services revenue number in the quarter. You did make some comments about perhaps making some additional hires there. What should investor expectations be with respect to service gross margins going forward? I mean is there going to be a period in which those margins may take a hit some as you're ramping up some additional staff? And maybe you could give a little bit of color about really what led to the growth that you saw on the services revenue in the quarter? Thanks.

Sure I would be happy to. Our services teams have done a nice job of working with clients to drive customer satisfaction, expand the use of our product, continue to roll-out to additional sites, and because of those initiatives we've been able to drive continued strong services revenue. New implementations, roll-outs as well as upgrades, so that the services team has done a nice job in demonstrating the value of our solutions.

In terms of margins, I think what you will see in 2006 and beyond is comparable to what we experienced in 2005. The strongest services margins will be in Q2 and Q3, and somewhat lesser services margins in Q1 and Q4. That's entirely based on seasonality. The number of holidays, working days within Q2 and Q3 are generally a few days more than in Q1 and Q4. Our belief is we've been pretty successful at this over the past year or so that we can add staff to our services teams without meaningful degradation in the margins. So, we're pretty good at that so far and we're very focused on continuing that. The only thing that might shift our services margin a little bit over the next couple of quarters, next couple of years, is product mix.

As we mentioned on these calls previously, WMS services tend to have larger dollars associated with them compared to non-WMS because of the nature of the implementation of those products. Where non-WMS products are generally a centralized implementation, WMS is often implemented at multiple sites and because of that, it's more manageable and easier to staff. Having said that, though, I think overall the services margins we've posted in Q1 and over the balance of 2005 are solid and probably the kind of services margins we would expect to see going forward.

Great, thanks, Pete.

Thanks, Philip.

Your next question comes from the line of Robert Schwartz with Jefferies & Company.

Thank you very much. Just a couple of fill-ins at the end here. You've mentioned, Pete, that you were looking to maybe potentially make some adds in sales management over the course of the year, and you mentioned 60 as sort of a target. And I'm wondering where you -- how, is that the target for the year or something sooner? And where do you think you would add if you had had -- is it replacement or is it net new ads to do better coverage of management?

Yes, at this point it would be more -- not so much sales management, but sales representatives. A manager or two, but quota-carrying reps would be the target for that. Of the -- about 10, we'd like to have on board, basically ratably spread over the balance of the year. Frankly, the sooner the better, but as I mentioned, finding the right talent is more important than just getting people to fill those roles. I would suspect the balance -- the majority of the 10 would be based in the United States and focused on helping us with the larger market opportunities for ourselves. So more dependent -- that were more domiciled in the U.S., but across the globe as well.

Are there any major holes in the team right now, in the management team?

No, I don't think there's any major holes. We have got a very good group of folks in our team. We have an expanding pipeline and as one of the other questions earlier, Terry's question, I think it was, talked about ability to mantle the opportunities, as that's causing some stress on the team. We certainly believe that the pipeline is strong and growing and to be able to address that properly we're going to need some additional help closing that business. So, I don't see any needs or any gaps in the management and teams, but a little extra help with the heavy lifting would be appropriate.

I'm wondering what your -- what the headcount was in the service organization? I may have missed it. And what your plans are for adds there? What do you think the growth rate is for the year?

Yes, off the top of my head, Robert, I think we have something like 800 people in our services. We will get you the specific number. But with the demand we see from our customers over the balance of the year, we'd expect to add folks every quarter to be able to meet our customers' needs. So similar to Q1, we added about 75ish people in Q1 to be able to meet their needs and I expect that we will have something like that over the balance of the year. We have decent visibility into services demand for about six months out and believe we're building to staff in that demand. So probably should expect an addition in services staff, something similar to the Q1 increases to meet the needs of our customers.

Great. And last question -- I didn't know if you could make any comments on RFID activity, and for you and also in the industry, if you're seeing any changes there?

Yes, I'd be happy to. Actually, there's a lot more activity in the market related to RFID. I don't believe it's going to translate into 2006 meaningful revenue opportunity for Manhattan Associates, but there is a lot more activity and a lot more real action taking place in the marketplace. I think the standardization on Gen2 so-called protocol, is an important step in the right direction. I think the activity for the next group of Wal-Mart, Tesco, Target, Best Buy initiatives is adding momentum. And I think the improvement in cost and performance is also adding some momentum. So there's more energy.

If you've attended any of the conferences or participate in any of the industry discussion, you will find more and more energy building around the potential for RFID to make material difference in supply chains in the not-too-distant future. So we're quite -- we remain quite optimistic about the future benefit of RFID to encourage companies to re-organize and retrofit their supply chains to take advantage of that new technical capability to improve the optimization of their supply chains. So while we don't see much short-term financial spike from it to Manhattan Associates, we're enthusiastic about the improvement in activity.

Any RFID revenue this quarter?

We're not disclosing that any longer, Robert. We mentioned that 90 days ago that since so much of that is part of other solutions, now we're no longer breaking out our RFID revenue.

Thank you.

Thanks, Robert. Operator, we have time for just one more question.

Your next question comes from the line of Yun Kim with A.G. Edwards.

Thank you. Just to understand a little bit better about the miss in the license sales business, was the miss primarily due to lack of some of your deals or did you also see lower-than-expected number of mid-size deals in the quarter, Pete?

Well, there's always going to be misdeals in every quarter, they were larger deals that didn't close that we had planned to close and there were some mid-size deals, also that we had planned to close in the quarter. Like all companies, we try to have enough deals in the discussion stage to accommodate the inevitable delay in one deal or another or more. And it's always across-the-board, mid-size, large deals or smaller deals.

So, this quarter we had a couple more of the larger ones that we would have liked to have booked, but we had a couple of the mid-size deals slip as well. So suggested earlier, I don't think there was any one particular pattern or issue that caused the delay. I have noticed quite a few other software companies had challenges in Q1 and that that could very well be the more typical Q1 that we all, unfortunately in the software space, wrestle with. But we're focused on correcting that and addressing it in Q2 and moving forward, driving customer satisfaction.

And then real quick, when you look at your pipeline for the next quarter and for the rest of the year, do you see those typical deal break-out of 50/50 between WMS and non-WMS deals in your pipeline or do you see more non-WMS deals out there? It seems like the WMS business is doing okay, but it seems like a non-WMS business is what is really providing a lot of volatility in your business. Is there any type of change that happened from last year when also non-WMS business did not perform consistently or anything like that, that led to the miss this quarter?

Well, no I don't suggest that if you borrowed down the pipeline there would be a very good mix of WMS and non-WMS in-line with the 50/50 that we expect to close for the most part each quarter over the balance of the year. So I don't think there's any degradation in the non-WMS opportunities for us. We just quite, frankly, have to go out and close them. But we're optimistic on the entire product portfolio.

And quickly, that one loss, seven-figured -- that one seven-figured deal in the quarter was that a WMS or was there multiple products in that deal?

Yes, it was largely WMS.

Okay, great. Thank you very much.

Thank you, Yun. Thank you, everyone for joining us. We look forward to talking with you in 90 days. Good night.

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