Manhattan Associates Inc (MANH) 2006 Q4 法說會逐字稿

Good afternoon. My name is Richard, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this call is being recorded today, February 7, 2007. I would like to introduce Mr. Dennis Story, Chief Financial Officer of Manhattan Associates. Mr. Story, you may begin.

Thanks, Richard, and good afternoon, everyone.

Welcome to Manhattan Associates' 2006 fourth 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 and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

I refer you to the documents that Manhattan Associates files from time-to-time with the SEC, in particular our 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 actual results to differ materially from those contained in our projections. Additional factors are set forth in Safe Harbor compliance statements for forward-looking statements, included as exhibit 99.1, to the company's annual report on Form 10-K for the year ended December 31, 2005. Manhattan Associates undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.

Now I will turn the call over to Pete.

Thanks, and welcome to our fourth quarter 2006 earnings call.

I'll start the call by taking you through some highlights from the quarter. Dennis will then get into details of our financial results. I will follow with additional details about our business and provide an overview of our outlook for 2007 and Dennis will follow me with the specifics of our financial guidance. And then we'll be happy to answer your questions.

We had a solid fourth quarter and full year 2006. License revenue for the quarter was a new record at $19 million, which was 18% better than the prior year. This 18% growth is all organic since the Evant acquisition was completed in September of 2005.

Totally revenue for the quarter was $75.9 million, an increase of 14% over the prior year. As an important note from a market perspective, this quarter marks our ninth consecutive quarter of double digit year-over-year revenue growth. For the quarter, we achieved adjusted earnings per share of $0.31, an increase of 29% over Q4 of last year. For the year, we finished with licensed revenue of $66.5 million, which represents 16% growth over 2005 and total revenue of $288.9 million, which represents an increase of 17% over last year. Adjusted EPS for the full year was $1.08, a 23% advance from the last year. Overall, we believe our consistent double digit revenue growth reflects a broadening awareness and market validation of our strategic value we deliver to our full compliment of supply chain solutions.

I will now turn the call over to Dennis to provide details on our financial results.

Thanks, Pete.

As Pete mentioned we closed the year with solid momentum, posting our third consecutive record quarter for revenue and adjusted earnings per share, which led to an overall record year for Manhattan Associates in 2006. The key highlights for the quarter include: 1. licensed revenue increased 18% in Q4 to $19 million, with full year growth of 16% totaling $66.5 million. 2. Services revenue increased 14% to a Q4 record of $49.9 million, with full year growth of 17% totaling $194.5 million. 3. Record Q4 adjusted earnings per share of $0.31 increased 29%, with full year adjusted earnings per share of $1.08, representing an increase of 23%. Our earnings performance was exceptionally strong when you consider Q4 fully-diluted shares increased 4% or 1.2 million shares over Q3 2006, driven by a 30% increase in our stock price from Q3 to Q4. Absent the effect of this increase of diluted shares, Q4 adjusted EPS would have been $0.01 higher. 4. Adjusted operating profit in Q4 grew 23%, resulting in a 120 basis point increase and operating margins of 17.3%. And finally, cash and investments increased 40% in 2006 to $131 million, driven by a 32% increase in cash flow from operations, which totalled $44 million for the year. Those are the highlights.

Now I will share more specific details. We enjoyed record levels of both license and services revenue in the fourth quarter, which led to consolidated revenue of $75.9 million, representing 14% growth over Q4 2005. Full year revenue was a record $288.9 million, a 17% increase over 2005. America's continued to be the growth engine and in 2006 delivered three 20s for the year: 20% license growth, 20% services growth and 21% total revenue growth. Another insight for your consideration is this; in 2006, Manhattan Associates posted a strongest top line percentage growth in six years.

Here is a quick historical snapshot. In 2001, revenues of $156 million grew 13%. We had approximately 800 employees and Warehouse Management Solutions generated 83% of our license revenue.

Fast forward to 2006, we have nearly doubled revenues to $289 million. We have approximately 2000 employees and are the leader in supply chain management solutions with approximately 45% of our licensed revenues generated from non-WMS solutions. License revenues in the quarter increased 18% to $19 million. Deal volume for the quarter was solid with a 60/40 split of new to existing customers, and with higher overall average deal sizes compared to the prior year quarter. Our mix of Warehouse Management versus non-Warehouse Management product sales in the quarter was 60/40, showing good demand of our full suite of supply chain solutions. For the year we experienced increases in average deal sizes, whether we do the analysis including or excluding deals over $1 million. License revenue growth in the quarter was led by the Americas, which delivered $16.4 million or 15% growth over the prior year quarter. Overall, the America segment accounted for 86% of total license revenues. EMEA and APAC's combined license revenues increased 35% over the prior year quarter. EMEA logged a license revenue increase of 5% and posted its best license revenue quarter of the year at $2.1 million, anchored by a $1 million-plus deal that brings with it excellent services revenue upside in future quarters. APAC delivered a half a million of revenue, just doubling its Q3 '06 revenues. While we have seen good international top-line performance in Q4, the emerging nature of these markets leads us to expect to see continued quarterly fluctuations in international license revenues.

In total, Q4 2006 was the second-highest licensed revenue quarter in Manhattan Associates history. Full-year licensed revenues increased 16% to $66.5 million, paced by America's 20% growth. We continue to take market share from competitors in 2006, as our license revenue grew at roughly three times market growth estimates published by industry analysts. We believe this success is being fueled by strong acceptance of the strategic value of our integrated supply chain solutions set as well as solid sales execution.

Now I will take a closer look at services revenue and margins. Services revenue increased 14% in the fourth quarter, for a Q4 record of $49.9 million. The Americas continues to deliver excellent results, with services revenue of $41.8 million growing 18% over the prior year quarter. International services revenues decreased 4% over Q4 2005. While APAC services revenues were up 10% in the quarter, EMEA services revenues decreased 13% over the prior year quarter due to the lack of large license deals closed through the first three quarters of 2006.

For the year, total services revenues increased 17%, to a record $194.5 million led by Americas' growth of 20%. Services gross margins of 52.8% and the fourth quarter improved modestly compared to the fourth quarter of 2005. For the year, services margins also were 52.8% which is down 110 basis points from 2005, principally driven by product mix resulting from our growth in our supply chain solutions beyond our core Warehouse Management System. As we have continued to grow our installed base, we have increased our investment in professional services personnel with 159 net new hires year-over-year, representing a staff increase of 21%. Overall, we continue to be pleased with our services margin performance and services demand outlook.

Now on to operating income. Consolidated GAAP operating income in the quarter was $8.4 million. Which includes $4.8 million of expense associated with acquisition costs, stock option expense under FAS 123R, sales tax recoveries and legal settlement costs of $2.9 million related to litigation with both a domestic customer and a large German customer regarding Warehouse Management System implementation. In each litigation, we reached a settlement in January 2007. The recorded charges represent our portion of the settlement agreed to with our insurance carrier during the quarter. These charges have been excluded from adjusted operating income, adjusted net income and adjusted earnings per share, consistent with our past earnings reports and due to the unusual nature of the litigation.

Today's press release and our 8K earnings release filed with the Securities and Exchange Commission provide a full reconciliation, a fourth quarter and year-to-date GAAP results with non-GAAP results and should be read in addition to listening to this call. We refer to our non-GAAP measures as adjusted operating income, adjusted net 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 option expense under FAS 123R, restructuring an asset impairment charges and legal settlement 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 I note otherwise, the balance of my comments will focus mainly on adjusted operating income, adjusted net income and adjusted earnings per share performance.

Here is a review of adjusted operating income. On a non-GAAP basis, adjusted operating income for the quarter increased 23% to $13.1 million. Adjusted operating margin improved 120 basis points, to 17.3% versus 16.1% in Q4 2005. Q4 America's revenues increased 17% over the prior year, driving strong operating margins of 21.2% up 200 basis points over Q4 2005. EMEA and APAC operations posted a combined operating loss of approximately $700,000, resulting in a negative 6% operating margin. EMEA delivered a $200,000 operating loss, down $1.1 million over the prior year quarter. EMEA performance benefited from improved expense management. However, lower services revenue kept us from delivering a profitable quarter.

Our APAC operations cut its operating loss nearly in half from last year to $500,000 on higher license revenues. However, our overall APAC operating losses stem from slow development in the emerging markets of China and Japan. Operating expenses defined as including sales and marketing, R&D and G&A were $31.6 million in Q4, an increase of $3.5 million over the prior year quarter. This increase was driven by additional head count investment in our India operations, and sales and marketing and, in G&A to support business growth. Total operating expenses for the year was 42% of total revenue compared with 42.7% in 2005. That covers the operating results.

Our effective income tax rate in the fourth quarter on a non-GAAP basis was 37.4%, compared with 38.5% in the first three quarters of 2006. The lower rate resulted from recognition of $160,000 income tax benefit in the quarter, which was due to the reinstatement of the U.S. R&D tax credit in December 2006, retroactive to January 1, 2006. Our full year effective tax rate on adjusted earnings was 38.2%. On a non-GAAP basis, adjusted net income for the fourth quarter was $8.8 million or $0.31 per share, a 29% increase in adjusted earnings per share over Q4, 2005. Full year adjusted earnings per share increased 23% in 2005, to $1.08. Average diluted shares outstanding for Q4, 2006 increased 4% or 1.2 million shares to 28.6 million shares sequentially from Q3 of 2006.

The share increase was driven by a 30% appreciation in our Q4 average stock price, which led to increased stock option exercises and in-the-money stock options that converted into a higher number of common equivalent shares. The average stock price in Q3 2006 was $21.82, compared to a $28.38 average in the fourth quarter. The impact of these factors on diluted EPS in the quarter was a $0.01 reduction. During the full year 2006, we repurchased 773,301 shares of common stock, at a total cost of approximately $16 million. There were no share repurchases of common stock made in the fourth quarter. We currently have 42.9 million remaining in share repurchase authority.

Before I address cash I will quickly cover GAAP effective tax rate, net income and EPS performance. Our GAAP effective tax rate for the quarter was 48.1% and it was 43.8% for the full year. The higher effective rate in Q4 was driven by the legal settlements in the quarter and FAS 123R stock option expense. We did not take a tax benefit on $2 million of the $2.9 million in legal settlements, as this charge was related to a foreign subsidiary with tax losses, which precludes Manhattan Associates from recognizing a financial statement benefit.

GAAP net income for the quarter was $4.8 million or $0.17 per diluted share, representing a 15% decrease in diluted EPS driven by the after tax charge for legal settlement cost of $2.5 million, which equates to $0.09 per diluted share. Excluding the impact of legal settlement cost, our GAAP Q4 diluted earnings per share increased 30%. Full year GAAP net income was $19.3 million or $0.69 per diluted share, an 8% increase in diluted EPS. Excluding the impact of our legal settlement charges, GAAP full year diluted earnings per share increased 22% over 2005.

Now on to cash flow. Cash flow from operations increased 32% in 2006 to $44 million. For the quarter, cash flow from operations was about $3 million, down approximately $1.5 million from Q4 2005 due to higher receivables on revenue billings, primarily driven by timing on license fee collections. DSOs ended the year at 73 days, down from 81 days in the prior year quarter and up sequentially from 67 days in Q3. Capital expenditures totalled $2 million for the quarter and $10 million for the full year.

Cash and investments at December 31, 2006 increased $131 million, or increased to $131 million compared to $118 million at September 30, 2006 and is up 40% over December 2005 total of $94 million. Finally, deferred revenue, which consists mainly of maintenance revenue billed in advance of performing the maintenance services was approximately $31 million at December 31, 2006, up from $28 million at December 31, 2005. The increase is driven by maintenance on new license deals and maintenance [renewals], which reflect the strength and loyalty of our growing install base. Our maintenance retention rates continue to track at a healthy 90-plus percent.

Now I will turn the call back to Pete for the business update.

Thanks, Dennis.

We had a successful quarter adding new clients and expanding our relationships with existing clients. You can find the names of the major ones listed in our earnings release. We signed four deals this quarter of $1 million or more in recognized license revenue. All four of these deals were with new customers and all four included Warehouse Management Solutions, plus each of the four also included one or more additional Manhattan Associates solutions, such as Replenishment, Transportation Management, Trading Partner Management, Labor Management and Performance Management. I believe these successes illustrate the growing awareness and value of our broad, deep suite of supply chain solutions. Significantly, one with a strategic win with a high-profile company already using SAP as their ERP system for where we were selected over SAP for supply chain. And one was a takeaway from another best-of-breed WMS best provider.

New customers generated about 60% of fourth quarter license fees and the remaining 40% came from our existing customer base. For the year, the ratio was also about 60% from new customers and 40% from existing customers. License fees for our Warehouse Management Solutions for the quarter were about 60% of our total license fees, while about 40% was from our non-Warehouse Management Solutions. For the year, it was about 55% WMS and 45% non-WMS. For the full year our Warehouse Management Solutions license revenue grew by about 20% over 2005. That's two years in a row where license revenue for WMS grew by about 20%. With most industry experts estimating global 2006 WMS growth at about 5%, our 20% growth was once again about four times the overall market growth rate and clearly indicates we took substantial market share from others.

Our non-WMS products grew by 12% over 2005. Our Transportation Management Solutions license revenue was up substantially in 2006 versus 2005, with a growth rate exceeding 40%. Our Planning Applications, formerly the Evant products, saw a total year license revenue growth in 2006, due to having the products for a full year in 2006 versus four months in 2005. But if we compared apples-to-apples, license revenue for the planning products was down somewhat in 2006. While disappointed with our license revenue, results from our Planning, Forecasting and Replenishment applications in 2006, we used the year to retool our sales teams and make important investments in the product offerings. We believe we are now much better-positioned than 12 months ago and are quite bullish about the success these solutions will contribute in the future.

License revenue in 2006 for RFID was less than half of its total in 2005. The retail and consumer goods verticals were once again strong contributors to our license fees and contributed more than half of our total license revenues for the year. We signed a few agreements with a Microsoft [Exacta] partnerships this quarter, but did not recognize any revenue from them. The revenue from this quarter's deals was relatively small and will be recognized over future quarters when certain conditions have been met. Overall, we continue to review the role of the [Exacta] partnership with our overall market objectives and will likely continue to refine our approach to address the low end of the market.

During December, we released the latest version of our supply chain management solutions, offering an expanded footprint that includes our Integrated Logistics Solutions plus our Integrated Planning Solutions. Our R&D teams continue to deliver on aggressive plans for enhanced functionality, ease of use and integration, and superior quality. At the end of the year, we had just shy of 2000 employees around the globe. That's an increase of about 25 people since the end of Q3, and for all of 2006, we added about 350 people, about half of those in billable consulting positions and the vast majority of the balance in research and development at our Bangalor, India facility.

Our fourth quarter results were in line with our plans and outlook for 2007 is positive. I will now provide an overview of our expectations for 2007 and Dennis will follow with more details. While we don't provide revenue guidance, I do want to give you some insight into our view of revenue growth for 2007.

Market analysts project the supply chain management market growth rate for 2007 to be similar to that of 2006, which they estimate at about 5%. In 2006, our organic growth was more than twice the market growth rate. For 2007, we expect to continue to outpace the market growth at about this rate. That is, we will take market share from competitors and continue to grow organically by about two times the market growth rate.

For 2007, we are expecting to see some improvement in our operating leverage. But we will continue to invest to take additional market share. Our investment in research and development will likely remain in the 14% to 15% of revenue range that we've experienced over the past couple of years. The investment in research and development will enable us to extend the richness of our supply chain management solutions and continue to deliver our technology road map, thus further distancing ourselves from the competition. We will investment in our sales teams, particularly in the United States. We expect to add about 10 sales reps to our year-end 2006 global total of 61 reps. We will also add to our sales management and marketing teams to drive awareness of our broad suite of supply chain solutions. We'll invest in enhancing customer satisfaction by adding staff to billable and nonbillable positions in our services and support organizations. And we will invest in developing our people with a goal of making Manhattan Associates a great place for talented people to achieve their ambitions. I believe these investments, while also expanding our operating margin, are justified by our proven ability to grow revenue by double digits nine quarters in a row and the opportunity to continue to take market share.

For your information, for 2007, we've altered our equity compensation programs. We essentially cut in half our annual stock option grants and replaced the eliminated options with restricted stock on a one-restricted share for three options ratio. The net effect of this will be to reduce our overhang over time by about one-third. As you know, the cost of stock options is included in our GAAP results, but is excluded from our adjusted results. The cost of restricted stock will be included in both our GAAP results and our adjusted results. For 2007, this change will reduce adjusted EPS by about $0.03 for the year and about $0.01 per quarter. This expense is included in the guidance Dennis will share with you in one minute. I believe this is the right thing to do for long-term shareholders of Manhattan Associates and for our employees.

In addition, our outlook for 2007 includes a meaningful increase in our fully-diluted share count, offset in part by a modest reduction in our income tax rate. Both of these are also included in our guidance. Our normal approach to guidance is to provide the quarter's EPS guidance range and the year's EPS guidance range. But because our first and second quarter 2006 results were not in line with normal seasonality for our business, and we don't want there to be confusion in the marketplace, we thought it would be helpful to provide EPS guidance for the full year, the full half year -- I'm sorry, for the first quarter, the first half of the year and the full year.

Now turn the call over to Dennis for some of the specifics.

Thanks.

Pete gave you a good summary overview of 2007 guidance. Before I get into the details, Pete mentioned a number of items that will impact our 2007 EPS comparables over 2006 placing, some downward pressure on adjusted full year 2007 earnings per share totaling about $0.09 per diluted share. These items are an increase in 2007 weighted average diluted shares, which will reduce 2007 full-year adjusted EPS by approximately $0.08. 2. The equity comp program modification Pete mentioned will reduce adjusted earnings per share an additional $0.03. And 3. partially offsetting this impact is a reduction in our effective tax rate to 37.5%, which improves adjusted EPS by about $0.02.

While the impact of these items will put some downward pressure on EPS growth, overall we view each of these events as favorable to our shareholders as the diluted share increase is largely a function of stock price appreciation appreciation in 2006, up 47% for the year. As Pete mentioned on the equity comp program, these modifications substantially reduce our future outstanding dilutive shares and a lower overall tax rate has significant cash economic benefits to the company going forward.

With that said, let's cover the guidance details. For the full year 2007, we anticipate adjusted earnings per share of $1.20 to $1.24, which represents a growth range of 11 to 15%, with the midpoint of 13% growth over the $1.08 in 2006. Our guidance includes $0.03 expense impact from restricted stock vesting under the modification of Manhattan Associates' equity comp program which Pete mentioned. The $0.03 impact equates to approximately $1.5 million pre-tax expense per restricted stock vesting to be expensed radically throughout the year. If you exclude the impact of the diluted share increase, the equity comp plan and the tax rate improvement, effectively adding back $0.09 of additional EPS, the 2007 adjusted earnings per share growth over 2006 would be 21% from assuming the midpoint of the growth range.

For 2007, we will continue to invest to take market share from our competitors while managing the business to improve operating leverage. We expect about a 50 basis point improvement and our consolidated operating margin to reach a little over 16%. Our effective tax rate on adjusted net income is expected to be 37.5%, resulting in a 70 basis point reduction from 2006. The GAAP effective tax rate will be 38%, a 400 basis point improvement over 2006 as a result of lower ISO stock option expense. In 2006, we discontinued granting of ISO stock options due to the tax inefficiency of these options. About 50% of the option expense in 2006 was related to ISO option grants form prior years. This ratio will drop to 10% in 2007, accounting for the 50 basis point difference between the GAAP and adjusted effective tax rate. We believe there are further opportunities to lower our overall effective tax rate through effective tax planning strategies which we will continue to optimize.

While we have not historically provided guidance on diluted shares, the $1.2 million or 4% increase in fully diluted shares from 27.5 million shares in Q3 2006, to 28.6 million shares in Q4, 2006, warranted providing some guidelines for 2007. For full year 2007, we are forecasting a 6% increase in our fully-diluted, weighted average shares to approximately 29.8 million shares. For the quarterly split, we are estimating fully-diluted, weighted average shares of approximately 29 million shares for Q1, 29.5 million shares for Q2, 30 million shares for Q3 and 30.5 million shares for Q4. We have not assumed any common stock repurchases in our estimates.

I want to caution that forecasting diluted shares can be volatile, as it is a function of multiple forecasts and variables, including stock price, options exercised, restricted stock vesting and common equivalent shares for options and restricted stock outstanding. A 500,000 increase or decrease in our diluted share count equates to a $0.02 impact on diluted earnings per share on a full-year basis.

As Pete mentioned, because our 2006 first and second quarter results were not in line with normal seasonality of our business and we want to avoid any confusion with year-over-year comparables, we are providing adjusted EPS guidance for the first quarter and first half. We believe adjusted earnings per share for Q1 will be in the range of $0.20 to $0.24 with the midpoint of $0.22 representing about 37.5% growth over the $0.16 of adjusted earnings per share we posted in Q1 2006. For the first half, we believe adjusted earnings per share will be in the range $0.55 to $0.59, with the midpoint representing about 12% growth over the $0.51 of adjusted EPS we posted in the first half of 2006. The midpoint of our range estimates for the first half and the full year would approximate our historical first and second half splits of the EPS contribution, with 46% coming from the first half of the year and about 54% coming in the second half of the year.

So how do we exit from $0.31 in Q4 to delivering the midpoint of our estimate of $0.22 in Q1 of 2007? Historically, Q1 operating margins declined on a sequential basis from Q4 to Q1 due to lower license revenues, combined with renewed FICA payroll expense and merit increases. All Manhattan employees received their merit increase effective January 1. In addition, for 2007 we will have the impact of our new equity comp expense for restricted stock in adjusted earnings. We estimate the incremental expense of these items to total approximately $3 million pre-tax, which equates to approximately $0.07 of adjusted EPS. The $3 million is roughly split 50/50 between cost of services and operating expenses, so you will see services margins remain in the low 50s. Thus for Q1 operating margin, we expect 170 to 270 basis point improvement and our consolidated operating margin over Q1 2006, with the midpoint at approximately 12 1/2% compared to 10.3% in Q1 of 2006.

Finally, for full year 2007, GAAP diluted earnings per share, we anticipate $1 to $1.04 which represents a growth range of 45% to 51%, with the midpoint of 48% growth over the $0.69 we delivered in 2006. We expect the full year GAAP diluted earnings per share to be approximately $0.20 per share lower than adjusted earnings per share, which principally excludes purchase amortization from acquisitions and stock option expense under FAS 123R.

Now I will turn the call back over to Pete.

Thanks, Dennis.

We provided a lot of information on this call so far. Hopefully you find that helpful. With the number of moving pieces we thought it would be useful to provide as much of that at the beginning of the year as possible.

Let me summarize. I believe our Q4 and full year 2006 performance was good and we are confident about the opportunities ahead of us in 2007 and beyond. We believe we made considerable progress in 2006 in establishing ourselves as the best-in-class supply chain solutions leader. Over the next three years we intend to further distance ourselves from the competition. We will continue to differentiate our solutions by offering the deepest, most comprehensive suite of supply chain solutions designed to deliver the best return on investment and architected to provide a low total cost of ownership. I believe the combination of innovative reliable products, built on proven market leading technologies, delivered by the world's leading experts will win Manhattan Associates a substantial piece of the supply chain management marketplace for many years to come. Operator, we'll now take questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Robert Schwartz with Jefferies.

Thanks so much. Can you give us some insight on your overall plans and expectations for Europe in 2007. You did close the big deal on the quarter. Maybe you could talk about the impact also of your new sales hires there have been and what your investments plans are there.

Sure, Robert. Be happy to.

We had a solid quarter from a license fee perspective in EMEA. But, for the year we continue to be behind where we had hoped to be. We made some additions to the sales team across the geography in 2006 and made some changes in sales management, that we expect will pay off in 2007. We are redoubling our efforts to focus on those vertical markets where we have natural competitive advantages and believe the additions of some talented people and some renewed focus on our sweet spot in the market places will lead to improved performance in 2007.

So you're going to be investing in Europe in 2007?

Modestly. The majority of our investments in 2007 will be in building out our product suite, the broad footprint, making progress on our technology plan, our services-oriented architecture to lead to better, tighter integration among our applications and with other enterprise applications at our customer sites, and in the United States market operations.

As you probably know about two-thirds of the supply chain management dollar spend globally is spent in the United States. We think the opportunity within the U.S. is substantial and are focusing significantly on that opportunity. At the same time, though, we are investing to build a strong foundation in both the EMEA marketplace and the APAC marketplace so that as we continue to expand and strengthen our global reputation, we will be able to improve our operating performance in both Asia/Pacific and EMEA.

That was a rich answer. Maybe you could give the same sort of response about Evant and what you are planning to do with that going forward. You mentioned you were turning that around and what should we look for in 2007?

We think we've made considerable progress in 2006 investing in the solutions, building out the R&D teams, building up the sales organization. Taking a look at the pipeline, we're optimistic that 2007 will be a good year for us for the planning suite.

One of the things that was encouraging over the last couple of weeks, we've had a number of opportunities to talk with customers and prospects. While we continue to be pleased with the momentum behind our Warehouse Management Solutions and Transportation I'm particularly pleased with the level of interest we are gaining from customers and prospects about our Planning Forecasting and Replenishment Solutions. I think that market opportunity is substantial and 2007 will be an important building year for us to capture market share in the whole planning part of the marketing chain space.

Last question before I hand it off to someone else -- when should we expect WMS and Evant to be on the new Lema platform and SOA platform?

We have a three-year technology road map that continues to evolve. Our current forecast has the majority of our products getting on to the Lema platform sometime in the 2008, 2009 time frame. We are making, I think, good solid progress in that evolution and are confident we will deliver on the majority of our solutions moving over to that platform in an orderly fashion, making sure we are providing the right path for our customer success.

Thank you for all the rich detail. Appreciate it.

Thanks.

Your next question comes from the Terry Tillman with Suntrust Robinson.

Hey guys, thanks for taking my questions. Pete, first question just relates to the higher ASP. I think you did allude to the fact that a lot of these deals, at least in the larger deals,there were some other modules aside from WMS. Could you articulate a little bit more in terms what is behind the higher ASP? Is it more users per warehouse or was it because some of the tools being added into the deal?

I think it's probably a combination of three things. One would be in many cases perhaps more users in a warehouse management deal. Secondly, would be the additional modules that we bring to the deal, but I would suggest to you that probably the most compelling opportunity for us to continue to grow the average deal size is the quality, the breadth and depth of the solutions we bring in general and the value propositions we bring to customers. I think our growing reputation as the market leader for supply chain management solutions is allowing us to command a better value for our solutions than perhaps we were able to command in the past and I believe certainly more than our competitors are able to command for somewhat similar products. Expect in 2007 our ability to deliver on our commitments to customers, the broadening solution footprint and market momentum will allow us to continue to make improvements in our ASP.

Okay, then Pete, in terms of -- I think you were talking a little bit earlier about the small- to the mid-sized end of the market. It almost sounds like maybe the strategy's in flux or maybe you are having a change of thought in terms how you go to market there. Could you talk a little bit more about that or is it just something to do with the lack of growth in that market? Or it's just not optimal for you?

We and our Microsoft, as well as the [Exacta] channel partners, are all learnings as this program rolls out. What we have learned so far a couple of things -- we have a lot of opportunity at the low end of the market, customers, prospects, less than $300 million or so in annual revenue. One of the approaches to reach the customers is through the Microsoft [Exacta] channel. The challenge for us, though, is many of those channel partners are less experienced and knowledgeable around supply chain management and therefore, are a larger burden on Manhattan Associates and our team than we initially planned for. So the cost of sale, the cost of support is a little higher than we had thought. So we're taking a look at our approach to that relationship and the market, and trying to determine what is the best way to meet the needs of that market in a profitable way. So we continue to talk with Microsoft and try to identify the best way to meet the needs of that space.

Okay, just the last question. It seems ironic, in '06 you were I think it's clear you were successful in terms of delivering license growth. So, then the diluted share count increases and you have all this dilution in '07 and I know you guys articulated that. Why not just bake into the guidance some more aggressive stock buybacks to at least offset that?

We won't bake that into the assumptions. If we do buy shares back during the year, we will certainly reflect that in the actual results. But at this point in time, we generally don't forecast share buybacks for a lot of very good disclosure reasons. So, that's the purpose for that. We do have $40 million + of repurchase authority available to us. And I personally believe at about $28 a share our stock is undervalued, so we'll look for opportunities during the year to take advantage of the repurchase program.

Okay. Thanks for the answer.

Your next question comes from Adam Holt with JPMorgan.

Good afternoon. This is [Nathan Doke] for Adam Holt from JPMorgan.

How are you?

Doing well, thanks. Got a couple of questions for you. Another good year in Americas here. If you could talk a little bit about what are the drivers here and what expectations in the international markets in '07?

Sure, be happy to, [Nathan].

I think what we are seeing in the U.S. and, hopefully, will see in other parts of the world over the next several years, is a growing recognition of the importance of supply chain, supply chain optimization for a global economy. U.S. organizations are taking a good hard look at how best to serve the needs of their customers, source globally and do that in a cost-efficient matter. Getting the right product to the right place at the right time. So we're seeing a lot of supply chain transformation activity and, fortunately for us as the recognized leader in supply chain management solutions, we are participating in a lot of those discussions.

I believe as we continue to focus on success in the U.S. but build out our foundation in Asia/Pac and Europe, as those markets continue to transform themselves we will be in a good position to export more of our solutions to those markets. As we mentioned on previous calls, for the most part outside the United States, English speaking markets-- the Australia and the United Kingdom -- the only solutions we sell in our non-English speaking markets are WMS solution and a couple of add-on components to that. We believe over the next several years we'll be able to export our entire suite of applications to all of our geographies and continue to take market share globally. But we have a very great, I believe, opportunity in the U.S. and a growing opportunity over time in international markets.

Great. And you -- for the operating margin for 2007 you got it to 50 basis points and expansion here, despite the change in the stock compensation plan. Where in the model do you think you have leverage to drive the expansion?

We believe we have opportunities in a number of places. We believe over time, as the opportunity to continue to take market share in three, five, seven years diminishes and we will have important opportunities and to reduce operating costs. Obviously, areas for us to do that will be in the G&A area, whether it's sales and marking and R&D or just generalized overhead, and will have opportunities to improve operating gross margins in each of the regions of the world.

Okay. And last question is, on the competitive landscape, have you seen changes there? Are you seeing any benefits from, any disruption from consolidation or increased competition from the larger European vendors?

Yes - you know, at this time the trends that we've talking about over the past couple of quarters continues. Consolidation, we believe, has a eliminated or reduced the amount of competition in the marketplace. The stronger companies have continued to gain strength and accelerated their successes. And I think the companies that had been rolled up continue to struggle to stay relevant. I would expect that to continue in 2007.

On the last quarter we did not see much more of SAP and Oracle than we had over all of 2006. We expect as 2007, '08 and '09 roll around we will continue to see gradual increases in the amount of competition we see from those two big ERPs, but remain confident we have a differentiated solution that will appeal to supply chain leaders.

Great. That's it for me. Thanks.

Thanks, [Nathan].

[OPERATOR INSTRUCTIONS] Your next question comes from Michael Huang with Thinkequity.

Thank you very much. Just a few questions for you guys. So first in terms of Evant, I was wondering do you have any customers yet who are live on the integrated planning and logistics products? When do you expect the referenceability that you need to accelerate sales cycles in that product area?

We have a number of customers that using our Warehouse Solutions, Replenishment Solutions and Transportation Solutions from Manhattan Associates. They're not all fully-integrated at this point in those customer sites, but we're looking to work with our customers over time to do that. We believe we're starting to build some solid references on the planning suite. We spent a lot of energy in 2006 working with the customer base that we acquired with Evant to improve the referenceability of those customers and believe we made very good progress in 2006. Plus added a number of new customers to the stable of planning customers on our suite of solutions. So feel that 2006 was an important building year and will accelerate our success in 2007.

But, keep in mind we are still relatively small in the overall planning space and need to continue to build that base of good solid referenceable customer.

We have a little history of this type of success. If you go back a few years ago, when we bought logistics.com it took us a little while to invest in the product, build up the sales organization and get market awareness for the leading solution we had developed. But once we had done that, I think you can see today we are achieving some great success in the transportation space and believe we will follow a similar pattern for our planning solutions.

Gotcha. When you examine the pipeline more closely, I was wondering -- could you provide some color on whether or not there are any notable differences in either size of deals or kind of product mix versus how you ended up in '06? Are there things that you're seeing in the pipeline that might be incrementally different than what the performance may look like in '07?

It's fairly similar to what it looked like in '06 at the beginning of '07. The only difference is it's larger. We are quite pleased with the progress we made during '06 building an impressive pipeline of business. We believe it's strong across warehouse management and transportation management. I tell you the one area we have seen a nice expansion in the pipeline for '07 is in the planning suite of solutions.

As you probably know our sales cycles generally run from 6 to 12 months, so the majority of business that will close new license revenue in 2006 -- sorry -- in 2007 is already in our pipeline and already being worked by our sales teams and we believe we've got substantial activity to achieve our goals for 2007. So the pipeline looks good. The sales team's fired up and we're optimistic about what we can achieve in '07.

Great. And last question for you, just following up on that point, when you actually -- when you look at the pipeline and you look at your guidance for '07, I was wondering could you comment on whether or not you are making any differences in assumptions around close rates given the success that you had in '06? And I wanted to throw out to you, where are the levers of upside to your guidance in '07? Thanks.

We expect our close rates would be similar in '07 to what they were in '06. Now, you can't guarantee that and, obviously, with the most volatility in our financial model being on license revenue, in particular, the ability to close in the quarter that you planned to close it makes a little more challenge. Overall we expect similar close rates in '07 to what we achieved in '06.

In terms of leverage, if we are fortunate enough to be able to have a higher close rate in '07 than we had in '06, that certainly would add substantial incremental leverage and licensed revenue is highly profitable at the gross margin line. So, working a nice pool of opportunities in '07, we think there is opportunities perhaps overperformed, but obviously it's still early in the first quarter. We've got a lot of work to do and we're very focused on achieving what we've set out to achieve.

Thank you very much, guys.

Thanks, Michael. Operator, we have time for one more question.

Okay, your final question comes from Philip Alling with Bear Stearns.

Thank you so much. Pete, I want a clarification from an earlier comment you made with respect to plans for coming out with applications in non-English language formats or other than WMS. That would appear to be a change in strategy. Maybe, if you could just give a little more color on timing of when you would do that and what impacts, if any, that would have on R&D and how you see sort of the allocations there across your products going forward.

Thanks for the question. We do translate our WMS products in multiple languages for all of the markets that we serve, as well as our Trading Partner Management Solution and Performance Management to allow customers to be able to best run their warehouse operations in each of the geographies we serve. We currently don't provide translation for the majority of the rest of our solutions, although we have in some spots component parts of that. What we'll look to do, quite frankly, is look for the right market opportunities to enter markets for our non-WMS solutions with global business partners who want to do business in those markets. For instance, some of our larger, U.S.-based, global companies as they expand into other geographic markets and wish to utilize our solutions in those markets, we'll translate those products as we enter those markets for their benefit. We've got a couple of those on the radar screens for 2007, to take our transportation solutions into other markets and look forward to gaining that experience in those markets with that solution. And we will look for those same kind of opportunities for the rest of the suite of solutions over the next couple of years.

Okay. So, for calendar '07, would you expect any material shift in the sort of split between WMS, TMS and replenishment applications as far as your revenues are concerned?

Probably be fairly similar to the experience we've had '06, Philip. Maybe slightly higher for the non-WMS solutions. But quite frankly, the WMS market continues to be quite good. The replacement cycle is quite strong and, given our global market leadership in that space, we continue to take substantial market share. So I would believe we'll see some improved strength in our non-WMS solutions, but I wouldn't be disappointed if WMS is that much stronger in '07 and continues to be the majority of our license revenue.

And just a final question from me. With respect to comments that you made on the legal settlements reached in January this year, the one regarding the domestic customer, is WMS implementation -- were there any revenues recognized in calendar '06 associated with that domestic customer and would you expect to recognize any revenue say ongoing maintenance in calendar '07 from that?

Yes. Philip, both of the transactions or the relationships that were settled related to 2003 sales and there was no revenue in 2006 or planned in '07 for those two relationships.

Thanks very much, Pete.

Thanks, Philip.

Thank you all for participating on the call. Sorry we ran about five minutes over and weren't able to get to all of the questions. We will try to be a little bit more brief in our prepared remarks at next quarter, but I did think it was important to make sure that we got some of the nuts and bolts for 2007 to help you all with modeling for this calendar year.

Thanks very much for joining us and look forward to speaking with you again three months from now. Good night.

Ladies and gentlemen, that does conclude today's Manhattan Associates fourth quarter 2006 earnings conference call. You may now disconnect.