Manhattan Associates Inc (MANH) 2007 Q1 法說會逐字稿

Good afternoon. My name is Eva and I will be your conference facilitator today. At this time I would like to welcome everyone to the Manhattan Associates first-quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this call is being recorded today, April 25, 2007. I would now like to introduce Mr. Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

Thank you, Eva, and good afternoon, everyone. Welcome to Manhattan Associates 2007 first-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, particularly our annual report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 14, 2007, and the Risk Factor discussion in item 1A of that report. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections. 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, Dennis, and good afternoon, to everyone. I apologize for starting the call a couple minutes late. For some reason, we had difficulty getting our earnings release to post and we waited for that to post. So I apologize for starting a few minutes late.

I'm pleased to share with everyone highlights from our first quarter of 2007. Dennis will follow with more color on these results and I will wrap up with an overview of our outlook for the balance of 2007 and our financial guidance. And of course we'll be happy to answer your questions after our prepared remarks.

I'm pleased with our performance in the quarter, particularly with respect to overall revenue and earnings per share. We achieved a new total revenue record for any quarter in Manhattan Associates' history, reaching $78.2 million, an increase of 25% over the prior year, all of which is organic.

License revenue for the quarter was $13.8 million, which was 24% better than the prior year. Many of you will remember that our license revenue in Q1 of last year was below our expectations. But we are nonetheless pleased with license revenue growth year-over-year of 24%. We're particularly pleased with our strong services revenue performance in Q1, which reached a new record of $54.8 million, an increase of 21% over the prior year. You'll also recall that our services revenue performance in Q1 of 2006 was quite good, so our 21% growth over that result is even more impressive.

I would like to note that this quarter marks our tenth straight quarter of posting double-digit revenue growth. We also achieved a first-quarter record adjusted EPS of $0.23 for the quarter, an increase of 44% over Q1 of last year.

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

Thanks, Pete. As Pete mentioned, we started off the year with a very solid quarter. In addition to the record revenue and EPS highlights that Pete shared, this quarter's performance included the following. One, while Q1 adjusted diluted earnings per share was a record of $0.23, our GAAP EPS was also was quite strong at $0.19, more than doubling over Q1 2006. Two, during Q1 2007, we repurchased 888,000 shares of our common stock, totaling $25 million at an average share price of $28.14. In addition, our Board has approved the repurchase of up to an additional $75 million of Manhattan Associates stock. And three, we continue to enjoy a strong cash position with cash and investments at March 31, 2007 totaling $109 million. Those are the highlights. Now I will share more specific details.

When we look at revenue from a geographic perspective, the Americas continued its solid performance delivering record revenues across the board with growth of 34% over last year's quarter. From the perspective of license revenue, the Americas delivered $13.4 million or 57% growth over the prior year. While our international pipeline is encouraging, in Q1, our EMEA and APac operations delivered combined license revenues of only $400,000, down $2.2 million over the prior-year quarter. Pete will comment on this in a few minutes.

Overall, we continue to take market share from competitors, as our total license revenue of $13.8 million grew roughly 4 to 5 times the 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 as well as solid sales execution.

From the perspective of services revenue and margins, we delivered an increase of almost $10 million in total services revenue over Q1 2006, and, as Pete mentioned, amounting to a record $54.8 million. The Americas led the way with record services revenue of $45.8 million, growing 26% over the prior-year quarter. APac services revenues were up 21% in the quarter, while EMEA services revenues decreased 9% over the prior-year quarter.

Services gross margins of 52.7% in the quarter improved 30 basis points compared to 52.4% in Q1 2006, an impressive result when you consider we have grown our global professional services organization to about 950 personnel, adding 175 net new hires year over year, which represents a 22% increase. Overall, we continue to be very pleased with our services business performance and services demand outlook.

Turning to a review of operating income, you will see that consolidated GAAP operating income in the quarter more than doubled to $7.3 million, which includes $1.9 million of expense associated with acquisition amortization, stock option expense under FAS 123R and sales tax recoveries. The 134% increase in GAAP operating profit was driven by higher operating earnings and lower stock option and acquisition-related expenses.

Today's press release and our 8-K earnings release filed with the Securities and Exchange Commission provide a full reconciliation of 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 operating expenses, adjusted net income and adjusted earnings per share, which exclude the impact of certain items if applicable in that period, including the following -- acquisition costs, the recapture of previously recognized sales tax expense and stock option expense under FAS 123R, 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.

On adjusted operating income, on a non-GAAP basis, adjusted operating income for the quarter increased 43% to $9.2 million. Adjusted operating margin improved 150 basis points to 11.8% versus 10.3% in Q1 2006. The Americas segment delivered strong Q1 operating margins of 15.5%, up 440 basis points over Q1 2006.

EMEA and APac operations' lower license revenues resulted in a combined operating loss of $1.4 million on combined revenues of $9.7 million in the quarter. EMEA's operating loss was $1.3 million due to lower license and services revenue performance while our APac operations recorded an operating loss of $100,000 on lower license revenues.

Our adjusted operating expenses, which include sales and marketing, research and development, G&A and depreciation were $33.6 million in Q1 2007, an increase of $5.4 million over the prior-year quarter. About half of the increase was driven by higher variable and equity comp expenses. As you may recall, our Q1 2006 bonus and commission accruals were low due to below target license revenue and EPS performance. In addition, as discussed in our fourth-quarter earnings call, we alter our equity compensation program by reducing our annual stock option of grants and replacing eliminated options with restricted stock at a ratio of 1 restricted share for three options. The cost of the restricted stock is included in both our GAAP and adjusted net income.

The balance of the expense increase is additional headcount investment in our India operations and sales and marketing and in G&A to support business growth. Total operating expenses for Q1 2007 were 42.9% of total revenue compared with 44.8% in Q1 2006. That covers the operating results.

Our effective income tax for Q1 2007 was 35.5%, 200 basis points lower than our 2007 guidance we gave in Q4 2006. We accomplished this reduction through continued tax planning and implementation of various state and international tax planning strategies. For the full year, we are lowering our effective tax rate forecast on 2007 GAAP and adjusted earnings to 35.5%.

On a non-GAAP basis, adjusted net income for the quarter was $6.7 million or $0.23 per share, a 44% increase in adjusted earnings per share over Q1 2006. Our GAAP net income was $5.4 million or $0.19 per fully diluted share, a 138% increase over Q1 2006.

Weighted average diluted shares outstanding for Q1 2007 decreased 114,000 shares to 28.5 million shares compared to 28.6 million shares in Q4 of 2006. The decrease was principally driven by our Q1 2007 share repurchases and lower common stock equivalents on stock options in the quarter.

Our adjusted EPS performance in the quarter was $0.23, with or without the EPS benefit of the lower tax rate and share repurchases. The impact of both combined was approximately 7/10 of a penny in the quarter. For the full year, the EPS impact of both combined will be about $0.04 per share.

As I mentioned earlier, we repurchased 888,000 shares of Manhattan common stock during the quarter at an average price of $28.14, totaling $25 million. This left $18 million remaining in our share repurchase program. And as I mentioned earlier, our Board recently approved increasing our repurchase authority up to an additional $75 million.

For the full year, we are forecasting a 4% increase over 2006 in our fully diluted weighted average shares to approximately 29.1 million shares. For the remaining quarters, we are estimating fully diluted shares of 28.8 million for Q2, 29.3 million shares for Q3 and 29.8 million shares for Q4. These estimates depend on a number of variables, such as stock price, option exercises, forfeitures, and share repurchases, which can have a significant impact to our estimates. The current forecast does not assume any common stock repurchases.

Let me go back and make one clarification on our increased repurchase authority of $75 million. That does include the 18 million of remaining share repurchase carryover from the previous program.

On to cash flow. For the quarter, cash flow from operations was $3 million, down approximately $7 million from Q1 2006. Excluding the $3 million of legal settlement payments we made in the quarter, on an apples-to-apples basis, cash flow was down only $4 million. That variance was due to higher working capital requirements driven by our record revenues.

Our DSOs for the quarter were very good at 72 days, down from 73 days in Q4 of 2006 and even with 72 days in Q1 of 2006. Our capital expenditures for the quarter totaled $3 million in total.

Cash and investments at March 31, 2007 totaled $109 million compared to $131 million at December 31, 2006. The decline was driven by our share repurchases investment.

Finally, deferred revenue, which consists mainly of maintenance revenue built in advance of performing the maintenance services, was approximately $34 million at March 31, 2007, up from $30 million at December 31, 2006. The increase is driven by maintenance on new license deals and maintenance renewals, which reflect the strength and loyalty of our growing install based. Our maintenance retention rates continue to track at a healthy 90%-plus.

Finally, as noted in our press release today, we are currently evaluating the impact of adopting the Financial Accounting Standards Board FIN 48, Accounting for the Uncertainty in Income Taxes. We will complete our evaluation before filing our quarterly report on Form 10-Q and will record the cumulative impact of this adoption as an adjustment to the beginning retained earnings in our balance sheet. This adjustment is not reflected in the balance sheet that we published in our earnings release today. Also, adopting FIN 48 is not expected to change our first-quarter results.

Now I will turn the call back to Pete for the business update and outlook for the remainder of 2007.

Thanks, Dennis. Our Q1 financial results were solid and position us well for 2007. We had a successful quarter, adding new clients and expanding our relationships with existing clients. Some of the best-known new clients in this quarter include Burlington Coat Factory, Canadian Tire, Cott Beverages, Lakeshore Equipment, PETCO, and Spiegel.

We signed three deals this quarter of 1 million or more of recognized license revenue. Two of the three large deals were with new customers and one was an existing client. All three had components of Warehouse Management solutions in the deals but in one case, our Planning applications were the catalyst for winning the deal and the overall size of the transaction.

About 50% of our first-quarter license fees were generated from new customers and the remaining 50% came from our existing customer base. License fees for our Warehouse Management solutions for the quarter were about 60% of our total license fees and about 40% was from our non warehouse management solutions. For the quarter, our Warehouse Management solutions license revenue grew by about 20% over the first quarter of 2006, as we continue to take market share in this space. Our non-warehouse management products grew almost 30% over Q1 of 2006.

While we're still early in the year, we are pleased with the success of our supply chain planning applications in Q1. These are the former Evant products and include supply chain planning, forecasting and replenishment. These solutions accounted for more than 1.5 million of license revenue in the first quarter, which is more than double the result of a year ago.

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

Our license revenue for EMEA and APac were below our expectations for the quarter. In EMEA we had expected three deals to close at the end of the first quarter, each of which were delayed. We expect all three to close in the second quarter. And in fact, one has already closed with license revenue approaching $0.5 million. We have a solid pipeline of deals in EMEA for the second quarter and the balance of the year and expect to report solid growth in EMEA license fees in the second quarter.

Our reported license revenue for Asia-Pac has been and will continue to be lumpy. Japan has and will be a long march to success and has been for most companies similar to Manhattan Associates. But as the world's second-largest economy with a complex supply chain, we view our investment in Japan as important.

For China and India, these are rapidly growing markets with evolving supply chain needs. Today, they are developing roads and other infrastructure to enable further economic growth. The infrastructure improvements and the growth in domestic demand for consumer goods will lead to growing demand for sophisticated solutions to help them optimize their supply chains. So being in these markets early and developing first mover advantage is important and I believe an appropriate investment for Manhattan Associates. But I believe our results from China, India and Japan will be inconsistent over the near term.

Australia is a good market for Manhattan Associates but, given its small size, can be expected to deliver only so much to our overall results. We continue to be optimistic about our international opportunities and expect our international operations to grow to be 30% of our overall revenue over the next several years.

Our professional services organizations around the globe continue to perform well. Our services revenue result was a new record for any quarter but as important, the teams did a very good job increasing customer satisfaction. In fact, during the quarter, we took more than 100 client sites live on our solutions, more than double the success we achieved in the first quarter of 2006.

As you might be aware, we will be hosting our annual supply chain conference, which we call Momentum, May 6th through 9th in Las Vegas. This year's conference will be the most heavily attended in our history and more than half of the content will be delivered by supply chain leaders in our customer base. We think this reflects the continued strength and resident opportunity of our customer base.

I would like to take a few moments to share with you some of what our product and technology strategists will be discussing with our customers, partners, and prospects at Momentum.

As a provider of supply chain solutions to some of the world's leading companies, we believe it's our responsibility to innovate and invest in research and development to define next-generation solutions that will in turn help our customers create sustainable differentiation in their markets. Using the technology that we deliver today, our customers are reporting some impressive results. Here are just some of them. 10% to 20% fill rate improvements; 10% to 15% increases in revenue; 10% to 20% fewer lost sales; 10% to 20% improvement in promotion effectiveness; 10% to 20% inventory reductions; 5% to 10% lower fulfillment costs; 15% to 25% lower labor costs; and 10% to 20% lower transportation costs. Healthy as these statistics are, they are just a toehold in a total footprint of business improvements that can be realized by continuing to evolve the way we think about and apply supply chain strategies.

Most of this evolution involves optimizing business decisions across complex supply chains. Here's what I mean. A supply chain and its related infrastructure present a platform on which companies can build unique competitive capabilities. As a result, no two supply chains are identical. There are single-tier supply chains with one facility serving multiple customers. There are multi-tiered supply chains with hub and spoke models. There are multitiered supply chains with complementary third-party facilities. There are global supplies, domestic networks, consolidators, carriers, and many other constituents that make up a dynamic network.

And on the buying side of the supply chain -- finance, marketing, merchandising, product management and sales, all participate. Each of these parties has an opinion on how products should be planned for, bought, promoted, and allocated and there's no shortage of reconciliation challenges that needs to happen.

Regardless of the physical infrastructure or organizational model, managing this complexity will drive supply chain excellence moving forward. Here are some of the common themes that will evolve over the next decade to change the way leading companies operate and which we will discuss at our Momentum conference.

Information transparency, extended global enterprises, intelligent neural networks, cross application optimization, and service-based ecosystems. Let me cover the last two briefly here so you have an idea how we're working with our customers to innovate supply chain advantages.

Our visionary customers want to optimize functions across their supply chains holistically rather than engaging in separate optimization exercises by function. This approach, called cross-application optimization, eliminates the suboptimal decisions that can be made when companies look at planning and procurement decisions, for example, out of context of their warehouse and transportation decisions. As you can imagine, there are a host of other examples in which the contextual data and workflows needed to make the best decisions reside in more than one application.

While the idea of cross application optimization isn't really new and its benefits are intuitively clear, the actual deployment of this approach is relatively unique in supply chains today. The reason is that if you look at the challenge from a top-down perspective, you will conclude that you need to do a wholesale restructuring of processes, workflows, and applications. However, if you take a bottoms up approach and start with a sophisticated business process platform that hosts business intelligence, manages the integrity of data and processes and coordinates workflows across applications, you could manifest significant improvements through incremental changes.

Our business process platform, LEMA, provides a cross application supply chain view and gives customers a defined road map for improvements that don't require wholesale application changes. We believe we are the only supply chain solution provider capable of executing on this vision.

With an eye to the future, we are investing in every product in our suite to move beyond cross application optimization within a company to embrace an entire service-based ecosystem, which includes companies' trading partners and customers. Future supply chain leaders will mine intelligence from their performance and their extended enterprise operations. This will significantly impact ecosystem relationships as firms begin to realign their economic interests.

From our perspective, this is an exciting evolution for which we are well positioned. Our technology platform, workflow tools, business intelligence solutions, supply chain product footprint and 2000 supply chain experts give us the best opportunity to lead this next-generation of supply chain management solutions.

Solving the complexities inherent in this evolution requires next-generation algorithms that are a matter of science and math. Fortunately, our in-house Ph.D.'s and our science advisory board, which is comprised of some of the most advanced thinkers in the supply chain industry from institutions such as MIT, Georgia Tech, and Princeton, are helping us shape the math and science innovations of tomorrow.

For our customers, the bottom line of this advanced thinking is simple, less inventory, fewer trucks and warehouses, better customer service, more complete asset utilization, higher revenue, lower costs and a stronger business performance.

Now, with ten straight quarters of double-digit revenue growth, more than 2 times the market's growth, I believe it's clear we're winning the battles in the trenches today. And importantly, I believe our products and technology strategies and the investment we're putting behind them positions us very well to ensure we will win the wars of the future.

While it's fun to look forward, we're very much committed to delivering on the promises we make today. Toward that end, we continue to augment our associate base around the globe. At the end of the first quarter, we had a little more than 2000 employees, which is an increase of about 40 people since the end of the fourth quarter. Essentially all of this growth was in our services organization. Our global sales team was down a bit from Q4 as we pruned underperformers. We finished the quarter with a total of 76 people in our sales organization, of which 56 were direct sales reps. That compares with 79 in the total organization and 61 direct sales reps at the end of the fourth quarter. We're actively seeking top supply chains sales talent and continue to expect to finish 2007 with approximately 70 sales reps. However, our goal is to add only top-notch talent to help sell our solutions.

Our first-quarter results were in line with our plans, and our outlook for 2007 remains positive. And overall, our teens are executing well as our competitive position continues to improve. Let me now shift to our view of the second quarter and our full-year financial guidance.

Our sales pipeline looks strong for Q2 and for the balance of 2007. Please keep in mind we had a very strong quarter for license sales in Q2 of 2006, which resulted in a very strong earnings performance. So our growth rates in Q2 of 2007 over Q2 of 2006 won't approach our first-quarter growth rates. With our Q2 expectations for license revenue considerably larger than our Q1 results, and the difficulty of accurately predicting the precise time of closing software deals, we're widening the range of EPS guidance for the second quarter.

For the second quarter, we expect adjusted earnings per share to be in the range of $0.32 to $0.38. Because reported license revenue in Q1 and Q2 of last year was unusual, we believe the best way to evaluate our 2007 performance is to look at the combined first quarter and second-quarter results from both years. With our Q1 results of $0.23, the second-quarter guidance reflects first-half 2007 adjusted earnings per share growth of between 10% and 22%.

For the full year, we're raising our outlook for adjusted earnings per share by $0.05 to a range of $1.25 to $1.29 from our previous range of $1.20 to $1.24. This reflects an adjusted EPS growth rate of 16% to 19%, as compared to the previous range of 11% to 15%. About $0.01 of the $0.05 increase comes from improved operating performance and about $0.04 comes from our shares repurchased in Q1 and a lower effective tax rate.

To summarize, I believe our Q1 performance was good and we're confident about the opportunities ahead of us in 2007 and beyond. We believe we've made considerable progress in establishing ourselves as the best in class supply chain solutions leader.

Operator, we will now take questions.

(OPERATOR INSTRUCTIONS). Steve [Koney], Jefferies.

I just wanted to know if I could get a little bit of color on two things. One is, on the success with the Evant products this quarter, can you give us a little bit more detail on what kind of business problem was being solved? What vertical, etc.? And then secondly, also a qualitative question on, in terms of international. Can you remind us where you are with local language support -- WMS and non-WMS? Is that a factor or are there other factors that go into the kind of the bumpiness as well?

Sure, I'd be happy to Steve. In terms of the applications from the planning suite that was sold in the first quarter, we sold replenishment solutions as well as planning solutions in the first quarter. Now, we're not ready to declare victory on our march to becoming a leader of the supply chain planning space, but we do believe the progress in Q1 is encouraging and believe we have an attractive pipeline to build on over the balance of 2007. Now we believe it's an attractive market space and in the comments I shared earlier, believe that planning applications complement the execution applications very nicely, particularly for cross application optimization.

In terms of international product capability around the globe, I think most of you probably remember that in the United Kingdom and in Australia, two English-speaking countries, we offer the complete suite of Manhattan Associates solutions. But in the other markets, that aren't dominantly English-speaking, our solutions are limited to essentially our Warehouse Management Solution and Trading Partner Management Solution. And in those markets, the Warehouse Management and Trading Partner Management are translated into the local language.

But we do not offer the complete suite of solutions in markets outside of the United States, United Kingdom and Australia.

Terry Tillman, SunTrust Robinson Humphrey.

Pete, first question just relates to -- you are talking about directionally year-over-year we do have a tough comp for revenue. I can see where total revenue would be up, just based on the strength in services. Are you also contending that against that $21 million license number, that license revenue could be up year-over-year?

Terry, one of the things that I qualified in my comments, as you know, it's hard to predict precisely the timing of license revenue closing in the quarter. We believe we have a strong pipeline of second quarter deals and are confident the second quarter will be successful. But getting that nailed down exactly is a little challenging. We clearly, given the guidance that we've provided, expect to have a strong license revenue quarter in Q2. But as you know, we don't give specific license revenue guidance. So we're looking for a strong second quarter and look forward to a strong year in license revenue. But we don't give specific guidance.

Fair enough. In terms of EMEA, you highlighted three deals. So is it safe to assume all three of these deals are meaningful in size or is that 500K deal the largest of the three?

Yes, each of the three deals if and when completed are in that neighborhood of our average selling price overall, something in the $250,000 to $700,000 kind of range. They tend to lean more towards the low end of the range but each of them are important deals for us to close in the second quarter.

Okay. And then in terms of, Pete, one of the themes, almost kind of secular that you guys were talking about, or you started to in the second half of '06 was the idea of -- at least in the WMS market, maybe a bit of a renaissance and a replacement cycle. One thing I'm trying to figure out -- that sounds like an interesting growth opportunity -- but, what about the duration though? Could this have legs over a multi-year period? Or maybe you can give an analogy of a baseball game and what inning we're in, in terms of if indeed that's still playing out?

That's a great question, Terry. I will tell you it's our assessment at the moment -- it's hard to predict exactly which inning we're in, but we would expect this transformation replacement cycle time period to at least last through 2007 and 2008. Trying to predict beyond that is a little challenging, but as I think most folks know, at least half of the overall supply chain management solutions currently being used are legacy, home-grown solutions. So I think there is a tremendous opportunity over the balance of '07 and '08 and beyond to both replace other packaged applications and replace legacy home-grown solutions. So we think there is many innings left in the ball game.

Then Dennis, I don't want to leave you out of this. The question just relates to, it's pleasing to see the bump up in the repurchase program but, from your perspective, for planning purposes, what is the minimal cash balance that you guys would need to run your business, from your perspective?

Probably 50 million, somewhere around there, Terry.

Adam Holt, JPMorgan.

This is Nitin Doke for Adam Holt. Thanks for taking my question. A couple of quick questions. As we look at the buildup of the second quarter, could you talk about your pipeline, as in, have you seen any changes there with respect to large deals? Or have you made any changes to assumptions with respect to close rates, etc.?

For the second quarter, we would expect experience that has been comparable over the last couple of quarters averaged out. We expect -- I think you know in the last couple of quarters we've had three, sometimes four million-plus deals. Our expectation to achieve the guidance we provided for the second quarter is we will need three to four million-plus deals in Q2 and certainly have the pipeline to be able to deliver that. So we believe we're looking at second-quarter activity that is meaningful and not expecting any real difference in close rates.

Great. And could you talk about your plans for Europe? Are you still planning to make investments here and what -- could you talk a little bit about your progress you have made?

Yes, we were a little disappointed in not being able to close a little bit more business in Europe in the first quarter. But we believe we're building a strong franchise -- continue to build a strong franchise in Europe and are pleased with some areas of progress. We think we've got a strong team, strong solutions, and believe we will see better performance out of our EMEA market space over the next several quarters. Now, we're not making meaningful additional investments in our international markets. As I mentioned in my earlier comments, at the moment, we're focusing the majority of our investment in building out our product and technology solutions and deploying those in English-speaking markets, while in the non-English-speaking markets we're deploying our market-leading Warehouse Management solutions, but delaying introduction of our non-WMS solutions to those markets until we're a little further down the learning experience curve with those solutions. So, in Europe and in Asia, we believe we've got a solid footprint in those markets and are optimistic about our long-term success there.

Great. I have one last question from me is if you could speak a little bit about the macro environment, if you are seeing any changes in the pricing environment or if you are seeing any of your competitors getting aggressive here?

Yes, yes, I would answer that question in two respects. The macro buying environment continues to look solid. We didn't notice any material upticks or slowdown in prospects' intentions for supply chain management capital expenditures in Q1. So, we believe that's encouraging. Having said that then the market continues to be quite competitive and there certainly is price competition. In some regards, it's probably stronger than it's been in some cases or more fevered. And in other areas I think we are able to defend the value of our solutions as effectively and perhaps more effectively than ever.

Where the competition on price is more heated is where companies are looking at a point solution I believe for the near term and aren't as focused on the next three to five years in transforming their supply chains for supply chain excellence. And in those cases, companies are looking application against application, not across suites and price becomes an important variable in that regard. But when companies are looking at a holistic view of their supply chain, I think our solutions become much more compelling than most of our competitors and, therefore, companies are more committed to investing with us for the long run.

Philip Alling, Bear Stearns.

Pete, could you give us a sense if you've had any change in your view about underlying growth for applications in your markets? So, do you have any -- a changed view now versus say three or six months ago or even a year ago about what the underlying growth may be?

That's a good question, Philip. From what we can see so far, it looks like the overall market, as the analyst firms have suggested of that 6 kind of percent supply chain management growth feels about right. Obviously, we're growing considerably faster than that, but that feels about right. But I will tell you, I did notice JDA posted a pretty good Q1. So that encourages us that the buying environment, spending environment, is pretty solid and notice that a couple of others non supply chain management software solution providers had okay Q1s as well. So, perhaps the macro environment is improving. We would like to think so. We think that would contribute to even greater success for Manhattan. But from my window at the moment, I think it's a solid buying environment and about the same as it's been from for the last three to six months.

Is there any more color that you could provide with respect to regions outside of North America about what you think you may need to do in order to improve license execution there? And are there issues on staffing you need to consider? Or is the competitive dynamic different enough that it really does impact your ability to get deals closes in those other regions?

Yes, you know, I would suggest, Philip, it's slightly different in every one of our international markets. The competitors in many cases are different in those markets. The development of supply chains in those markets are different, meaning the level of complexity they have in those markets, and, therefore, the need for sophisticated solutions like ours today are different. I would suggest to you, I think for the most part we're on the right track. We continue to try to develop world-class talent around the globe and focus on global companies in those international markets that have the needs that can only be met with sophisticated solutions like ours. But I would suggest to you there, there isn't a one size fits all in our international markets and we're working very hard to continue to drive better performance in those markets. As I suggested, I think we will see better performance in the near term in Europe but I'm not expecting meaningfully better results in Asia-Pac in the near term, as that will continue to be inconsistent.

Just a question -- final one for me really is just on the operating cash flow number in the quarter that's lower than what we had seen historically for the March quarter. Any comments on sort of what investor expectations should be in terms of the ability of your financial model to generate cash going forward and something we should bear in mind as far as the performance for this particular quarter?

Yes, we like to target on average about $10 million of cash flow from ops per quarter, Philip. I think that's a reasonable target. I would expect that we should see a little bit stronger quarter in Q2.

Brad Whitt, RBC Capital Markets.

Dennis, just to follow up on that last question there, if you do 10 million a quarter in cash flow from ops, that's actually going to be quite a bit less than what you did last year. It seems like with the revenue growth, it would actually go up, but is there something we're missing there?

No, that's a good point, and we typically like to under-promise and over-deliver, Brad.

Okay, so if you actually do hit the revenue and earnings expectations that you've laid out for the Street, we would expect free cash flow to grow year-over-year?

Absolutely. Absolutely.

I'm just looking at the last two quarters, there's been virtually no free cash flow.

Yes, but if you look at -- if you look at 12/31/05 we had about $63.5 million of receivables and we drained that down about $8.5 million going into Q1 of last year. And we've been posting record revenues just about every quarter for the last three quarters. And our receivable base has been building. Our DSOs are very strong. We are very confident in terms of the quality of the receivables and our ability to pull those dollars in.

Are you doing some kind of extended payment terms, more so than you normally would or --?

No.

Okay. Pete, you may have mentioned this -- I was hopping around on a couple of different calls. But on the three $1 million deals that you had this quarter, can you give us a little color on which -- were those all WMS transactions? Were they new customers, existing customers?

Yes, I would be happy to. I did mention part of this in my prepared remarks but I will expand on it a little bit. Of the three deals, two were with new customers and one was an existing customer. All three had included in the transaction a Warehouse Management solution. But Brad, one thing I emphasized in my prepared remarks, in one of the deals, our Planning Applications were very important in winning the deal and importantly, building the size of the deal to include the Planning suite. So we were quite pleased with that transaction in the quarter.

Very good. Final question, Pete, can you give us some color on the thinking around exchanging the stock options for restricted stock? And can you tell us what the average stock price was for the options that were converted to restricted stock?

Sure, Brad, no options were converted from options (multiple speakers)

Or exchanged -- (multiple speakers)

No, we didn't exchange anything either. What we announced was a program beginning in 2007 to issue fewer stock options to replace the reduction in stock options with a proportion of the stock options in restricted stock. So we took -- I will make this -- average it out for you simplistically. We took the 2006 grant of stock options, cut that in half for stock option purposes so we issued about half the number of options but for the options that we eliminated, the other half we replaced those for associates with restricted shares on a basis of one restricted share for every three options. So the concept behind that is to over time reduce the number of shares that we're granting, the dilution and the overhang for Manhattan, which I think is quite valuable to shareholders, and at the same time, provide a fair reward to employees.

So, Brad, this is Dennis. So what you will see on an EPS impact of the restructuring of that program, stock option expense was about $0.19 last year. It will be about $0.10 this year.

Okay, that's very helpful. Thanks for the clarification. That's all I have.

Brad, one other point. I think everyone probably realizes this and that's for the GAAP results that Dennis was referring to. The difference for us in the non-GAAP results or adjusted results, we do include in that the costs for the restricted shares.

(OPERATOR INSTRUCTIONS). Mark Verbeck, Cantor Fitzgerald.

Congratulations on the quarter. When I look at the services performance, it's actually pretty phenomenal quarter on quarter and I think it's one of the fastest-growing sequential changes you've had. Can you tell me what went into that? Are you guys really tapped out in terms of how much you are delivering? Do you need to add capacity? Or just give me some more color on that and the mix between maintenance and services revenue in there, if there's any change?.

Yes, the relative proportion of maintenance services was about the same as it has been. We have a nice increase in maintenance revenue in 2007, based on the strong license revenue we had in 2006. But the services teams, particularly in the Americas, but also in other parts of the world, are really cranking. I think we probably mentioned this in previous calls, we have pretty good visibility on services business and feel good about our services revenue opportunities for Q2 and Q3. Q4 gets a little far out there but feel good about the performance expectations for the second and third quarter.

The demand for the great talent we have in our organization is quite strong. Dennis mentioned in his comments, we added about 20% in headcount in services over the past year and we expect over the next couple of quarters to continue to add to our services teams. I think the value of our applications are quite clear to customers and they are complemented by the strong teams that we put on the implementation of those applications in our customer base. So, the demand is quite strong for our services teams. I think we're doing a sound job of making sure we can adequately supply and appropriately train talent to meet that demand and are optimistic we will be able to continue to do that throughout 2007.

But it was a very strong performance. Rick [Frankie] and the Americas services team did a spectacular job in the first quarter.

Absolutely, great! One more thing. Can you just clarify something on the tax situation? If I looked at just the taxes, I know you gave us a number of 7/10 for taxes and buyback, but when I try to calculate it, I think I came that just taxes was about a penny, if I compared 38% and the 35.5%. And then just also clarify, what is driving that? Because typically if you have a geography that's losing money, you don't get that benefit, so sometimes I've actually seen tax rates go the other direction in that scenario. So if you could just clarify that, that would be great. Thank you.

Yes, the 7/10 of a penny is being driven off of a 37.5% rate, Brad. That was the guidance that we gave at the end of the year versus a 38%. So that probably accounts for your 3/10 difference. And then, on the international side, without a transfer pricing strategy/policy in place, you would see the tax rate go in the opposite direction if an international unit were throwing off operating losses because typically a Company can't take a tax benefit for that. So, what we're doing through tax planning is setting up our royalty rate structure by individual market, our management charges by individual market, etc., to maximize lower tax rates in other jurisdictions.

Operator, we have time for one more question.

Actually, sir, at this time we have no further questions. Do you have any closing comments?

Oh, that's very good! Great timing! Well, thank you all for joining us for the call. We appreciate everyone's involvement, apologize for being a few minutes late at the start and look forward to speaking with you again in about 90 days. Thank you.

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