Manhattan Associates Inc (MANH) 2006 Q2 法說會逐字稿

Good afternoon. My name is Seeya and I'll be the conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates' second 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 a remainder, ladies and gentlemen, this call is being recorded today, July 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 sir.

Thank you, Seeya. 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 guarantees of future performance and involve risks, 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'll hand you over to Pete Sinisgalli.

Thanks Matt. And welcome to our second quarter 2006 earnings call. Dennis Story, our Chief Financial Officer, is on the call with me. We are very pleased to report very strong second quarter results across all key metrics. Dennis will go into the details in a minute, but I will cover a few highlights upfront.

License revenue in the quarter was 21.2 million, an increase of 45% versus Q2 of last year. Total revenue was 77.9 million, an increase of 27% over the prior year. And adjusted earnings per share was $0.34, an increase of 37% over last year's Q2.

In the first quarter of the year, we executed well in all areas of the business except recognized license revenue. I mentioned 90 days ago that we believe the first quarter shortfall for license revenue was a timing issue and would be recovered over the balance of the year. We are quite pleased that in the second quarter we recouped the entire first quarter miss.

I believe investors should look at our first quarter and second quarter results combined to more fairly judge our progress. For the first six months of 2006, license revenue is up 14% over the first half of 2005. Total revenue is up 20%, and adjusted EPS is up 19%. With our first half results, we are right on track to achieve our full year objectives.

Dennis will now walk you through the financial details for Q2 and I will follow Dennis with additional comments about our business and provide a view of the third quarter and full year of 2006, and then we will move to your questions. Dennis?

Thanks Pete and good afternoon, everyone. As Pete mentioned, we posted a very strong quarter, putting us back on pace at the mid year point to achieve our full year objectives.

My top five highlights for the quarter are: Number one, record license revenue of 21.2 million, achieving 45% growth year-over-year and year-to-date growth of 14%. Number two, record services revenue of 48.4 million or 17% growth year-over-year and year-to-date growth of 19%. Number three, record adjusted earnings per share of $0.34, representing 37% growth year-over-year with year-to-date growth of 19%.

Number four, record cash flow from operations of 21.5 million, 47% growth year-over-year and year-to-date growth of 54%. And number five, our Board of Directors has approved an additional 50 million share repurchase authority. Exceptional performance across the board, now for the details.

We delivered consolidated revenue in the quarter, totaling 77.9 million or 27% growth over the prior year quarter, driven on record software and services revenue. Year-to-date, we have generated 20% topline growth totaling 140.7 million. License revenue in the quarter totaled 21.2 million, increasing 45% over the prior year quarter with sequential growth of 92%. We closed three software license deals in excess of $1 million in the quarter, up from only one in the first quarter. Overall, our deal volume was very strong with a 60/40 split of new to existing customers with higher overall average deal sizes even after excluding deals over $1 million.

Our mix of Warehouse Management versus non-Warehouse Management product sales in the quarter was 50-50, showing good demand across our supply chain suite of products. License revenue growth was led by the Americas, which delivered 18.7 million or 47% growth over the prior year quarter and accounted for 88% of total license revenues in quarter.

Our international segment also generated good license growth of 35% on a combined basis. Overall, Q2 was an unprecedented quarter for Manhattan license revenue. Much of our momentum in the quarter was building from Q1 and served to put us back on pace for the first half and the full year. For the first half, year-to-date license revenues grew 14%, totaling $32.3 million.

Services revenue, our Professional Services team delivered record services revenue of 48.4 million for the quarter, increasing 17% over prior year's second quarter. We continue to make significant investment in the growth of our services business, which delivered strong gross margin of 52.2% in the quarter.

On the international front, we delivered 12.2 million in total revenue for the quarter, with A-Pac delivering 38% growth year-over-year. In EMEA, we had good license growth of 41% year-over-year, but overall revenues were down 14% due to a lack of sustained big deal growth to fuel services revenue momentum. Not to mention the EMEA economy continues to be a challenging region for economic growth.

As you know, our international markets are strategic growth channels for us, delivering approximately 20% of total company revenue. We are focused on measured profitable growth in our international units. However, we are in the early stages in certain markets, so we do expect continued fluctuations in revenue on a quarterly basis.

Now, on to operating income. Consolidated GAAP operating income in the quarter was 10.8 million, which includes 3.3 million of costs associated with acquisition-related costs including purchase amortization, stock-based compensation expense under FAS 123(R), and sales tax recoveries.

Today's press release and our 8-K filing provide a full reconciliation of second 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 cost and the amortization thereof, the recapture of previously-recognized transaction tax expense, stock-based compensation under FAS 123(R), 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.

Adjusted operating income, on a non-GAAP basis, adjusted operating income increased 22% to 14.1 million on our strong revenue performance in the quarter. Adjusted operating margin was 18.2% compared to 18.9% in the prior year's second quarter. The 70 basis point decline was primarily due to two factors: One, higher variable comp accruals, that's bonuses and commissions based on our record quarter revenue and earnings performance. And two, lower Americas services margins.

These impacts were partially offset by our international units operating margin improvement. EMEA and A-Pac delivered combined operating margin of 7.1% in the quarter compared to a negative 3% margin in the prior year. Our services gross margin for the quarter was 52.2%. Sequentially in line with the first quarter of this year, but down from 2005’s second quarter margin of 56.1%. The decline in margins were driven by lower Americas services margins due to mix, resulting from our growth in non-Warehouse Management product implementations, combined with higher accrued bonus expense year-over-year.

As we continue to grow our installed base, we have increased our investment in professional services personnel. Year-to-date, we are up 25% or 166 net new hires year-over-year. Overall, we continue to be pleased with our services margin performance as well as services demand outlook for the remainder of the year and are targeting services margins in the low to mid 50's.

Operating expenses in Q2 defined as including sales and marketing, R&D, and G&A were $31.3 million, an increase of $5.6 million over the prior year quarter, primarily due to the Evant acquisition, increased variable comp accruals and increased R&D headcount – in the R&D headcount. Total company-wide headcount at quarter-end was approximately 1,800 employees, up 100 employees sequentially and 330 employees over second quarter of 2005. Our increases are driven by revenue growth with 90% of our additions coming in the services and R&D functions.

And now, I'll cover the below the line items. Interest and other income totaled 1.3 million in the quarter compared with $609,000 in the prior-year quarter. Average interest returns for the quarter were 3.4%. Our effective income-tax rate in the second quarter on a non-GAAP basis was 38.5%. No change from the first quarter and 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 123(R) and should approximate this rate for the remainder of the year. GAAP net income for the quarter was $7 million or $0.25 per fully diluted share. On a non-GAAP basis, adjusted net income was $9.5 million with adjusted net earnings per share of $0.34, up 37%.

The record second quarter adjusted EPS performance brings our year-to-date adjusted EPS to $0.51 or 19% growth, which puts us back in line with our first half expectations. Average diluted shares outstanding totaled 27.5 million shares in the quarter, a 7.7% reduction over Q2 2005. In the second quarter, we repurchased 439,790 shares at an average share price of $20.33 in the quarter for $9 million total, thus completing our $50 million buyback program approved in July 2005. As I noted in my highlights, our Board of Directors has approved an additional 50 million share repurchase authority as well.

Now on to cash flow. Cash flow from operations in the quarter was a record 21.5 million, more than doubling our first quarter performance, while posting a 47% increase over Q2 2005, driven on record collections. Year-to-date cash flow from operations totaled 31.4 million, up from -- up 54% over the comparable 2005 period.

DSO for the quarter was 60 days, down from 72 days in the Q1, reflecting our disciplined focus on cash. This was exceptional performance. However, we anticipate our DSOs going forward will turn back into the 70s. Capital expenditures for the quarter totaled $2.6 million. At June 30, 2006, our cash and investments totaled 113.2 million compared to 103.2 million at March 31, 2006.

Finally, deferred revenue, which consists mainly of maintenance revenue billed in advance of performing the maintenance services, was 31.7 million at June 30, 2006, on par with the first quarter and up $27.5 million -- from $27.5 million at December 31, 2005. The increase is driven by maintenance renewals and reflects strength of our growing installed base. Our maintenance retention rates continue to track at a healthy 90% plus.

That covers my financial report. Thank you. And I'll turn the call back to Pete.

Thanks, Dennis. Our second quarter license revenue was easily a new record for us, exceeding the previous record from fourth quarter of last year of 16.1 million by about $5 million or more than 30%. It was a very strong quarter for Warehouse Management sales and a very strong quarter for sales of our other products, especially Transportation Management.

About 60% of the second quarter license fees were generated from new customers, and the remaining 40% came from our existing customer base. License fees for our Warehouse Management Solutions were about 50% of our total license fees and about 50% was from our non-Warehouse Management Solutions.

For the year-to-date, we've returned to our four 50s experience, meaning that 50% of license fees were from new customers and 50% from existing customers, plus 50% of license fees were from Warehouse Management Solutions and 50% from non-Warehouse Management Solutions. We believe this is an excellent balance between new and existing customers and an excellent balance between our global market leading Warehouse Management Solutions and our quickly emerging other leading solutions. iSeries deals were about 20% of the quarter's revenue and 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 for us this quarter with the signing of eight new deals. License revenues from these transactions tend to be considerably smaller than our direct deals.

Our Professional Services organizations around the globe continue to perform very well. Our services revenue result was a new record in the quarter and increased 17% over the prior year. As Dennis mentioned, we posted a solid margin for the quarter of 52%. While that was down from last year, it was primarily due to increased incentive compensation accrued in Q2 and some investments in driving customer satisfaction for some of our newer products, particularly our Distributed Order Management Solutions. And maintenance continues to run quite strong at over 90%.

During the quarter, we released our latest version of our suite of Supply Chain Management Solutions. Our R&D teams around the world did an exceptional job of meeting our objectives for this release, delivering on time, on budget, with full functionality and quality. We continue to make strong progress pairing our Bangalore R&D center with our US development teams to drive exceptional solutions to market at an efficient cost.

Moreover, our focus on quality, delivering a superior return on investment, our clear product roadmap and our clear technology roadmap have helped us improve customer satisfaction and improve our competitive win rate.

Headcount during the quarter increased by about 100 to about 1,800 employees, about half the increase was in billable service positions. In addition, we increased our direct sales rep headcount by 5 from 50 to 55 associates.

Areas for improvement in the quarter include driving stronger sales of our Integrated Planning Solutions and continuing to build momentum, driving new sales in Europe. Our Integrated Planning Solutions include the planning, forecasting and replenishment products we acquired last fall in the Evant acquisition. Today, I'm more convinced than ever that this is an important addition to our strategic portfolio of Supply Chain Solutions.

Enthusiasm among customers and prospects continues to build for a suite of solutions that enable companies to optimize across supply chain planning and supply chain execution, and we're the only company that can deliver that. We're making important investments to achieve this goal, and I'm confident that we will. But so far, new sales have been somewhat slower than our expectations. Over the second half of 2006, we are redoubling our efforts to drive awareness and adoption of Manhattan Associates Supply Chain Planning Solutions, and I'm confident we'll achieve both.

In Europe, we continue to struggle with a soft environment for capital expenditures for enterprise software. While our quarter's license revenues showed a strong 41% growth over the prior year, it's off a small base. We've made good progress in EMEA since our restructuring in the Q2 of last year and our win-loss results have been positive. We're poised for success in EMEA, but would benefit from an improved macroeconomic environment.

Let me now shift gears to our view of the third quarter and the full year. While our third quarter historically has been seasonably soft, we expect to post a good Q3 in 2006. Our license revenue pipeline for the quarter is solid, and we have good visibility into deals that we expect to close this quarter. Moreover, the other parts of our business continue to perform quite well. As a result, for the third quarter, we expect adjusted earnings per share to be in the range of $0.22 to $0.27.

We posted $0.21 in the third quarter of 2005, so our guidance reflects EPS growth of between 5% and 29% for the quarter. For the full year, our outlook is unchanged from January. Our overall revenue expectations remain the same, and we continue to expect adjusted EPS in the range of $1.01 to $1.05.

The annual guidance range represents growth over 2005 of 15% to 19%. With our strong performance in the second quarter and for the first half of 2006, a strong sales pipeline and a strong services business, we are increasingly confident in our full year adjusted EPS guidance.

The Supply Chain Management landscape from a competitive position continues to evolve. And we believe we are uniquely positioned in this space. At one end of the market, you have the two big ERPs, SAP and Oracle. SAP has some basic supply chain solutions, but is moving to improve those solutions. And Oracle has a collection of supply chain pieces that it is trying to sort out.

We expect SAP and Oracle to be meaningful competitor of ours for many years to come. But both have much work to do to compete with our advanced solutions. At the other end, you have the rollups, companies that are acquiring other companies to drive expense synergies to support cash-flow needed to pay off debt, but with little resource left available to drive future innovations.

By design but also increasingly by default, Manhattan Associates is quickly becoming the world's only complete Supply Chain Management Solutions Company. That goal has long been our ambition. We are now benefiting from the fact that other companies that previously shared that ambition, have been swallowed by, or have themselves become rollups, leaving the field more available to us.

We intend to be the supply chain solutions company, the supply chain leaders, and believe we are on a very good path to achieve that. To summarize, we have had a very strong second quarter and a solid first half of 2006. We're executing well and have confidence in our second-half outlook. While there are certainly areas for improvement, we believe we are well-positioned to lead the Supply Chain Management Market and intend to capitalize on that opportunity.

Operator, we'll now take questions.

[Operator Instructions]

The first question is from Terry Tillman with SunTrust Robinson Humphrey. Please go ahead.

Thanks, guys. Congratulations on the license rebound in the quarter. First question Pete is, in terms of visibility into license revenue in the third quarter.

What gives you that visibility, is it signed business already in July, is it just better sales coverage? Can you talk a little bit more about just the third quarter visibility?

Sure, Terry I'd be happy to, thanks for the compliment on the quarter. We had a very strong license revenue quarter in the second quarter, and that momentum is carried over into the third quarter. We've had some business already close in the third quarter. And we're progressing well on the business that we believe should close in the third quarter.

So we have good visibility into the quarter with some activity already booked. In addition, I think our sales teams are really fired up after the second quarter. The pipeline is strong, the activity is good, and I think our momentum is quite solid. So for that reason, we feel we have good visibility for the third quarter license revenue expectations.

Okay, great. And then, in terms of we saw in the first quarter it was a pretty significant short-fall, but in second quarter you make it all up. Is there anything post the first and/or the second quarters that you were able to take a step back and look at operationally?

Whether it's changes or enhancements? You mentioned earlier you have added five more quota carrying sales reps, so that should help. But is there anything looking back on are there things proactively you are able to do to at least reduce the volatility? I guess first and second quarter has pretty extreme volatility. So is there anything going forward that can help minimize some of the volatility?

We made some very small changes to some of our processes. We think those had a positive benefit in the second quarter. But the truth of the matter is as we said 90 days ago, a couple of the deals that closed this quarter, had closed in the Q1 as we had expected, Q1 would have been a very good quarter and Q2 would have continued that trend. So given that about $0.5 million of license revenue translates to about $0.01 for us, it will be somewhat challenging to really fine-tune our sales closing process down to the penny.

But we do believe we made some important subtle changes to our processes and believe we've got a pretty good grip on what's going on. But given the magnitude of the activity and the environment in which we compete, I would like to tell you we have got our arms firmly around it. But I think we made some progress, but as always, there are opportunities for improvement.

Okay. Thanks, Pete.

Thanks, Terry.

The next question is from Adam Holt with JP Morgan. Please go ahead.

Hi, guys. I'll also echo the congrats on the quarter. I guess my first question is if you look at sort of the seasonality in your business, you know, historically, the June quarter has had some seasonal strength offset by some seasonal weakness in the September quarter.

I was wondering if, first of all, maybe you could talk about whether or not that is becoming more pronounced perhaps that it was behind some of the upside in the June quarter? And is it possible to quantify, you know, what actually did fall out of the first quarter into the second quarter versus just opportunities maybe surfacing in the second quarter organically?

Sure, I'd be happy to, Adam. We think overall the seasonality of our business is about the same year-over-year. We did have a couple of deals that we had planned to close in the first quarter that slipped into the second quarter. And because of that, we came up short of our license revenue and EPS expectations.

If my memory is correct, I think Wall Street had expected us to deliver something like $0.22 in the first quarter. We delivered about $0.16. The difference of $0.06 is about $3 million in license revenue. If something like that had shifted out of Q2 into Q1, it would have been a little bit smoother quarter-over-quarter and more in line with our traditional annual seasonality.

Now, each year is going to be somewhat different, and we certainly expect that and we are working harder and smarter to try to manage that process. But net-net, we think overall, seasonality is probably fairly similar in 2006 to the past.

The only difference I would suggest for Q3 is we're a little further down the path than we might have been in other years both, in terms of visibility into deals and a couple of things that have closed for us. So we feel pretty good about how that's worked out for us in the first half of the year and our view for Q3.

And just sort of along that line, I know you are not in the business of giving specific license revenue guidance, but you made the comment that your expectations haven't changed for the year. And are you feeling good about the revenue expectations for the third quarter? Is there anything you can, you know, give us to help us get a tighter range with what those numbers might look like in your expectations?

Yes, sure. I can give you repeat. It might be useful though at the half-year point to repeat our overall expectations for the year. For the year, we had said back in January that we expected to grow total company revenue by about twice the market growth rate, as we had in 2005.

Now, the market expected -- the industry analysts expected the supply chain management market to grow, you know, 5%, 6%, something like that. And we said we'd grow twice that rate. In addition to that, we also suggested that folks should add about 10 million to that revised number for total revenue to reflect the partial period of Evant ownership in 2005 compared to the full-year Evant ownership in 2006.

So we continue to believe that's an appropriate, general method to use to evaluate our annual performance. And we also said at the beginning of the year we expected seasonality in 2006 to be similar to 2005, and we continue to believe that will be the case. So, Adam, if you use those kinds of numbers, I think we'd be comfortable with the calculations you came out with.

Okay. And just my last question is on the margins. You know, obviously, a tremendous amount of revenue upside and you saw some EPS upside as well. But the year-on-year operating margin clearly impacted by some of the changes in your services business, you know, it was flattish, and you had a sequentially down operating margin contribution in Europe.

Beyond just the services business, can you talk about some of the things that you're going to do get the operating margin performance, you know, to continue to -- sorry to increase again on a year-on-year basis heading into the back half of the year?

Sure, I'd be happy to. We do believe that we have a little bit of a timing issue given the Q1 miss and so forth that impacted our year-to-date margins. And we expect, as we had predicted at the beginning of the year, to have about a 50 basis point improvement in overall margins.

Over the second half of the year, we think we'll benefit from our continued improvement and success in the marketplace, winning additional important new license revenue and continue to sell into our installed base, plus expect to continue to see some productivity improvements, both from our overall R&D team, our sales and marketing team and some modest, modest improvement from the services team. So in those ways, we expect to see modest improvement to ballpark 50 basis point improvement in overall margin for the year.

Great. Thank you.

Thanks, Adam.

Your next question is from the Philip Alling with Bear Stearns. Please go ahead with your question.

Thanks very much. Pete, just could you give us a bit more color with respect to how Evant has been performing and maybe you could give us some more details really about sort of what the Evant contribution was to revenues in the quarter and is it really meeting your expectations? And should we be moderating our growth outlook for the overall company based on Evant's performance?

Sure, I'd be happy to. We are extraordinarily excited about the potential for Evant, be it landscape changing, addition to the Manhattan Associates' portfolio. I believe we are tracking a lot of activity for the second half of the year and 2007. But we will acknowledge the new deals that have closed so far have not -- in the first half of '06 have not been quite as much as we had anticipated.

But having said that, we are very excited about the opportunity to link planning with execution, to provide sophisticated science and math, to optimize supply chain activities across the entire supply chain management spectrum, and believe we are the only company that has advanced solutions in the planning and execution space and that the marketplace is excited about that potential.

Having said that, we believe that the contribution from Evant on a year-to-date basis for overall license revenue growth is something around 4 percentage points. As mentioned to you a couple of quarters ago, we no longer have very accurate financial statements for Evant broken out. But from a license perspective, of the 14 percentage points of year-to-date license revenue growth, about 4 percentage points of that is from Evant and the remaining 10 is from our organic business.

I will point out though that that one other thing that has hampered our growth a little bit is the maturation of the RFID middleware space. While we are still quite active in RFID deals and are pleased with the progress we're making and the price points in that space and the number of deals are shipping a bit. So from an apples-to-apples comparison, the 4 percentage points contribution for license revenue growth for the first half of the year from Evant, basically offset a similar kind of reduction in license revenue from RFID.

So the net of it is our core applications, core organic growth was about that same 14 percentage point growth. But we do believe that the planning applications are very important to our long-term strategy, and we expect to pick up considerable market share -- not necessarily next quarter, not necessarily in 2006, but this is a long-term investment that we are very excited about.

All right, Pete. I appreciate all that. Perhaps you could just -- I wasn't sure that I understood the math with respect to the impact of what's was going on in the RFID middleware space, with respect to how you derive the core organic growth for the company. So is that something we should discuss offline or is that something that you could help us a little bit because I wasn't exactly sure how that basically organic growth?

I apologize, I probably wasn't as clear as I should be. If you pulled out the 14% year-to-date license revenue growth from Manhattan Associates, the contribution from Evant and the activity in both years from RFID, the underlying growth rate is 14%. So basically the incremental contribution in 2006 of 4 percentage points for the first half of 2006 from Evant was offset by a decline in the first six months of 2006 versus the first six months 2005 from RFID license revenue.

Okay. Thanks for the clarification Matt.

Sure.

With respect to acquisitions, you have made some comments about them on the call today. Is your appetite any different in terms of supplementing your organic growth with - by acquisitions and should investors view a use of cash primarily as share repurchase or do you think that there are ways in which you could supplement your growth meaningfully via M&A deal?

Sure. I’d be happy to. We'd be quite interested in trying to expand and extend our growth through smart, strategic acquisitions. We continue to be active and aggressive looking for those good fit strategic acquisitions into our supply chain management portfolio. As I said, we'd love to do that. At the same time we do believe we have substantially -- a substantial balance sheet. 100 plus million of cash generated more then $20 million cash flow from off this quarter.

So a strong balance sheet and strong cash position. I certainly believe that if we found an attractive acquisition target, we would have available borrowing capacity to be able to fund most deals that we wish to fund if our cash position wasn't large enough to be able to fund that. So we'd certainly, would like to find complementary acquisitions along the lines of an Evant or something in that nature to grow the company more quickly. At the same time though we think we have the capacity to do that and repurchase shares.

Excellent. And just a final question from me is any change in view, given your performance this quarter with respect to growth drivers that you may see internationally? I know that you had made some comments previously about perhaps scaling back some investments outside of the US. So how should we be thinking about sort of the growth opportunity outside the US for Manhattan?

I think both consistent with the comments we made in the past and what you just summarized, we think there are good opportunities for us overseas. I am quite pleased with the job that Jeff Baum and Steve Smith are doing for us running Asia/Pacific and EMEA respectively. Very capable guys looking at ways that we can leverage the core Manhattan Associates, our business capability to penetrate international markets.

And the opportunity for us over the next couple of years should be quite meaningful. Today, we are focusing a lot of our strategic energy in building out our broad suite solutions on a common technology business process platform. That suite of solutions essentially is only available in the United States with some component parts available in the UK and Australia.

We believe as we continue to build out that suite of solutions, make it ready for export to non English-speaking markets, and the teams under Baum and Smith continue to build and improve their performance, we will be well-positioned to drive future international revenue to the target that we've talked about in the past, and that is about 33% of overall revenue.

So we see some good opportunities to do that, but we are very focused on making sure that our international operations continue to contribute to our overall earnings trajectory.

Pete, that's all I have for now. Thanks very much.

Thanks Philip.

Your next question is from Brad Whitt with RBC Capital Markets. Please go ahead, sir.

Yes. Hi, this is [Brian Schwartz] for Brad Whitt. Pete, did you close all the large deal that got pushed out in Q1?

We probably don't get into much specificity like that, but no, we did not. You never close all the deals that you wish to. Some are still percolating, and we are still quite active. We lost none of the large deals we thought we would get in Q1. We closed some in Q2 and some are still percolating.

Great. Can you update us on your sales hire plans for the second half of '06? Are you looking to put more heads on the ground in EMEA?

Sure. I’d be happy to. During the second quarter we did one additional sales person to the EMEA sales team, and we're looking to do the same in the third quarter. In fact, that person is already committed to join us in the third quarter and is working hard at his leave from his previous company.

On the rest of the world, we will look to add probably in the neighborhood of four or five additional salespeople over the balance of 2006. And we believe the pipeline justifies us expanding that team and getting them trained to make a material contribution to our 2007 results.

And Pete, I was just wondering from the macro aspect if you can comment a little bit on the pricing environment, if you're seeing any changes there but it's still competitive there?

Sure, sure. I'd be happy to. I wouldn't think there was any substantial change in Q2 versus Q1, it still quite competitive, the usual competitive energy from the different players in the market space. If it's an important strategic transaction, a transformation of a company's supply chain pricing is not as important -- important, but isn't as important if the transaction -- the deal tends to be a tactical, single solution, a short timeframe transaction that would tend to be more price sensitive. And that has been the case over the past couple of quarters. We would expect that to continue.

And just in regard to one of your comments earlier in the areas of improvement, one being your ILS sales. Is that more an execution issue on the sales side or do you see it that the industry is just looking more for point solutions as opposed to packaged solutions?

My comment was really pointed at our integrated planning solutions, not the logistic solutions, but the planning solutions and those are the products that we acquired with the Evant acquisition.

And I think it's less of an execution issue and more of a transition issue. When Manhattan Associates acquired Evant we began building integration points within the company, end marketing programs and awareness within the company. And now, we need to translate that into greater external market awareness and penetration into both our installed base and to new customers.

We think the marketplace for planning, forecasting, and replenishment is right for a suite of solutions like Manhattan Associates’ and believe with strong backing from all parts of Manhattan Associates, our IPS products, integrated planning solutions will do well for us over the next foreseeable future. So it's more of an execution focus issue from Manhattan in total and not a sales execution issue.

Great. That's very helpful. Thank you for taking my questions Pete.

Thanks Brian.

The next question is from Robert Schwartz with Jefferies. Please go ahead sir.

Thanks very much. You have had great productivity improvement in license sales. Yet without you depending in the first half of this year on a typical flow of large deals or increasing sales heads it looks like since the end of December sales heads are flattish or maybe even down one.

You often, it seems to me in the past quarters you've done three to four large deals over a million in a quarter and you done four in the first half. Is it more volume of deals? Help us understand how we have seen this huge -- this improvement year-over-year in the first half on licenses?

Sure. I’d be happy to Robert. That is a great question. We've had nice improvement from the sales teams and sales productivity. And the number of deals we are transacting has increased.

And as Dennis mentioned in his comments the average deal size has increased as well. We are getting involved in more strategic transactions, and those lead to larger deals not just in Tier 1, but in Tier 2 where the value of the solution being presented is quite important to the customer. And therefore they're willing to perhaps pay a little bit more for the value of dealing with Manhattan Associates than perhaps other point solutions.

So I think for that reason, we are having greater velocity within the deals -- within the sales force and greater average deal price. It is still quite competitors, but better average deal price.

In fact we've got our sales team here in Atlanta today and for another day or so getting updated on our solutions, the progress we are making in the marketplace, and getting some training on how to sell those solutions and getting them fired up for the second half of the year.

In fact I think part of their agenda has been listening to this earnings call. And if you guys are listening, congratulations on a great second quarter. What are you going to do for us in the third quarter? So we've got a good sales team. I think we're doing some good stuff and expect continued improvement in their performance and productivity.

Congratulations. You've talked about these integrated solutions and I wonder -- and I haven't heard much mention of ILS in the quarter and in particular deals that involved both transportation and warehouse management, let’s say, or distributed order management and warehouse management. Can you give us some insight on how those have done and that strategy has performed in Q2?

Yes. It's performed well. I think we have mentioned we generally – so there was a number of multi-product sales in the quarter as there always are. For the most part though for the larger deals -- integrated logistics solution deals, ILS deals, we generally work hard to sell the direction of what we can provide for the customers, but they will generally buy and implement one or two solutions first, but with the confidence that investing with Manhattan Associates as a strategic business partner will lead to additional expanded relationships with us and additional value for them over the long run.

So for instance for the three large deals we did this quarter, each had some component of multiple products included in it, but we also believe that it's the starting point for expanding that relationship over the long term. So that strategy of a broad suite of execution solutions continues to work well in the marketplace, and now with the IPF solutions to complement on the planning side, we believe the value proposition and that explanation of why we should be the strategic partner has improved materially.

And then my last question really has to do with some granularity on linearity in the quarter. Many companies in software have blamed a weaker end of the quarter. Your confidence in Q3 sort of belies that, or I’m sorry suggests that is not true for you, but I'm curious to hear that. And also I'm curious if there was -- you are seeing something interesting or different by vertical. Maybe more strength in X segments of retail or 3PL, something like that?

Sure. I would be happy to. We, like you, did notice that the early part of July, a number of software companies did report pre-release disappointing second quarter license revenue results. We certainly did notice that, and it's caused us to review where we stand. And having looked at that we still feel good about our Q3 and the second half of the year. We've not seen some of those softening factors in our business so far. But we're quite alert to see if we spot any of those -- some of those factors.

As we said earlier in the comments, the strong verticals for us once again were consumer goods and retail, retail being both the grocery retail and the more traditional retail business base. More than half of our license revenues in the quarter came out of those verticals. Those verticals seem to be pretty healthy and our penetration in them is strong. So we expect that to continue over the balance of the year.

Thank you very much.

Thanks Robert.

[Operator Instructions]

The next question is from Yun Kim with A.G. Edwards.

Thanks and congrats on the quarter again. First quickly were there any 10% customer in the quarter?

No, there was not.

Okay. And just trying to get a better sense Pete on your confidence around the Q3 visibility that you commented. Are you expecting the typical three seven figure deals in Q3 or do you think you will shift towards more or less than three? And do you see a potential for a 10% deal in the Q3?

We really don't forecast that. We certainly do expect in Q3 that we will have some million plus deals. We're pretty confident on that. But beyond that, we wouldn't forecast anything specific there. But we do see good large million plus deal flow in Q3 and Q4.

We don't expect that there would be any real unusual trends in Q3 from license revenue. We think we have got good momentum, good visibility. And Jeff Mitchell and his team are pretty fired up about what we can over the second half of the year and so we're focused on executing on that.

Okay. And also you mentioned that the ASP went up quite a bit this quarter. Is there any way to quantify that? And also it sounds like this trend is likely to continue going forward, I just want to get some clarity around that. Thanks.

Sure. Our average selling price -- we do not disclose the particulars of that but I'll give you some directional comment. We have said in the past that our average selling price is somewhere between 0.25 million and 0.75 million. And I know that is not all that helpful, but that is what we have said in the past. And this quarter, we saw our average selling price remain in that range, but move up in the range by more than a tiny bit. So we would expect that to continue going forward. And as Dennis had mentioned that was both including -- or it was still accurate excluding the large deals.

Okay. And then, one final question on the balance sheet. Deferred revenue balance remained flat sequentially. Is this strictly driven by seasonality regardless of the bookings in the quarter, Dennis?

Yes. That's correct.

Okay.

That's largely maintenance revenues, so yes that is correct.

Okay. Great. Thank you very much.

Operator, we have time for one more question.

Yes, sir. Your final question is from Mike Huang with ThinkEquity. Please go ahead, sir.

Hey, guys.

Hello, Michael, how are you?

Doing well. A few questions for you guys. I'm assuming that you guys had some selling the standalone labor or transportation modules. I was wondering if you could talk about going forward whether you're likely to have more success selling either labor or transportation standalone?

Sure. I would be happy to answer that. Yes, we do have good success selling labor and transportation standalone. We don't break that out by quarter, particularly, but we have had good success in the past. We had good success in that in the second quarter. And we would expect to continue to have good success doing that in the future.

We certainly like to think though that that we can marry those applications with other applications in our portfolio of solutions to deliver broader value. But we have led in a couple of cases with labor, and are optimistic that we can follow that up with subsequent sales of other products and likewise our transportation planning and execution and Transportation Procurement products have been sold standalone, but have led to additional business for us.

So we certainly have had good success in leveraging our installed base of warehouse management customers and expect to continue to build that same kind of follow-on product success with labor, transportation, planning, forecasting, replenishments, distributed order management and so on.

Great. And can you talk about whether or not there are any early customers who are working on driving deep integration between planning and some of the supply chain execution side of the business? And if so, I mean, when do you expect that some of these customers could be referenceable to help drive sales activity?

Yes. That is a great question. When we acquired Evant, we went and met with couple of their larger customers who were also existing customers of Manhattan Associates. We were pleased that they were satisfied with what Evant had been able to deliver for them and subsequent to that we've worked with a number of those large organizations to continue to refine and improve the benefit of transportation, warehouse management, replenishment and planning.

I think we're making good progress on that front in a number of key accounts and look forward to in the not too distant future getting that on the platform speaking for us. I won't share their names on this call because I don't have authority to do so, but one of those customers did speak at our momentum conference. And I thought spoke very eloquently about the power of integrating Manhattan Associates' replenishment solution with its Warehouse Management Solution and its Transportation Management Solution.

So one very large customer using all three products gave us a rousing review I thought at our momentum conference, which is our customer conference back in May. A number of you on the call were at that conference and hopefully, recall that presentation.

And last question that I have for you is, So in terms of the dynamics behind the delayed deals in Q1, did they go away in Q2, and do you believe the macro environment actually is healthier now than it was 90 days ago?

Yes. No the deals that were delayed in the Q1, a number of them did close in Q2. So we were quite pleased about that. As I mentioned earlier, are not all closed in Q2, but we were pleased to report that we lost none of the deals that we had expected in Q1 to close. A number did close in Q2, and a couple are still in the works and we're optimistic they'll close shortly.

In terms of the macro environment, two schools of thought there. We certainly look out on the horizon and see how competitors are doing, and competitors are struggling. So I'm not sure if it's because the macro environment is getting tougher, it appears it is to some degree or because the value proposition they are offering isn't resonating in the market space.

But from our window for the pipeline and the activity that we see, we continue to think the environment for Supply Chain Management Solutions continue to be about the same as it has been for the last couple of quarters. And we are expecting that for our guidance for the next two quarters as well.

Great. Thanks very much.

Thank you Mike. Thank you everyone for joining us. We look forward to giving you an update on our progress in about 90 days. Thanks very much. Good afternoon.

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