Manhattan Associates Inc (MANH) 2006 Q3 法說會逐字稿

Good afternoon. My name is Dennis, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates third quarter 2006 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions].

As a reminder, ladies and gentlemen, this call is being recorded today, October 24th, 2006.

I would now like to introduce Mr. Dennis Story, Chief Financial Officer of Manhattan Associates. Mr. Story, you may begin your conference.

Thanks, Dennis, and good afternoon, everyone. Welcome to Manhattan Associates 2006 third quarter earnings call. Before we launch into the results discussion, I will review our cautionary language, and then turn the call over to Pete Sinisgalli, our CEO.

During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or 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 annual report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 15, 2006 and other SEC filings.

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 changed assumptions, the occurrence of anticipated events or changes in future operating results.

Now I'll turn the call over to Pete.

Thanks and welcome to our third quarter earnings call. I'll start the call by taking you through some of the highlights from the quarter. Dennis will then get into the details of our financial results. I'll follow with additional details about our business and provide a view of our fourth quarter of 2006, and then we'll move to questions.

I'm pleased to report that we had a solid third quarter. License revenue was $15.2 million or 21% better than last year's third quarter. Total revenue was $72.3 million, an increase of 16% over Q3 of last year. For the quarter, we achieved adjusted EPS of $0.27, which is better than the prior year's third quarter by 29%.

We signed some very important new clients across our solutions sweep during the quarter, including three deals with license revenue of 1 million or more. We're pleased with our third quarter results and our results on a year-to-date basis. Given our strong results so far this year and a solid outlook for Q4, we're revising upward our guidance for full year EPS.

I will go into that in more detail following Dennis' remarks. Dennis?

Thanks, Pete. As Pete mentioned, we posted a very solid quarter delivering record Q3 results in revenues and EPS. The key highlights for the quarter include; one, record Q3 license revenue of $15.2 million, achieving 21% growth year-over-year and year-to-date growth of 16%. Two, record services revenue of $51 million or 17% growth year-over-year and year-to-date growth of 18%.

Three, record Q3 adjusted earnings per share of $0.27 representing 29% growth in the quarter and year-to-date growth of 21%. Four, adjusted operating profit grew 25% over the prior year quarter delivering strong operating margins of 16%. And finally, strong cash flow from operations of $9.9 million representing 16% growth year-over-year and year-to-date growth of 43%.

Our solid momentum continued from Q2 as we delivered record Q3 consolidated revenue in the quarter totaling $72.3 million or 16% growth over the prior year quarter on strong license and services revenue growth. Year-to-date, we have generated 18% topline growth totaling $213 million.

License revenue in the quarter totaled $15.2 million, increasing 21% over the prior year. We closed three software license deals in excess of $1 million in the quarter. Deal volume for the quarter was solid with a 60/40 split of new to existing customers with higher overall average deal sizes compared to the prior year quarter. Also our mix of Warehouse Management versus non-Warehouse Management product sales in the quarter was 60/40, showing good demand across our supply chain suite of products.

License revenue growth in the quarter was led by the Americas, which delivered $14 million or 46% growth over the prior year quarter, accounting for 92% of total license revenues. Our international license revenues declined about 58% over the prior year quarter. A number of factors impacted revenue growth in our international units, including traditional seasonality in both EMEA and APAC regions and large IT project spending in the EMEA economy continues to be sluggish.

In total, Q3 2006 was our third highest license revenue quarter on record paced by our continued momentum in the Americas. Furthermore, year-to-date license revenues totaled $47.5 million, an increase of 16% representing about 2.5 times market growth estimates, driven by strong demand for our products and solid sales execution.

Service revenue. Our Professional Services team continued its strong momentum delivering record consolidated services revenue of $51 million for the quarter. This represents an increase of 17% over prior year third quarter. The Americas continues to deliver strong results with services revenue of $41.3 million, growing 21% over the prior year quarter.

International services revenues of $9.7 million grew 3% over Q3 2005 led by 35% growth in Asia Pacific. EMEA services revenues were down 14% due to continued softness in large license deals. For the fourth quarter, we do expect our services revenue to trend down sequentially from Q3 approximately 2 to 5% due to seasonality driven by the Q4 holiday period.

On to operating income. Consolidated GAAP operating income in the quarter was $8.4 million, which includes $3.2 million of expense associated with acquisition costs, stock based compensation expense under FAS 123(R), sales tax recoveries, and an asset impairment charge of $270,000 taken this quarter against a $2 million investment in a technology company.

Today's press release and our 8-K earnings release filed with the Securities and Exchange Commission provide a full reconciliation of third quarter and year-to-date GAAP results with non-GAAP results and should be read in addition to this call. 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 costs, the recapture of previously recognized sales tax expense, stock based compensation expense under FAS 123(R) and restructuring and asset impairment charges, all net of income taxes when referring to net earnings.

Our treatment of these non-GAAP adjustments is consistent with past earnings reports. Unless otherwise noted, the balance of my comments will focus mainly on adjusted operating income and adjusted earnings per share performance.

On a non-GAAP basis adjusted operating income for the quarter increased 25% to $11.6 million based on the Americas strong revenue performance. In total, adjusted operating margin improved 110 basis points to 16% compared to 14.9% in Q3 2005. Americas revenues increased 24% over the prior year with license revenues increasing 46% driving 20% operating margins. This represented a 360 basis point margin improvement over Q3 2005.

EMEA was weaker with revenues down 24% driving an operating loss in the quarter based on market factors I discussed earlier. And in APAC, revenues were up 8% in the quarter driven by strong services revenue growth, which was partially offset by lower license revenues, while delivering margins of 3% in the quarter.

Services gross margin continued to be strong totaling 53.6% in the quarter, our strongest quarter this year. Compared to Q3 2005, services margins were down 70 basis points, principally driven by product mix resulting from our growth in non-WM product implementations.

As we continue to grow our install base, we've increased our investment professional services personnel with 189 net new hires year-over-year, up 28%. Overall, we continue to be pleased with our services margin performance as well as services demand outlook for the remainder of the year and our targeting services margins in the low to mid-50.

Operating expenses in Q3 defined as including sales and marketing, R&D and G&A were 33.3 million, an increase of $3.3 million over the prior-year quarter, primarily due to the Evant acquisition and growth in our India operations. That covers our operating results.

Our effective income tax rate in the third quarter on a non-GAAP basis was 38.5%, consistent with prior quarters. Our GAAP effective tax rate for the quarter was 42.2%, and a higher effective rate is driven by the adoption of FAS 123(R).

GAAP net income for the quarter increased to 5.2 million or $0.19 per fully diluted share, a 12% increase in fully diluted earnings per share. On a non-GAAP basis, adjusted net income was $7.5 million or $0.27 per share, a 29% increase in adjusted earnings per share over Q3 2005.

Year-to-date adjusted earnings per share of $0.78 has increased 21% over the prior year. Average diluted shares outstanding for Q3 2006 totaled 27.5 million shares. During the quarter, we repurchased 330,511 shares for $7.1 million at an average share price of $21.18. This leaves $42.9 million in remaining share repurchase authority.

Now onto cash flow. Cash flow from operations for the quarter increased 16% over Q3 2005 to $9.9 million. Year-to-date cash flow from operations have increased 43% totaling $41.3 million over the prior-year period. DSOs for the quarter were 67 days, down from 80 days in the prior-year quarter. And capital expenditures for the quarter totaled $2.7million.

At September 30, 2006, our cash and investments totaled $117.6 million compared to $113.2 million at June 30, 2006, and $93.7 million at December 31, 2005. Finally, deferred revenue, which consists mainly of maintenance revenue built in advance of performing the maintenance services, was $31.2 million at September 30, 2006, up from $27.5 million at December 31, 2005.

The increase is driven by maintenance on new license deals and maintenance renewals, reflecting strength of our growing install 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. As Dennis mentioned, we experienced good license sales growth in Q3 in the Americas, but both EMEA and APAC were somewhat disappointing. Our EMEA license revenue in Q3 was about $1 million, about half of the results in Q3 of '05. While we're disappointed in this result, we believe the tough economic environment in EMEA is restricting capital investments for most companies.

During the quarter, we added two experienced sales reps to our EMEA team to strengthen our position in this market. We believe we are well positioned competitively so as the economic situation improves, so will our results.

APAC license revenue was also down versus Q3 of the prior year. The numbers for APAC are relatively small and therefore, subject to large percentage swings based on actual deal flow in the quarter. We believe we continue to build a strong franchise in Asia Pacific and looking forward to a successful future in that market.

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. We signed three deals this quarter of $1 million or more in recognized license revenue. Two of the large deals were with new customers and one with an existing customer. Two were Warehouse Management transactions and one was a transportation management transaction.

The retail and consumer goods verticals were once again strong contributors to our license fees and combined for more than half of license revenue in the quarter. Our professional services organizations around the globe did an outstanding job this past quarter. Our services financial results were a new record for the quarter and as important, the teams did a very good job increasing customer satisfaction.

During the quarter, our services teams took more than 60 customer sites live on our solutions, about double the number from Q3 of '05. We now have over 1,900 employees around the globe. That's an increase of about 125 since the end of the second quarter. About half of the increase in staff is in our India organization, supporting our R&D and customer support teams.

About 25% are additions to billable services positions in our three regions. The remaining 25% is in all other areas of the company, but importantly, we are able to increase our sales team by six during the quarter, two in EMEA and four in the Americas. The six come to Manhattan Associates with substantial experience in supply chain execution or supply chain planning solutions. We now have 61 photo carrying direct sales reps around the world.

We view our substantial investment in research and development as a material competitive advantage. Today, we have a little over 700 people in R&D, which is more than a third of our total staff. With the majority of our R&D team in India, we're able to maintain our cost of R&D at less than 15% of revenue. I believe our substantial personnel investment in R&D at a competitive P&L cost is a significant differentiator from our competitors.

The big ERPs certainly have more people in R&D overall than we do, but I've not found any company that has committed a similar number of talented people to R&D for supply chain solutions. And at the end of the day, I believe this is a major reason our company will be successful over the long run.

Our third quarter results were in line with our plans and our outlook for the remainder of the year continues to be positive. Our sales pipeline and sales activity for Q4 look good. Please keep in mind as Dennis mentioned that services revenue in Q4 will likely be somewhat lower than Q3 because of the holidays in Q4 and the impact that has on the number of working days.

Plus the big holiday shopping season requires many of our customers to focus on meeting their sales goals during the quarter and take some focus away from supply chain initiatives. Normally, we experience a seasonal sequential decline in services revenue from Q3 to Q4 in the 2% to 4% range, and we expect a somewhat similar result this year. Also because of the lower revenue in the quarter, we expect a somewhat lower services margin in Q4 than Q3.

With our strong year-to-date results and a solid Q4 outlook, we are increasing our EPS guidance for the full year. Our current guidance calls for adjusted EPS of $1.01 to $1.05 a share. We're raising that to $1.02 to $1.10 per share. The new guidance range represents adjusted EPS growth of between 16% and 25% for the year. The revised annual guidance translates into Q4 adjusted EPS of between $0.24 and $0.30 per share.

Our Q4 2005 adjusted EPS was $0.24. So our guidance range represents growth of 0% to 33% for the quarter. To summarize, I believe our 3Q performance was good. There are certainly areas for continued improvement and we're focused on improving those areas. And there are serious competitive threats in the marketplace particularly from the two largest ERPs.

But we're confident that our strategy, be the global leader of supply chain solutions that optimize the supply chains of our customers is dependable and will create substantial shareholder value. We'll continue to differentiate our products by offering the deepest, most comprehensive suite of innovative supply chain solutions that deliver the best return on investment.

And we'll provide these solutions on our logistics event management business process platform for our low, total cost of ownership and a relatively easy integration into ERPs. Importantly, our professional services organizations will continue to distinguish us from all of our competitors.

I believe the combination of great products on proven market-leading technologies delivered by the world's leading experts will win Manhattan Associates a substantial piece of the attractive supply chain marketplace. Thank you.

Operator, we'll now take questions.

[Operator Instructions]

Your first question is from the line of Philip Alling with Bear Stearns.

Thanks very much. Just with respect to the service revenue, you know, you had some upside in the quarter there. Could you give us a sense of, you know, was there any change in the split between implementation services and your maintenance revenue there? Perhaps you could give us a bit more color on the maintenance revenue outlook going forward?

Sure, Philip. We'd be happy to. The balance between the services revenue, professional services and maintenance in the quarter was similar to previous quarters. We don't break out these -- those two component parts separately, but the balance of the two in Q3 was similar, comparable to prior quarters

No change there, okay. Just on the -- what is the outlook at this point with respect to international sales as a percent of total. It seems as if that's been a moving target zone. What is your view at this point going forward about the contribution that you would expect to get some international sales and you know, what are you doing to sort of, you know, get to that level?

Sure, Philip. I would be happy to address that. We continue to believe that over the next several years that international can contribute about a third of our total revenue. We're doing a number of things to try to improve our ability to get there more quickly. As I mentioned in our prepared remarks, somewhat disappointed in the performance of our international operations and in Q3 but you have to remember Q1 were pretty strong for both EMEA and Asia PAC.

So overall, we continue to be confident in those units' long-term contribution to our success. In the near term, we added two very capable salespeople to the EMEA sales team to help us capture additional market share in that space. While that market continues to be embroiled in a bit of an economic challenge, we believe we continue to improve positions so that once the economy improves in that market, we'll be well positioned.

In Asia Pacific, we're in two markets, relatively new to Manhattan Associates and China and Japan. We believe those markets will be attractive, long-term supply chain management markets for us, but we'll continue to take some time from Manhattan to establish itself for the long run. In Japan, China , France, and Central Europe, those markets generally require American solution vendors to have an existing presence for an extended period of time before those markets get too excited about purchasing solutions from those companies.

Now, we believe we've been in each of those markets for a reasonable period of time, making good, strong customer successes, reference to all customers and believe over the next several years, that investments will begin to payoff. In our international markets for the most part, we offer just a subset of our overall supply chain management solutions. In most markets, we offer Warehouse Management solutions and trading partner management solutions, but not much beyond that in most markets.

In the United Kingdom and Australia, we do offer most of our broad portfolio of solutions, but in the non-English speaking markets, it's a small subset of our overall footprint. We expect that will continue to build as our products become more and more mature. We'll export more products to other markets and expect that overtime, that exportation will help grow our overall revenue contribution from international markets.

So well, in summary, we're somewhat disappointed in the quarter's results. We continue to be confident in the opportunities for us overseas and we'd look for the next three plus years for international to contribute approaching a third of total revenue.

Right. In terms of the update on the guidance that you have given, to what extent does that factor in closure of large deals and maybe you could maybe just give a little more color on sort of the large-deal pipeline?

Sure. I would be happy to. For the most part over the past -- about two years, we closed somewhere between two and four million plus deals in each quarter. We'd expect something similar to that for Q4. So far, the deal activity in Q4 looks good. The pipeline looks good. The sales team's quite busy and energized about the prospects forQ4 but also 2007 and beyond.

We believe, given our second quarter and third quarter results, we're building a good, strong momentum in the market . Believe our message about strategic supply chain solutions vendor with a broad footprint and an attractive business process platform is resonating well. And because of that, we believe our sales opportunities continue to grow.

And just -- and the final question from me, just with respect to the Evant acquisition that was a year ago now, if you could just sort of give us a recap of how you feel how that has gone and what the revenue contribution was in particular from Evant in the quarter? I believe you did have about one month's worth in the current quarter.

Yes. In 2005, we closed the Evant transaction on September 1st, 2005. So we had one month of Evant revenue in prior year.

Right.

But that was primarily -- that was virtually all of its license revenue in prior year for the quarter, which is pretty typical for some software companies. So it's not quite an apples-to-apples comparison, but it's getting closer to that.

We believe we're making solid progress in our planning suite of solutions. While we were somewhat behind where we had hoped to be in the first part of 2006, we believe we're improving and we're building momentum. The sales team is quite focused on taking market share. In fact, two of the four sales reps that we added in the Americas in Q3 were for planning solutions and come to us from competitive planning organizations where they've had very strong previous track records.

We believe our presence in that space is going to be a huge, positive benefit for us over the next several years, and believe we're building momentum. We're not where we'd like to be yet, but we believe we're headed on the right path and are confident with the team we have in place that good things are to come.

Thanks, Pete.

Thanks, Philip.

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

Thanks, guys, and congratulations on the license growth. Peter, a question in terms of what there's always this negativism around core WMS growth. Can you give us an update on what you're seeing into the health of that core WMS market?

Yes, Terry. I'd be happy to. It's hard for us to know what the core WMS market is, what rate it's growing at. We get the same reports that I think you and others see of somewhere around 5% growth. Our growth in that space, as Dennis said is, 2.5, 3, 3.5 times that rate. So our core -- our WMS business is growing much more quickly than that.

We believe we are certainly taking market share, but we're quite excited about the WMS space. We believe that many current marketplace WMS solutions are older legacy solutions. And as the technology has changed, as the functionality has improved, a meaningful portion of the marketplace will be looking over the next couple of years to upgrade, to transform their Warehouse Management Solutions and will be looking to companies like Manhattan Associates to help in that process.

So we do believe there is a meaningful replacement cycle for WMS. We're currently in it and believe it will continue for several years and believe we're well positioned in that space. So we're quite excited about the opportunity for ourselves in that market. I don't have all the great statistics to tell you about the overall market, except the generally available ones from Gartner and AMR and the other firms which would suggest about 5%, but we're growing substantially quicker than that.

Okay. And then in terms of -- you mentioned every quarter you close $2 million to $4 million plus deals. Can you give us any more color whether in the third quarter and the outlook, there's any like out wire type deals, meaning $5 million or above in transaction value, they played out in the guidance or played out in the third quarter?

Yes. Terry, I wouldn't comment on the size of the deals. We thought we have just commented on the million dollar plus deals in the quarter, and I'm going to stick with that that kind of comment. And I did say that historically, we generally get two to four deals per quarter, but is all too painfully I recall.

In Q1 of this year, we did not get the normal two to four and therefore, we had trouble in Q1. So we certainly are expecting Q4 we'll get two plus, two or more million dollar deals and are tracking to do that, but we won't have any specific comments on the size of those deals beyond being million dollar or more.

Okay. And my last question, Pete, I don't know if you had mentioned this or if this was from Dennis. But the idea of year-over-year, the deal size seems to have been larger. Can you -- can one of you guys give us a little bit more commentary? Is it just the size of the warehouse as they are larger for WMS deals or the number of seats or there are some add-on modules that are being added and or is it some success with the ILS?

Yes. Terry, it's a combination of all of those. I think our market position is allowing us to attract larger opportunities, multi product opportunities and I would say by in large, we've been pretty fortunate over the past couple of years while in general, the value of software transactions, the dollar amount of selling price is declined for most vendors in the space.

We probably had a better track record of protecting value than many other companies in the industry. So it's a combination of being able to communicate the value of our solutions, being add additional components, modules to the sales just think more momentum is helping us overall.

Okay. Thanks, guys.

Thanks, Terry.

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

Good afternoon. I echo the congratulations on the license number. And I guess my first question is along the lines of the performance in the United States. You know, obviously, 46% growth there is substantially are as you noted in the aggregate marketplace, but also faster than you have seen in the last several quarters.

Presumably, you know, the large deals were in the United States. I was hoping maybe you could drill down a little bit on, you know, the drivers for the acceleration there. And secondly, as we think about the seasonality in your business, historically, the September quarter's been a little bit of a slower quarter. It doesn't appear to really have been the case this year. What we assume from that as we look into the fourth quarter to try and figure out where our license numbers should shake out?

Sure, Adam. Thanks for the compliment. The Americas had a very strong Q3. I believe that's for a number of reasons. We've been very focused in our investment strategy on our broad solutions on a common business process platform and really targeting that toward opportunities in the Americas.

As I mentioned earlier in my comments, we're not offering many of those component parts outside of the US at this time and really focusing our energy and effort that's optimizing those solutions in the US marketplace. Our Americas team led by Jeff Mitchell has done an outstanding job for us over the past couple of quarter and believe we're building a very strong organization.

And they do believe that complement of integrated logistic solutions on the execution side and integrated planning solutions on the planning side. The niche optimization across those applications is really resonating in the US market and it's allowing us to attract a lot of good activity. All three of the million plus deals in Q3 were in the US and the vast majority of the past couple of quarters have been in the US.

So we believe, frankly, it's been a focused investment strategy on our part to build to out our sales organization in the states as well as our product and technology road are really to focus on broadly on that market is.

As you probably know by most estimates, the US market is somewhere between 55% and 65% of the global supply chain market. So it make sense for us to continue to build out our suite, focus on that market first and then look forward to exporting that as the applications and integration matures.

Regarding seasonality, we had a solid third quarter in line with our expectations. Over the past couple of years, I think we've figured out the seasonality of our business a little bit better than maybe perhaps we had in the past. So I do think that as we had forecasted in January, seasonality throughout the year in 2006, should be similar to what it was in 2005 and 2004 and it's more or less tracking that way.

Again, there little bit of a license fee challenge in the Americas in Q1 that threw us off a little bit, but we pick that back-up in Q2. And believe on a year-to-date basis, we're well tracking about where we could be. So more or less, we would expect the seasonal attributes of Q4 past to be present in this Q4.

And if I could, just one housecleaning item. It looked like deferred revenue might have been down a little bit sequentially. I was wondering maybe you could build down on that and you know if we ex out apart from last year in the contribution damage. Is that in your normal seasonality or are there other factors to play with that progression?

Adam, it's normal seasonality and as you probably are aware, we, you know, we have differing anniversary dates in terms of maintenance renewals, so with standard January 1 profile. So, plus, you have the timing of the deferred revenue recognition that flows through the accounts, so nothing unusual there.

And there's no license revenue in that deferred balance?

No. No, no.

Terrific. Thank you.

Thanks, Adam.

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

Yes. I was wondering if we could talk about the four large deals. I think Dennis, said that there was a 60 -- largest was 60/40 split between new customers and old. I'm wondering if any of the large ones were to new customers.

Yes. Two of the three large deals were to new customers.

And could you maybe look at those sort of new deals and I'm curious, you've talked about the competitive landscape as well as how ILS and the platform played into the sale. Did you sell modules that were capital ILS or did you just notion that the ILS was available to people help close sales of traditional WMS? I'm trying to get a --

Sure, it's a great question, Robert. We continue to believe for the most part, customers will buy an application or an application or two at a time, but with a long-term view of the strategy of the vendor. So we believe our broad suite of solutions, integrated planning and execution on the common business platform are not being purchased in its entirety upfront is it important factor in company's decision making.

So when the two large deals to new customers, we do believe our broad footprint, our technology direction, our investment in R&D and our commitment to that investment, were important factors in winning that new business. In the case of the existing customer they expanded their relationship with Manhattan with large purchase of a new application for them based on our long-term technology and business process platform direction.

So I do believe in important transformational deals, companies that are trying to lead or partially lead their industry through excellence and in supply chain management that our broad, strategic direction both from a product roadmap and a technology roadmap perspective, do make a difference in our win rate and in our ability to command value for our applications.

But I think it the two new deals essentially, what I'm hearing is that they surveyed the product set, but really bought one or two core products?

Correct.

Okay. Great. If we look at the mix of products, it looked pretty healthy on both sides of WMS and non-WMS. And I'm wondering if we're going to -- if you're seeing in the pipe line a trend toward more transportation deals, driven by the energy price movements we've seen this year. And if we can expect the mix shift and what those effects might be on service revenue going forward?

Yes. That's a good question, Robert. We certainly have seen the activity in transportation pick up. But commenting back on a question Terry asked earlier, we're also seeing good activity in our core WMS space. So I think both of those two key markets for Manhattan are [inaudible] and we're optimistic about growth in both of those markets.

Core WMS, replacement cycles and our global market leadership position in that space is helping us and in transportation space, we've had a number of important wins over the last year or two. The obvious needs in that space to reduce cost or manage costs effectively given fuel prices, driver shortages and asset utilization is driving demand for transportation solutions.

But my estimate at the moment is, because of the strong demand in both of those areas, more or less are 50/50-ish balance should prevail for the next quarter or two.

Great. And the competitive landscape part of the question, who are you seeing in these large deals?

Yes, you know, we generally see a couple of different suspects in larger deals, if it's a Warehouse Management deal, we might see Red prairie in the deal. If it's a transportation deal, we might see G-Log, a unit of Oracle in the deal. Usually the same group of folks, SAP and Oracle and the background generally on many deals, but on the best-of-breed front, it's usually Red Prairie, WMS, JDA, on a replenishment or forecasting deal.

G-Log perhaps on transportation deal and then of course international is a whole new set of competitors based on that national domestic market. But the market for supply chain management solutions continues to consolidate. I think we'll see fewer and fewer competitors, I believe, strong companies and which I put Manhattan associates in that category will continue to gain strength and others will struggle as much as they have recently and more or so going forward.

I guess the way I should have phrased it, have you seen any change in the competitive landscape? I'm wondering if you have seen drop-off in competitors, particularly with EXE having being picked up and trying for effectively to the SSA acquisition?

Yes. I would suggest that a couple of companies that have been more visible over the past year, year and a half that have been consolidated into other organizations are less visible in the market space and just my own personal style, I'm not going to beat up on some of those companies. But I do think we see less of them and I would expect we'll see less of them going forward.

Okay. Congratulations to the team and particularly to Jeff for great execution in the Americas.

Thanks, Robert.

Your next question comes from the line of Mark Verbeck with Cantor Fitzgerald.

Thank you. Congratulations on the results. Peter, can you tell me what you're seeing with both your Microsoft product and the industry builder initiative. We're a ways into it. I'm curious to get some more information in terms of what kind of traction you're getting?

Sure, Mark. Thanks for the compliment. We continue to gain traction with Microsoft industry builder and the Exacta partnership. We're very early in that relationship. Although we've been at it for 9 or 12 months, , but we also at the same time are very conscious of the amount we invest in that channel and the opportunity costs. We do believe it's an attractive channel for us on both a US and global basis to try to reach smaller companies that we couldn't efficiently reach with a direct sales force.

But at the same time, we're also very conscious that broad-channel relationships with smaller channel partners can be a drain on resources. So we're trying to make sure that we balance that investment and that channel with the long-term opportunities. We did close a half dozen or so additional costs this quarter through the industry builder initiatives.

So we continue to build some nice momentum, and we have closed a couple more partner deals with Microsoft outside of the industry builder initiative as well, particularly in some of the newer Eastern European markets. So we continue to be optimistic about that relationship. But we're not counting on that relationship to add a lot to our financial performance.

Okay. Earlier you talked about the fact that you have -- that there functionality in the US, any sense of timing of when you would make that functionality available in other geographies? Do you have kind of a roadmap at this point?

Yes, we do, Mark. That's a great question. Our team here does I think a very good job of assessing market demand by geography and the appropriateness of our solutions to meet that demand. We probably err a little bit on the cautious side. There's this two important requirements. One, the product needs to fit the need within that market and secondly, we need to have trained resources on the ground in market to successfully implement and support those applications.

So we try to factor both of those issues into our decisions on when to enter a market with different products. We're likely to continue to see some expansion in 2007 with transportation management into a couple of markets and we would like to see some additional expansion in probably our replenishment solutions, part of the planning suite into some additional markets in 2007.

But we're likely to be a little bit more conservative than companies in rolling out additional solutions in those international markets, because of the very strong opportunity we see in the Americas any opportunity to take share here.

Okay. That makes sense. One final question, can you give us an update on your science advisory panel, kind of what's the feedback been so far? And what might that do to your product direction or your development efforts? Thank you.

Sure, Mark. We had our first meeting of the science panel, about six weeks ago. We have five leading professors from top logistics institutes in the United States as well as a couple of leading experts within industry that are part of our science advisory panel.

As you would expect at the first meeting, it was more or less an update from Manhattan and each of the professors on ourselves and work they're doing, their focus on specific components of logistics optimization and how we can best work together.

Manhattan has a meaningful staff of scientists onboard. Each of which was assigned to one of the science advisory board members to work one-on-one, to work and understand how we can better leverage the work that they're doing in their organizations and embed some of that opportunity within our applications. So it's quite early in the relationship with the science advisory board. Pleased with the quality of people that we've got participating on the board.

Our scientists, internal scientists are excited about working with those very well known industry leaders and believe over the next several years we'll get some good value out of that group. One of the differentiators we're looking for long-term product strategy is due to our ability to integrate our applications across supply chain management on a business process platform.

We believe we have the opportunity to leverage science, sophisticated mathematical algorithms across the entire supply chain to deliver better optimization than individual applications can provide on their own. And we will be looking for the science advisory board to help us in how best to do that. Thanks, Mark.

Your next question comes from the line of Michael Huang with ThinkEquity.

Thanks. Hey, guys.

Hey, Michael.

A few questions for you. First, can you talk about the health of the retail IC study environment? And is this healthier than 12 months ago? And what are the assumptions for direction of trends for the next year?

Yes. At the moment, it feels lake the retail industry is about where it was a year ago. It continues to be meaningful spending with in the retail space and our outlook near term is consistent with our recent past. The fourth quarter shopping season I am sure will have some influence on their thinking. So far this year, our retail has been solid and the outlook for the moment continues to be so.

Great. And it seems that JDA and many just kind of had a tough time this past quarter. I was wondering whether or not your win rates and pipe line activity has reflected some of the challenges they may be facing and how could you expect this trend to look like over the next year or so?

Well this is their first quarter together, so I'm sure they're going through some integration challenges, growing pains and so forth. We do compete with Manugistics transportation space and on the planning side. And we do compete with JDA and planning replenishment forecasting side.

We do, obviously, believe our position in those markets are solid. And believe our position is strengthening. I think we have a very good competitive profile against each of those firms separately. And as I mentioned a couple days ago, we don't believe a combination of the two improves their ability to compete with our suite of solutions.

So certainly, they continue to struggle. That would be an opportunity for to us take additional market share. It's early in the game for them in their integration, and I'm sure they will sort those things out. While they're doing so, we both certainly are focused on trying to grab share and transportation and planning

Great. And last question for you. How much of your license idea could have influenced by system integrators? And who are your strongest partners now? And is it any different then what you've seen a year ago?

Yes. To our best estimate we continue to have something in between 25% and 33% of our license revenue influenced by third parties. The usual companies, specific smaller companies that have direct roles in supply chain management continue to be a plus. And then in the last quarter we had this a nice help from IBM on two defects made a noticeable difference. IBM continues to be an important for us and they are prominence seems to be escalating a little bit.

Great. Thank you very much.

Operator, we have time for one more question

Thank you. Today's final question will come from the line of Brad Whitt with RBC.

Yes. Hi.

This is Brian Schwartz sitting in for Brad Whitt. I was hoping to dig down again on the success that you've had in the Americas that's been two real strong quarters here.

You know, without mentioning customers' names, are you seeing deals coming your way due to really the uncertainty over the competition's product roadmap, whether it's a new platform or its roll-out. And just maybe some additional feedback from the way you had in the quarter, what you're hearing from the customers?

Sure. I think there's two primary activities going on in the market that are benefiting Manhattan associates. As I mentioned earlier, I think the WMS replacement cycle is helpful to Manhattan associates. We've got global market share, leadership in WMS and I think my opinion is we have clear thought leadership in that space as well.

So I think as companies are looking to upgrade, transform, drive efficiencies in their distribution networks, we're on the short list from the very beginning. So I think that's certainly is helping us. Now I certainly do believe our strategic product and technology direction is definitely making a difference, but as you suggested, I also think the struggles of our competitors are elevating our position in customer's minds.

If you are making the kind of commitment that these customers are making, putting their business at risk, they would like to be sure that company they're doing business with is committed to their success. One of the reasons why we believe we're gaining share, we have a meaningful commitment to research and development.

700 plus people. We've got strong product and technology roadmaps that we published and we've distributed to the marketplace, and services teams are world-class in delivering the solutions and I think because of those attributes, we're generally regarded highly on people's list of companies they would like to have as a strategic partner.

So I believe over the next couple of quarters, next couple of years as the market continues to consolidate and sorts out would who are the strategic market leaders and who are the financial or roll-up kinds of companies, our market position will improve.

Great. And then I guess we're about a third of the way here into Q2. Did you have any large deals slip last quarter that you've gone ahead and you closed already this month?

Yes. Not going to comment on that just to say that we are pleased with our activity in Q4, our pipeline and our visibility into the quarter and feel good about the outlook for the quarter.

Great. And then one just quick question for Dennis. With the DSOs, do you think they're going to stabilize here at the mid to high 60s or return more to the historical low 70s?

I think the historical low 70s is probably a good benchmark.

That's real helpful. Thank you both for taking my questions.

Thanks Brian. Thank you, everyone, for joining us for our third quarter call. We look forward to speaking with you in 90 days.

Ladies and gentlemen, this does conclude the Manhattan Associates third quarter 2006 earnings conference call. You may now disconnect.