Manhattan Associates Inc (MANH) 2007 Q2 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 second quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, July 24th, 2007. I would now like to introduce Mr. Pete Sinisgalli, CEO and 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, second 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're cautioned that any such forward looking statements are not guarantees of future performance and involve risk 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 14th, 2007 and the risk factor discussion in item 1.A 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.

In addition, our comments will cover certain non-GAAP financial measures, our earnings press release filed earlier today with our form 8-K reconciles each non-GAAP measure to the most directly comparable GAAP measure. Our form 8-K which contains important disclosures about our use of non-GAAP measures and our earnings release containing the reconciliation, can be found on our website at www.MANH.com. Now, I'll turn the call over to Pete.

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

We're pleased to report a superb second quarter, many of you may remember that in 2006 we reported a relatively weak first quarter as a few license fees slipped from Q1 into Q2. And as a result, we reported a very strong Q2 of 2006. Therefore, comparisons of this year's Q2 with Q2 of last year are more challenging. Nonetheless, I believe we delivered a strong second quarter of 2007, even when compared with an exceptionally strong result in the year earlier.

License revenue in the quarter was 23.4 million a new record and an increase of 10% versus Q2 of last year which was our previous record. In particular, our European operations had a great quarter. EMEA posted license revenue of about 4 million in the quarter. More than 3 times greater than the prior year. Total revenue was 89.6 million, a new record and an increase of 15% over the prior year. This quarter's record total revenue was more than 10 million greater than our previous record. And this marks the 11th consecutive quarter of double-digit revenue growth. Adjusted EPS was $0.36 for the quarter an increase of 6% over last year. And if you strip out the impact of a weaker dollar, our adjusted EPS growth was 15% over the same quarter last year.

Because of the timing of recognized license fees in Q1 and Q2 of last year, I believe investors can more fairly judge our progress versus last year by looking at our first quarter and second quarter results for 2007 combined. For the first half of 2007, license revenue is up 15% over the first half of last year. Total revenue is up 19% versus the same 6 months last year. And with industry analysts projecting market growth for supply chain management of about 6% for 2007 our growth so far this year is more than 3 times the market growth rate. Clearly we continue to take market share.

It's probably worth reminding everyone that our growth rates reflect only organic growth and are not boosted by the impact of acquisitions. Adjusted EPS is up 16% over the first half of '06. And if you exclude the impact of a weaker dollar, our adjusted EPS for the first half of 2007 would be up 22%. Dennis will now walk you through the financial details for the second quarter and I'll follow Dennis with additional comments after that.

Thanks, Pete. As Pete mentioned we posted a very strong quarter delivering solid growth in the second quarter and first half while continuing to outpace market growth in supply chain management space. In addition to the record revenue and EPS highlights Pete shared. This performance included the following. One, while Q2 adjusted diluted earnings per share was a record of $0.36 , we also delivered record GAAP EPS of $0.32 in Q2. An increase of 28% compared to Q2 2006. Our year-to-date adjusted diluted earnings per share increased 16% to a record $0.59. GAAP EPS increased 50% to a record $0.51. As you know, we have a large R&D center in Bangalore, India. As Pete mentioned, currency appreciation mainly in the rupee, negatively impacted EPS in the quarter on an adjusted and GAAP basis by about $0.03 year over year. On an apples to apples basis, excluding the impact of currency, Q2 adjusted EPS increased 15% and GAAP EPS increased 40% over Q2, 2006. On a year-to-date basis, adjusted EPS increased 22% and GAAP EPS grew 59%.

Currency impact reflects the changes in foreign exchange rates and foreign exchange losses included in other income. For your reference, we have added a detailed breakout of the currency impact by quarter and our supplemental information schedule included in today's earning's release. Second, during Q2, 2007 we repurchased 969,000 shares of our common stock, totaling $27.8 million, At an average share price of 28.67. Year-to-date we have repurchased about 1.9 million shares, totaling $52.8 million, at an average price of $28.42. Approximately $47 million remains under our current share repurchase authority. And 3, we continue to enjoy a strong cash position with cash and investments at June 30, 2007 totaling $96 million. Those are just a few highlights, now we'll share more specific details.

Our solid momentum continued from Q1 as we delivered consolidated revenue in the quarter totaling $89.6 million or 15% growth over the prior year quarter. Licenses, License Services and Hardware revenue lines all delivered record numbers. Year-to-date, we have generated 19% top line growth, totaling $167.8 million . Excluding the impact of currency, Q2 top line growth was 14%, and year-to-date growth was 18%. So the top line currency impact was a favorable 1 percentage point in the quarter and year-to-date. License revenues, the leading momentum indicator of our business were $23.4 million in the quarter, representing a 10% increase over a very strong comp in Q2, 2006. We signed 6 deals in excess of $1 million, which takes us to 9 1 plus million dollar deals signed in the first half of 2007. This is more than double the first half 2006 pace. Overall, our deal volumes and ASP contract sizes continue to reflect our growing market presence.

When we look at revenue from a geographic perspective, the Americas continued a solid performance, delivering record revenues, totaling $75.6 million with growth of 15% over last year's Q2, 2006. License revenues of $18.9 million were up 2% versus a strong 2006 comp that Pete eluded to in his opening remarks. A better comparison is America's first half license growth of 19%. Our international operations delivered combined total revenues of $14 million, increasing 15% over the prior year quarter, led by our EMEA segment. EMEA total revenue increased 43% to $9.8 million in the quarter on record license revenues of $4 million.

APEC total revenues of $4.2 million were down about $1 million, largely due to slower license sales. Overall, we continue to take market share from competitors. We believe the success continues to be 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, consolidated services revenue increased 15% to $55.9 million , compared to Q2, 2006 and 18% to $110.7 million year-to-date. The Americas segment continues to lead the way with record services revenue of $46.8 million, growing 20% over the prior year quarter. This marks two consecutive quarters of America's growth of 20+% over the prior year. Our success largely reflects our strength in closing large strategic accounts over the past 12 months. International services revenues were down about $200,000 over the prior year.

In the spirit of transparency starting this quarter, we're now reporting our services and maintenance revenues. The breakouts are included in item 3 of the supplemental information schedule included in today's earnings release. Services and maintenance revenue splits are presented by quarter for 2006 through Q2 of 2007. Maintenance revenues for the quarter increased 14% to $16 million and for the first half through 17% totaling $32 million year-to-date. Our double-digit growth is driven by new license deals and maintenance renewals which reflect the strength and loyalty of our growing install base. Additionally, our maintenance retention rates continue to track at a healthy 90+%. On the services margin side, Consolidated Services margins were 51.4% in the quarter, compared to 52.2% in Q2, 2006. The 80 basis point decline is due to head count additions to support growing demand for our services expertise. Our year-to-date services margins for 2007 were 52% versus 52.3% in the first half of 2006. Overall, we continue to be pleased with our services business performance and services demand outlook. Further, we expect services margin performance for the second half to be in the range of 52 to 53%.

Now, I'll cover operating income. Consolidated GAAP operating income in the quarter increased 26% to $13.7 million which includes $1.7 million of expense associated with acquisition amortization, stock option expense and sales tax recoveries. The increase in GAAP operating profit is driven by higher operating earnings and lower stock option and acquisition related expenses. Today's press release in our 8-K earnings release filed with the securities exchange commission provide a full reconciliation of GAAP results in 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 123-R. 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 mainly focus on adjusted operating income, adjusted net income and adjusted earnings per share performance. Here's a review of adjusted operating income. On a non-GAAP basis, adjusted operating income for the quarter increased 9% to $15.3 million. Adjusted operating margins were 17.1% versus 18.2% in Q2, 2006. For Q2, the 110 basis point decline in margins was driven by currency and restricted stock expense. As discussed on our fourth quarter earnings call, we altered our equity comp program by reducing our annual stock option grant and replacing eliminated options with restricted stock at a ratio of one share per three options, one restricted share for three options, the cost of the restricted stock is included in both our GAAP and adjusted operating income, and net income.

Excluding these impacts, operating margins would have been about the same as 2006 or 18.2% for the quarter. The Americas segment delivered operating profit of $14 million with strong Q2 operating margins of 18.5% versus 20.2% in Q2, 2006. The 170 basis point decline was driven by currency appreciation in the rupee related to our Bangalore operations, restricted stock expense and additional staff to meet -- hired to meet customer demands. Just a reminder, as disclosed in our 10-Q's and 10-K's for segment reporting purposes, all research and development costs included -- including our Bangalore, India operations are included in our Americas segment.

Both EMEA and APEC were profitable in the quarter. EMEA delivering $1.2 million and APEC about $200,000 in operating profits. EMEA operating margins were 12.1% on record license revenues of $4 million and APEC operating margins were a positive 4.5%. Our first half operating margins of 14.6% equaled the first half of 2006. Excluding the impact of currency, margins would have been 15%. We expect rupee appreciation to continue to put some downward pressure on margins in the second half of '07. Impacting about 50 basis points in each quarter. Overall, we are still targeting a 50 basis point improvement in 2007 operating margins, absorbing the currency impact.

Our adjusted operating expenses, which include sales and marketing, R&D, G&A and depreciation were $36.9 million in the quarter. Representing an increase of $5.6 million over the prior year quarter. $1 million of this increase was driven by currency and equity comp, expenses. Of the remaining increase, about $1.5 million was driven by higher variable selling expenses in the quarter, marketing expenses associated with our annual momentum conference, and investment new internal systems. The balance of the expense increase in the quarter represents additional head count investment in our India operations, sales and marketing and in G&A to support business growth. Total operating expenses for Q2, 2007 were 41.2% of total revenue, compared with 40.2% in Q2, 2006. That covers operating results.

Interest and other are income for Q2 totaled $300,000, down approximately $1 million over the prior year quarter. Lower interest income earned on lower cash balances and foreign exchange losses drove the decrease. We will continue to see lower interest and other income for the balance of the year driven by $53 million of year-to-date share repurchases and potential foreign exchange losses. Our effective income tax rate for Q2, 2007 was 35.5%, the same as Q1, 2007 for the full year we expect to achieve an effective tax rate forecast on 2007 GAAP and adjusted earnings of about 35.5%. On a non-GAAP basis adjusted net income for the second quarter was $10.1 million or $0.36 per share, a 6% increase in adjusted earnings per share over Q2, 2006. For the first half, net income grew 20% to $16.7 million or or $0.59 per share representing an EPS increase of 16% over the 2006 first half.

GAAP net income was $9 million for the quarter or $0.32 per fully diluted share, representing a 28% EPS increase over Q2, 2006. Year-to-date GAAP net income was $14.4 million or $0.51 per diluted share, representing a 50% increase over 2006 year-to-date earnings per share performance. Weighted average diluted shares outstanding for Q2, 2007 were 27.8 million shares, about 1% or 281,000 shares higher than Q2, 2006. Weighted average diluted shares year-to-date were 28.1 million, about 2% or 591,000 shares higher than 2006 year-to-date fully diluted shares. Sequentially fully diluted shares decreased 767,000 shares from 28.5 million shares in Q1, 2007 to 27.8 million shares in Q2. The decrease was principally driven by our share repurchases. Our adjusted EPS performance in the quarter was $0.36 with or without the EPS benefit of the share repurchases.

The first half impact of our share repurchases program was approximately 6/10 of a cent for the full year, our estimate of share repurchases accretion is about $0.02 per share, net of interest foregone. We are estimating our fully diluted weighted average shares to be approximately 28.1 million shares for 2007. For the remaining quarters we're estimating fully diluted shares of 28 million for Q3 and 28.3 million for Q4. These estimates depend on a number of variables such as, stock price, option exercises, forfeitures and share repurchases which can significantly impact our estimates. Our current forecast does not assume any common stock repurchases for the second half of 2007.

Now on to cash flow. For the quarter, cash flow from operations was a strong $13 million, down approximately 8 million from Q2, 2006. Due to higher working capital requirements driven by record revenue growth. Our DSO's for the quarter were 72 days, the same as in Q1 and up from 60 days in Q2, 2006. Q2, 2006 however, was an anomaly quarter driven by record license collections. Year-to-date cash flow from operations is $16 million compared to $31 million in 2006. About half of the decline in 2007 year-to-date cash flows is related to the $3 million legal settlement reached in Q4, 2006 and $4 million of incremental estimated income tax payments made in the first half of 2007 the remaining decline is simply the result of record revenue growing at a faster pace than collections. Our capital expenditures in the quarter totaled $3.5 million. Cash in investments at June 30, 2007 totaled $96 million, compared to $109 million at March 31, 2007. The decline was driven by our share repurchases, partially offset by our cash flow from operations.

And finally, deferred revenue, which consists mainly of maintenance revenue billed in advance of performing the maintenance services was approximately $32 million at June 30, 2007. Up from $30 million at December 31, 2006. This increase is driven by our strong business growth and as I mentioned earlier, our maintenance retention rates continue to track at a healthy 90+%. Now I'll turn the call back to Pete for the business update, and outlook for the

Thanks, Dennis. As mentioned earlier, our Q2 license revenue was a new record. It was a good quarter for warehouse management sales and a very good quarter for sales of our other products. Our non-WMS products accounted for 55% of license revenue in the quarter. Other training partner Management Solution had a particularly strong quarter, plus our supply chain planning applications posted license revenue of about 1 million in the quarter which represented increase of over 25% versus Q2 of last year. In fact our license revenue for our planting solutions for the first half of 2007 is greater than what we reported for all of 2006.

About 30% of second quarter license fees were generated from new customers and the remaining 70% came from our existing customer base. The Retail, Consumer Goods and Logistics Server Provider verticals once again combined for more than half of license revenue in the quarter. Our professional services organizations around the globe continue to perform well. In addition to posting strong financial results, the teams continue to drive improvements in customer satisfaction. For the first half of 2007 our global services teams helped customers go live with our solutions in more than 150 sites an increase of about 20% over the prior year and more than one go live each business day.

I want to take a moment to focus on one Q2 go live to add some color to what these teams are helping our customers accomplish. Cabelas is the nations largest direct marketer. And leading specialty retailer of hunting, fishing, camping and related outdoor merchandise. Cabelas is leveraging the breadth of our offerings by combining warehouse management, replenishment, assortment planning and supply chain intelligence solutions. Our professional services teams have worked side by side with Cabelas supply chain team to implement our solutions in ways that will enable Cabelas to optimize planning and execution across channels that include, internet sales at Cabelas.com, 76 different catalogs with a circulation of more than 120 million and 20 destination retail stores that average 170,000 square feet each and attract 40 million customers per year.

Centralizing common supply chain functions, while accommodating the diverse needs of each channel is at the heart of how our solutions will help Cabelas balance efficiency with customer service levels. Our ability to help customers create and execute sophisticated supply chain strategies such as this continued strength in this quarter as we release the latest version of our suite of supply chain solutions. Our R&D teams around the world did an exceptional job of meeting our objectives for this release, delivering on time, on budget with full functionality and high quality. This release represents the achievement of several significant milestones for our business.

First, we've completed significant integration between our supply chain planning and supply chain execution solutions. Second, we've reorganized how our solutions logically assemble to address specific customer needs. And finally, we're creating cross functional application integration that creates new advantages for our customers. One example is flow management, which integrates demand forecasting, replenishment, supply chain visibility, distributed order management and warehouse management to enable customers to dynamically match inbound supply with multiple channels of demand. This helps customers reduce overall network inventory, reduce labor requirements and increase customer service levels. To our knowledge, this new offering makes Manhattan Associates the only solution provider capable of optimizing the planning and execution of flow strategy.

Over 20 months ago, when we acquired our planning forecasting and replenishment solutions, we made a commitment to the market to become the first solution provider in our space to offer a complete set of fully integrated supply chain solutions, we're proving that we can deliver on that promise as we continually add value by bringing together planning and execution supply chain capabilities.

Head count during the quarter increased by about 150 to 2,150. About 120 of the additions are recent college graduates that will receive up front training and then move into full time positions. About half of the increase was in billable services positions. We also increased our direct sales rep head count by 9, from 56 to 65. 5 reps were added in the U.S. and 2 each in EMEA and AsiaPac.

Let me now shift to our view of the third quarter and the full year. While our third quarter has historically been seasonably soft we expect to post a good quarter this year in 2007. Our license revenue pipeline for the third quarter is solid. More over, the other parts of our business continue to perform well. As a result, for the third quarter, we expect adjusted earnings per share to be in the range of $0.29 to $0.34 . We posted $0.27 in the third quarter of last year, so our guidance reflects EPS growth of between 7% and 26% for the quarter. For the full year we're raising our adjusted EPS expectations by $0.02 per share. We now expect adjusted EPS to be in the range of $1.27 to $1.31 per share. The annual guidance range represents growth over 2006 of between 18% and 21%.

The supply chain management competitive landscape continues to evolve and we believe we are uniquely positioned in this space. At one end of the market you have the two big ERP's, SAP and Oracle. We expect SAP and Oracle to be meaningful competitors of ours for many years to come. We believe we compete quite well against them for businesses that require advanced supply chain solutions. We've also been able to leverage our ability to tie our supply chain solutions to ERP backbones fueled by SAP and Oracle. In fact many of our high profile wins have been with companies that have standardized on SAP or Oracle for the ERP needs that have also considered supply chain technology and processes strategic to their long term success. These companies desire the supply chain sophistication and capabilities end scalability only Manhattan Associates can deliver.

At the other end of the market you have the best of breed competitors, we believe we continue to distance ourselves from the other best of breed companies and are are clearly becoming the supply chain solutions leader. The breadth and depth of our solutions, the richness of our business process, technology platform, our continued investments in research and development. The strength of 2,150 Manhattan Associates supply chain experts and of course, the 1,000 plus supply chain leaders we have as customers position us well to continue to extend our lead in the supply chain space.

I'm quite excited about the great things we're accomplishing and confident about our future. I was very pleased at our board of directors meeting last week when the board offered to extend my employment agreement, which was set to expire in April by four years through April of 2012. I'm thrilled to accept the opportunity to continue to guide such a strong company to what I'm confident will be an expanding market success. To be sure, as with all companies, we'll continue to face our share of challenges. But I believe we have the right portfolio of assets, including our people, our solutions, our domain expertise and our customer base to surmount any challenges we face. To summarize we've had a very strong second quarter and solid first half of 2007. We're executing well and have confidence in our second half outlook. While there surely areas for improvement. We believe we are very well positioned to lead the supply chain management market and intend to capitalize on that opportunity. Thank you. An operator will now take

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Adam Holt. Adam your line is open.

Good afternoon and congratulations on the quarter, I wanted to drill down a little bit on the improvement in Europe. Particular, what were some of the key drivers this quarter and as you look into next quarter as you suggested, which is historically been sort of seasonably slow, what's sort of the build-up to your confidence level and the sustainability of that strength.

Number of things have been working for us in the last couple of quarters in Europe to build to a strong quarter in Q2, Adam? As you may remember from our Q1 conference call, we mentioned that a couple of deals slipped out of Q1 that we expected to close in Q2, something in the neighborhood of about a million dollars of revenue. So we were fortunate to have that business for the most part in Q2.

So some carry over from Q1 supported the Q2 results, plus the teams have been working quite hard at driving improved sales execution, we made some changes in our sales teams in the EMEA marketplace, and I believe those sales teams are performing well. Plus we've had some good continued support from other customers in the market that have been positive references for us. We believe we're continuing to build strong customer satisfaction in that market, beginning to build an expanded pipeline, and are optimistic about our third quarter performance in the EMEA marketplace. Traditionally Q3 is a soft quarter for us, but I believe our third quarter results in EMEA will be an increase in 2007 at a minimum over our 2006, third quarter results. And by the way, Adam. Thanks for the compliment.

If I could just ask one more question on the forward-looking guidance, you noted you expect operating margins to expand for the year, I think you said 50 basis points, applying a real back half acceleration at the margin, I was wondering if maybe you could also detail a little bit how you get there. Given that the RSU's will obviously continue, what are some of the key leverage points you expect to benefit from in Q3 and Q4, thanks.

Sure, Adam. Well we expect to have continued license revenue momentum in the second half of the year, historically we deliver about 46%, 40% of EPS in the first half year with a balance in the second half of the year. And we are expecting that to be about the pattern for 2007 so natural seasonality for license revenue helps in addition as Dennis mentioned and I commented as well. We've hired a number of folks in the first half of the year to staff up our services teams and expect those folks to be productive in the second half of the year which will help somewhat as well.

But for the most part, it's normal annual seasonality, quarter to quarter seasonality, that I think will make the difference. Dennis mentioned on an apples to apples basis excluding currency, our margin for the first half of the year was about 40 basis points better than prior year. Now, of course, we expecting to absorb the impact of currencies in our full year outlook and still deliver the 50 basis point expectations, but we believe we're tracking to do that. Of course, as Dennis also alluded to in his comments, we're expecting the dollar to be about where it is over the second half of the year, so if that moves much in one direction or another that may have some impact on us.

Your next question comes from the line of Robert Schwartz with Jefferies. Robert, your line is open.

Thank you so much. This is the second year where you've had a big first half that's been split with the first half a little weaker than expected. The second half significantly stronger, and I'm wondering if you see a pattern behind it and if you're taking actions to address that.

Robert, I think there's probably just a little more cyclicality in our business perhaps in the last year or two than there had been. As I mentioned, last year we did about 46%, 47% of EPS in the first half and we're expecting to do about the same this year. I think the -- Probably the biggest change we've seen, our Q1's the last couple of years have been a little bit weaker than they had been say in 2002, 2003, 2004, so, and we think that pattern will likely continue with strong license revenue sales in Q2 and Q4 and weaker license sales in Q1 and Q3. I believe the pattern of 2006 is the most likely outcome for us in 2007.

Have you had a very good quarter with a non-warehouse management? Maybe could you talk about you see legs there, it's bounced around a lot. And I'm wondering if there's trends that you see that are supporting growth of those products.

Thanks, Robert. We're pretty excited about the strength we've had in warehouse management as we've mentioned on previous calls, our warehouse management, license revenue has been growing at about 20% quarter over quarter for the last year and a half or so, it was down a little bit from that in this quarter, but still quite strong as we continue to take market share. We had a very good quarter for a non-WMS license revenue, and we'd like to think that will continue. We historically had about a 50/50 split, sometimes a little bit more WMS, sometimes a little bit more non-WMS. So I wouldn't read too much into a 55% non-WMS, 45% WMS quarter. We're enthusiastic that our ability to stack sell our solutions into our install base continues to be strong with about 70% of license revenue in the quarter coming from an install base, but still delivering good new customer additions with 30% of license revenue growth this quarter coming from new customers, so we think it's a pretty good balance. It will move a little bit quarter-to-quarter just depending on which deals close, as Dennis mentioned we closed 6 million dollar plus deals in the quarter, so the timing of those deals does have an impact on the statistics we report.

Your Next Question Comes From the Line of Terry Tillman with Suntrust Robinson Humphrey. Terry, your line is open.

Hey, guys, nice job on the license quarter. Pete, I guess we're going to have you around a little bit longer now. The first question just relates, Pete, to the fact that JDA software, which has a lot of retail and CPG exposure posted a strong quarter, you guys had a really strong license quarter, I know it's only about 50% to 60% of sales, so it's not all of your sales from those verticals, but still I can't help but notice the strength. Have you all been able to do a diagnosis from your field force in terms of are close rates improving, or is actually the sales coverage picking up. There's that many more leads that are developing.

I think Terry, it's a great question, I think our close rates are about the same improving a little bit. I think our win loss ratio though is probably the thing that is most different, In this past couple of quarters than it has been over the last year or two. We continue to take market share and believe we're winning a higher proportion of the deals we compete in. I think that's having the most profound impact on our ability to deliver higher license revenue growth. We do believe that we compete well with SAP and Oracle and those deals where the customer has a game plan for supply chain excellence. We also believe we compete very well against the other best in breed providers, I suggest to you there's a nice pipeline of business in the market space. I think the capital expenditure market continues to look about as it has over the past couple quarters looking out the next couple, I believe our strategic market position places us at a competitive advantage with many of our competitors and for that reason we are able to close a greater proportion of the deals we are entering.

Okay, and then in terms Pete, you were talking about you've owned Avant now for about 20 months, you guys have a strong -- a pretty large cash balance. Can you give us an update, in terms of as you look out over the next 6 to 12 months could we start to see an appetite again for acquisitions or do you feel like you're still digesting Avant and you have more than enough in the tool kit right now.

We would like to think that we're pretty well digested with Avant many quarters ago. But we continue to have things we need to do to improve our market position in the planning forecasting, and replenishment space. But we are very committed to market leadership in that space. Pretty good quarter, in that area, pretty good first half, but a lot of opportunity to grow our business and take more market share. But that's going to take a couple of years to continue to build out the market leadership in the planning forecast and replenishment space.

In terms of overall M&A activity, we continue to be quite interested in finding appropriate complimentary capabilities to our broad footprint of supply chain management solutions, we will stay very focused on the supply chain management space and try to find M&A opportunities that compliment our technology business process platform. Having said that we have been aggressive in looking for those opportunities, but have been disappointed to date that we've not been able to find a candidate or candidates that fit the profile we're looking for, but we have a strong team out beating the bushes on a regular basis, talking with most of the folks that are active in the market, trying to find a good complimentary opportunity for us to expand our strategic market positions. Just nothing that we've found in the last couple quarters to get us excited.

Your next question comes from the line of Phillip Alling with Bear Stearns. Philip, your line is open.

Thanks much, Pete, was wanting to get a sense from you as far as investment levels outside of the core North American market. You have made cautious comments in the past about investments that you wanted to make in non English speaking versions of your software, and in those regions in particular, so did anything occur in the quarter as far as your better performance in EMEA that would maybe change the thinking as far as sort of a -- the levels that you would make in investments in those regions?

It's a good question Phillip. No, I don't think there was anything in this quarter that would change our direction. We believe we've got a pretty good strategy for our European and Asia Pacific marketplaces, we're very focused in those marketplaces on profiled companies that match up well to our strengths. I think under the leadership of Steve Smith in Europe and Jeff Baum in Asia Pacific we've got a good strong footprint in those markets, But I also don't want to declare victory in EMEA off of one quarter and also recognize we have got more we need to do in both EMEA and AsiaPac to strengthen our position. So I think the game plan we have, the strategy we have in place for both of those markets continues to be appropriate but we, of course, will continue to fine tune it as the market evolves and we find opportunities to better position ourselves.

Your next question comes from the line of Atul Bagga with ThinkEquity. Atul, your line is open.

Thank you, guys. Thanks for taking my question. And congratulations on a great quarter. I was wondering you could give some commentary on the large deals, were these deals with new customers, how many were existing customers and also, how many of these deals were warehouse management? Thank you.

Yes, it's a great question. Give us one second to -- I don't have those numbers off the top of my head. Let me take a quick look, if you give us two seconds we'll be able to answer that question.

Five of the six large deals were in the United States. And one was outside the United States in Europe. Three of the large deals were WMS deals and three were non-WMS deals, that's the basic footprint of those deals, four were to existing customers and two were to new customers. Atul, did that answer your question?

Let's assume so, okay. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Yun Kim with Pacific Growth Equities. Yun, your line is open.

Thank you. First quickly, were there any 10% customers in the quarter?

No.

And then, can you talk about your plan to ramp up the consulting business, do you expect to ramp that business up at a accelerator rate going-forward due to your strong performance over the past few quarters? How would that impact your business and then also, how are you managing your relationship with system integrators such as IBM and [centure] now that you're signing bigger deals, which should interest them?

It's a great question. Our service business has been growing close to 20% for the last two years, we've been gradually adding head count in line with our overall revenue expectations, we have got, I think, relatively good visibility out at least 2 quarters, probably 3 quarters for demand for services and believe we have solid demand for services from existing customers for the next 9 months. We have been staffing up. As I mentioned in my prepared remarks. We added about 120 college grads to help build capability to be able to deliver on that customer demand and believe we'll continue to try to grow head count in line with services, revenue growth, but we'll take opportunities each summer to try to bring in college grads, put them in a little bit of a training program for a while, and staff them on projects to get them up to speed.

So you'll see a little bit of a spike in summer months as we try to add some capacity and then leverage that capacity over the balance of the year. But basically head count growth will be in line with services revenue growth. In terms of our relationship with the big integrators, I think as you pointed out they continued to become increasingly interested in the relationships with us. I think as our market presence continues to grow, we can become a more important part of their overall value proposition. And are finding our relationships with the big systems integrators continuing to improve. We have got good relationships with most of the major SIs and I think those are getting stronger.

And thank you, and Dennis, long term liabilities saw a pretty good sequential uptick there from about 2 million in Q1 to 9 million in the end of Q2. What's behind that increase?

It's GAAP accounting. We expanded into our new facilities in the Atlanta office. And the landlord funded tenant improvements of about $8 million Yun, and we have to treat that as deferred rent. So it's a balance sheet gross up.

We were fortunate, we stayed in the same building that we had been in in the Atlanta area and due to market conditions, we're able to get additional space in that facility in total at a lower price than we had been paying historically for the smaller space. So it worked out very well for us, and as part of that we extended our lease.

Your next question is a follow-up from the line of Philip Alling with Bear Stearns. Philip, your line is open.

Thanks very much. Pete, I wanted to get a sense from you as far as assumptions that you're making in your guidance as far as large deals are concerned. You have given us some visibility in the past in terms of what your expectations were on large deal closures, perhaps can you share that with us again.

Sure, be happy to Philip. Generally speaking, we closed 3 to 4 large deals per quarter and we'd expect something in that neighborhood to persist in Q3 and Q4.

Okay. That's what I have for now. Pretty much. I appreciate that.

Great, thanks Philip. Very good. Operator, we have got time for one more question.

Okay, sir. Your final question comes from the line of Mark Schappel with Benchmark. Mark, your line is open.

Hi. Nice job on the quarter, and I wonder if you could talk a little bit about your partnerships and how well they performed in the quarter, specifically the Microsoft exact and the IBM relationship.

Sure, we'd be happy to. The IBM relationship is one that, I think, has got great potential for Manhattan. It's a good relationship currently. But I think it's improving and I think we have real opportunities to leverage one another. Obviously in the case of IBM, there's natural synergy between we and they for the AS400 or I series customer base. So hardware, software, and database opportunities for them there.

But also in their global services business and in their vertical market focus we're seeing increased interest on their part and the marketplace's part for joint proposals from Manhattan and IBM. We have got a number that we're implementing together today that are working well, and I'd like to believe that IBM's broad reach complimented with our sophisticated supply chain solutions in the marketplace can help both of us develop a more successful business.

In terms of Microsoft, we continue to have a very positive relationship with Microsoft. We have taken a little bit of a step back in the exact partnership. I think I mentioned this on a previous call. Recognizing from a Manhattan Associates perspective, that market segment -- that exact partnership, the IBI partnership was focused on -- probably wasn't the best use of Manhattan resources, so we backed off of that relationship and Microsoft is looking for other alternatives to fill that need. But we continue to have a very strong relationship with Microsoft, more at the enterprise level with their larger channel partners and with Microsoft in total looking at both structural functional solutions as well as vertical market specific solutions.

So we're very pleased with our relationship with Microsoft, they're being quite helpful to us from a technology perspective, helping us advance a Microsoft based solutions offering, they did some pretty cool things with some of the most recent releases of that product in large part helped by Microsoft. So, in those two cases we feel very good about the opportunities for us going forward. Well very good. Thank you everyone. We appreciate your attention this afternoon. We'll be speaking with many of you in one on one calls later today. So look forward to getting caught up with you. Thanks very much spending time with us and we look forward to speaking with you in about 90 days. Thank you.

This concludes today's Manhattan Associates second quarter 2007 earnings conference call. You may now disconnect.