Manhattan Associates Inc (MANH) 2007 Q3 法說會逐字稿

I will like to welcome everyone to the Manhattan Associates' third quarter 2007 earnings conference call. (OPERATORS INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, October 23, 2007. I would like to introduce Dennis Story, CFO of Manhattan Associates and Peter Sinisgalli, Chief Executive Officer of Manhattan Associates. Mr. Story, you may begin your conference.

Thank you, Stephanie. And good afternoon, everyone. Welcome to the Manhattan Associates' 2007 third quarter earnings call. Firstly, we would like to apologize to those who have not received a full set of financial schedules over the wire. Our wire distribution service is experiencing some technical difficulties, but should have the full set of financial schedules available within the hour. However, our 8-K has been filed with the SEC and you can find a complete set of our financial schedules along with the release on our website at www.manh.com. So, before we launch into the results discussion today, I will review our cautionary language and then turn the call over to Peter 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 these forward-looking statements involve risks and uncertainties, are not guarantees of future performance and that actual results may differ materially from those in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-K for fiscal 2006 and the risk factor discussion in that report. We are under no obligation to update these statements.

In addition, our comments will cover certain non-GAAP financial measures. These measures are not in accordance with or alternative for GAAP and may be different from non-GAAP measures used by other companies. We believe that this presentation of certain non-GAAP measures facilitates investors' understanding of our historical operating trends with useful insight into our profitability exclusive of unusual adjustments. Our Form 8-K filed today with the SEC and available from our website, www.manh.com, contains important disclosure about our use of non-GAAP measures, and our earnings release filed with the form 8-K reconciles our non-GAAP measures to the most directly comparable GAAP measures. Now, I will turn the call over to Pete.

Thanks and welcome to our third quarter earnings call. I'll start the call by reviewing highlights from the quarter. Dennis will then get into the details of our financial results. I will follow with additional details about our business and provide a view of the fourth quarter of 2007 and then we will move on to questions. I'm pleased to report that we posted another strong quarter. Our 12th consecutive quarter of double digit revenue growth. For three years running, we've been able to grow at a rate double than that of the overall market. For the third quarter, license revenue of $17.3 million or 14% better than last year's third quarter. Total revenue was $84.6 million, an increase of 17% over Q3 of last year.

For the quarter, we achieved adjusted earnings per share of $0.34, which is better than the prior year's Q3 by 26%. We signed some very important new clients across our solution suite during the quarter, including four deals with license revenue of $1 million or more. And we continue to take market share as 55% of our quarter's license revenue was from new customers. Based on our third quarter results, our results on a year-to-date basis and our solid outlook for Q4, we're revising upward our guidance for EPS for the full year. I will go into that in more detail following Dennis' remarks. Dennis?

Thanks, Pete. As Pete mentioned, Manhattan's top line growth momentum continued in the third quarter as we delivered record Q3 and year-to-date revenue and earnings per share performance. EPS and net income highlights for the quarter were as follows: We reported Q3, 2007 adjusted EPS of $0.34 today, representing a 26% increase over the Q3, 2006 adjusted EPS of $0.27. Adjusted net income for the third quarter increased 23% to $9.3 million over Q3, 2006, and year-to-date adjusted EPS performance increased 21% to a record $0.94 compared to $0.78 in the same period a year ago. Year-to-date adjusted net income of $26 million also increased 21% over the comparable prior year period.

On a GAAP basis, we reported record GAAP EPS of $0.29 in Q3, an increase of 53% compared to Q3 of 2006. Year-to-date GAAP EPS was $0.80, representing a 54% increase over the same period in 2006. GAAP net income for Q3 of $7.9 million increased 50% versus Q3, 2006 while year-to-date GAAP net income of $22.3 million increased 54%. As you know, we have a large R&D center in Bangalore, India, which continues to drive significant pressure on operating margins and earnings per share due to currency appreciation in the Rupee. The Rupee appreciation year-to-date has generated a $0.05 reduction in EPS and a $0.02 reduction in Q3, 2007. Overall, the foreign exchange rate variances, including the Rupee, negatively impacted GAAP and adjusted operating income by about $600,000 or $0.01 per share in Q3, 2007.

The negative $0.01 impact of currency changes on operating results was offset $0.02 of foreign exchange gains and other income. The combined net impact of currency appreciation in foreign exchange gains in the quarter of GAAP for GAAP and adjusted EPS was a net increase of $0.01 per diluted share. On a year-to-date basis, currency changes, including the Rupee, negatively impacted GAAP and adjusted operating income by $1 million or $0.02 per share. The negative $1 million impact of currency changes on operating results was partially offset by $273,000 of foreign exchange gains and other income. The combined net impact of currency appreciation and foreign exchange gains reduced GAAP and adjusted EPS results by $0.02 on a year-to-date basis. For your reference, we have added a detailed breakout of the currency impact by quarter, including a stand alone breakout for the Indian Rupee in our supplemental information schedule included in today's earnings release.

On to revenue and operating results. Our solid revenue momentum from the first half continued as we delivered Q3 consolidated revenue totaling $84.6 million or 17% growth over the prior year quarter. Our license, services and hardware revenue lines all delivered record Q3 numbers. America's continued its solid performance delivering revenues totaling $69.9 million with growth at 15% over last year's quarter. Our EMEA and APAC operations delivered combined total revenues of $14.7 million, increasing 28% over the prior year, led by the EMEA segment. EMEA delivered record Q3 revenues of $10.5 million representing a 62% increase over Q3, 2006. On strong license and services revenue performance of 2.3 and $7.4 million respectively.

APAC total revenues of $4.3 million were up about $100,000 sequentially over Q2, 2007, but down over the prior year quarter by $800,000. Year-to-date, we have generated 19% top line growth totaling $252.4 million. Excluding the impact of currency, Q3 top line growth was 16% and year-to-date growth was 17%. So, top line currency impact was a favorable 1 percentage point in the quarter and about 2 percentage points year-to-date. License revenues, the leading momentum indicator of our business were $17.3 million in the quarter, representing a 14% increase over Q3, 2006. Including four deals signed this quarter, we have closed $13 million-plus deals year-to-date, which is nearly double our 2006 nine-month pace for signing deals of this magnitude.

America's license revenues of $14.3 million were up 3% in the quarter and 13% year-to-date. EMEA posted record Q3 license revenues of $2.3 million for 132% increase over the prior year quarter, and APAC, albeit small, tripled its license revenues to nearly $650,000 in the quarter. Our Q4 pipeline is solid across all geographies and the volume and magnitude of both our software licenses and ASP contracts continue to reflect our market leadership position. Regarding services revenue, on a consolidated basis, they increased 14% to $58.4 million versus Q3, 2006 and increased 17% to $169.1 million year-to-date. The America segment continues to lead the way with record services revenue of $47.7 million, growing 15% over the prior year quarter.

Year-to-date, America's services revenue has increased 20% to $140.4 million. This pace largely reflects our strength in closing meaningful strategic accounts over the past 12 months. At $7.4 million, our EMEA region logged its second strongest services revenue quarter since Q3 of 2004, helping to drive international services revenues overall to $10.7 million, an increase of 10%. Maintenance revenues for the quarter increased 6% sequentially and 13% over Q3, 2006 to $16.9 million. Year-to-date maintenance revenues increased 15% and totaled $48.9 million. Our double digit growth in this area stems from the increased volume of new license deals and maintenance renewals which reflect the size of loyalty of our growing install base. Our maintenance retention rates continue to track at a healthy 90-plus percent.

For services margins, consolidated services margins were 51.7% in the quarter, a 30 basis point improvement over Q2, 2007, but down compared to 53.6% in Q3, 2006. A couple of factors create this interplay. First, we have increased our services head count by 20% year-over-year to support escalating demand for our services expertise. Second, margins reflect the more intricate services work required as our sales mix shifts from our heritage I-series platform to our open systems platform. Our year-to-date services margins for 2007 were 51.9% versus 52.8% in 2006. Overall, we continue to be pleased with our services business performance and demand outlook. We expect services margin performance for the year to be in the range of 51 to 52%.

Hardware and build travel revenue increased 46% or $8.8 million in the quarter and is up 39% year-to-date compared to the comparable period last year. For the quarter, hardware revenue is up 69% driven by demand from larger accounts and billed travel is up 19% on higher services revenue. A strong revenue growth in the quarter shifted our revenue mix and increased hardware as a percent of revenue from 8% in Q3, 2006 to 10% in Q3, 2007. This shift equated to about 110 basis point decline and operating margins from revenue mix. We have provided revenue splits between hardware and billed travel and our supplemental information schedule included in today's earnings release.

In summary, revenue momentum continues with Q3 and year-to-date growth of 17% and 19% respectively. Moving on to adjusted operating income, adjusted operating income for the quarter increased 10% to $12.7 million compared to 11.7 - $11.6 million in the prior year quarter. Excluding the negative currency impact of $580,000 driven by $693,000 of Rupee appreciation, adjusted operating profit growth was 15% in the quarter. Adjusted operating margins were 15% versus 16% in Q3, 2006. For Q3, margins were negatively impacted 110 basis points due to a shift in revenue mix to lower margin hardware revenues and 160 basis points tied to currency and restricted stock expense.

As a reminder for 2007, we altered our equity comp program by reducing our annual stock option grants and replacing eliminated options with restricted stock at ratio of one restricted share for three options. The cost of the restricted stock is included in both our GAAP, adjusted operating income and net income. Excluding these impacts in the quarter, Q3, 2007 operating margins would have been 17.7%, 170 basis points better than Q3, 2006 margins of 16%. The America segment delivered operating profit of $11 million with operating margins of 15.7% versus 20% in Q3, 2006. Excluding the impact of hardware on revenue mix, currency appreciation in the Rupee, which is related to our Bangalore operations and restricted stock expense, Q3, '07 margins were 19.2%. The remaining 80 basis point decline is driven by 20% increase in professional services staff to satisfy growing services demand.

Just as a reminder, as disclosed in our 10-Q and 10-K for segment reporting purposes, all research and development costs, including our Bangalore, India, operations, are included in our America segment. Both EMEA and APAC were profitable in the quarter with EMEA delivering record operating profit of $1.5 million and APAC nearly $300,000 in operating profits. EMEA operating margins were 14.1% compared to a negative 10.9% margin in Q3, 2006. APAC operating margins were 6.1% for the quarter, up 320 basis points over Q3, 2006. For year-to-date, adjusted operating margins were 14.8% compared to 15.1% in the comparable period last year. Excluding the impact of currency, restricted stock expense, and revenue mix, margins would have been 190 basis points higher at 16.7%.

The sequential impact of the Rupee appreciation was a 51% increase in the currency dollar impact from Q2, 2007 to Q3, 2007, negatively impacting margins 60 basis points. Because we expect the continued strengthening of the Rupee and continued strong hardware sales, we are planning for full year 2007 margins to be flat to slightly better than 2006 full year operating margins of 15.7%. Our adjusted operating expenses, which include sales and marketing, R&D, G&A and depreciation were $34.7 million for Q3, 2007, an increase of $4.5 million dollars over the prior year quarter. $1.2million of that increase was driven by currency and restricted stock expense. 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 Q3, 2007 were 41.1% of total revenue compared with 41.9% in the comparable Q3, 2006 period. That covers operating results.

Interest and other income for the quarter totaled $1.6 million, up $1 million over the prior year quarter. Driven by $900,000 in foreign exchange gains. For the fourth quarter, we expect interest and other income to be in the range of approximately $500,000 to $1 million. Our effective income tax rate for Q3, 2007 and year-to-date was 35.5%, the same as we reported for the first half, and for the full year we expect to maintain 35.5% for both GAAP and adjusted earnings. Diluted shares outstanding for Q3, 2007 decreased 2% to 26.9 million shares compared to 27.5 million shares in Q3, 2006. Diluted shares year-to-date of $27.7 million were flat with 2006 year-to-date diluted shares. Sequentially, fully diluted shares decreased 3% from 27.8 million shares in Q2, 2007 to 26.9 million shares in Q3, 2007, reflecting the impact of our share repurchase program. During Q3, 2007, we repurchased 809,680 shares of our common stock totaling $22.2 million at an average share price of $27.37.

Year-to-date, we have repurchased about 2.7 million shares totaling $75 million at an average price of $28.10. In addition, our board has approved the repurchase of up to a total of $50 million of Manhattan Associates stock. Our adjusted EPS performance in the quarter was $0.34 with or without the EPS benefit of the Q3 share repurchases. The year-to-date EPS impact from our share repurchase program was accretive by approximately $0.01. For the full year, our estimate of the share repurchase accretion is about $0.02 per share net of interest foregone. We're estimating our diluted shares for Q4 to be approximately 27.5 million shares and full year 2007 shares to be approximately 28 million shares. These estimates depend on a number of variables such as stock price, option exercises, forfeitures and share repurchases which can significantly impact our storm systems. The current forecast does not assume any common stock repurchases in Q4, 2007.

Now on to cash flow. For the quarter, cash flow from operations was $6.4 million, down approximately $3.5 million of Q3, 2006 due to higher working capital requirements stemming from two factors: Record revenue growth mainly in America's services, and strong license and services growth in EMEA for the past two quarters. Our DSOs for the quarter rose to 80 days compared to 72 days in Q2, 2007. EMEA contributed three of the eight day increase as nearly 80% of that region's year-to-date revenue has been generated in the last two quarters. Very strong momentum. The remaining five days came from Americas and is tied to record services growth. From a year-to-date perspective, cash flow from operations is $23 million compared to $41 million in 2006.

About half of the decline in 2007 year-to-date cash flow is related to $3 million of legal settlements reached in Q4, 2006 and $6 million of incremental estimated income tax payments made in the first nine months of 2007 because we're making lots of money. The remaining difference is the result of increased working capital attributed to record revenue growing at a faster pace than collections. While our collection trends are positive with sequential growth in every quarter this year and record collections in Q3, our year-to-date collection growth of 7% is outpaced by our record revenue growth of 19%. Our network and capital, excluding cash, at the end of Q3, 2007 was $14 million compared to $8 million for Q2, 2007 and $2 million at the end of Q4, 2006. The $12 million growth from the beginning of the year is all in trade receivables.

Overall, the quality of our receivables are very solid and we have seen no deterioration in our aging. As you know, a number of factors can cause DSOs to fluctuate from quarter to quarter, such as increased revenue growth, which Q4 typically is our strongest revenue quarter. Also, timing of customer payments, length in payment terms on competitive deals and geographic mix related to revenue growth and collections performance. With all of that said, our objective is to deliver mid-70s DSO for the fourth quarter. Our capital expenditures for the quarter totaled $1.5 million, bringing year to date CapEx spend to $7.9 million compared to $7.5 million for year-to-date 2006.

Our cash investments at September 30, 2007, totaled $82 million compared to $96 million at June 30, 2007. The difference was driven by our share repurchases investment partially offset by cash flow from operations. And finally, deferred revenue which consists mainly of maintenance revenue billed in advance of performing the maintenance services was approximately $34 million at September 30, 2007, up from $30 million at December 31, 2006. The increase is driven by strong business growth and our continued 90-plus percent maintenance retention rate. Now, I will turn the call back to Pete for the business update and outlook for the remainder of 2007. Pete?

Thanks, Dennis. As you might expect, I'm quite pleased with the results Dennis just reviewed. I'm particularly encouraged by our continued success adding new customers to our roster, even as we continue to expand the software and services we deliver to our existing customer base. I won't run through the long list of new customers and expanded relationships as the major ones are listed in our earnings release. Two of the four million dollar plus deals this quarter were with new customers and two were with existing customers, all in the Americas. Two were warehouse management deals, one was for transportation management, and one for sliding optimization. The retail consumer goods and logistics server provider verticals were once again strong contributors to our license fees and together these sectors represented more than half of license revenues in the quarter.

As I mentioned in my opening remarks, about 55% of the quarter's license revenue was from new customers and about 45% from existing customers. Year-to-date, the ratio is about 45% new customers and 55% existing. I believe our success in adding new customers is a clear indicator that we're capturing substantial market share. Several of these new customers have chosen SAP or Oracle for their back office applications and have chosen Manhattan to drive their supply chains. I believe this is further proof we will continue to both compete with and integrate with the two big ERPs quite successfully. About 60% of the quarter's license revenue was for warehouse management solutions and about 40% for our other supply chain solutions.

Our supply chain planning applications continue to achieve strong license growth with revenue of about 1 million in the quarter, up 50% over last Q3. On a year-to-date basis, our planning applications have captured about $4 million in license revenue, almost double the results of the first three quarters of last year. For Q3, America's license revenue was up 3% versus the prior year and year-to-date it's up 13%. EMEA continues to show strong improvement with its Q3 license revenue results. For the quarter and also for the year-to-date, EMEA license revenue more than doubled versus the prior year. And, as Dennis mentioned, APAC showed improvement in Q3 off the small base. License revenue was about $650,000, about three times the amount recorded last year.

In the quarter, three of our important deals were for online warehouse management solutions providers. As a number of our customers begin to look for second generation WMS solutions to help manage their online service offerings. As companies look to upgrade their online distribution channels for the next phase of growth, they are finding Manhattan Associates to be the best choice for replacing existing systems to ensure they can manage the unique demands of online consumers. Similar to the overall replacement cycle we've been seeing for the past couple of years for warehouse management systems, this replacement cycle for eCommerce driven needs will likely continue to add market share for Manhattan Associates. We now have over 2,200 employees around the globe. That's an increase of about 50 since the end of the second quarter. Essentially, all of the increase in staff resides in our India office.

During the quarter, we lowered our direct sales rep head count by six from 65 to 59, mostly by pruning underperforming sales people. Two of the six were in the United States and the remainder overseas. We view our substantial investment in research and development as a material competitive advantage. We have about 800 people in R&D, which is more than a third of our total staff. With the majority of our R&D team in India, we are able to maintain our cost of R&D at about 14% of revenue.

I apologize for the folks on the call if there is some noise in the background. There is a severe storm taking place in Atlanta. If you have been reading the newspaper, Atlanta can certainly benefit by a severe storm. We aren't complaining about it, but it might create some background noise. I apologize for that. Customer satisfaction continues to grow. During Q3, we hosted our customer conferences in Tokyo, Singapore, Sidney and Paris. Each was well attended and provided a forum for customers and prospects to provide feedback which confirmed to us that we are doing the right things regarding the value we deliver today and innovations we are planning for the future.

As I mentioned at the start of the call, our pipeline for Q4 is strong and our outlook for the remainder of the year is positive. Please keep in mind that services revenue in Q4 will likely be lower than that in Q3 as it traditionally is due to two factors. First, the holidays that fall in Q4 reduce the number of working days and, second, the intensity of the holiday shopping season requires many of our customers to focus on meeting their sales goals during the quarter which takes some focus away from supply chain initiatives. Normally, we experience a seasonal sequential decline in our services revenue from Q3 to Q4 between 2 and 4%. We expect a similar result this year. Also, because of a lower revenue in the quarter, we expect a somewhat lower services margin in Q4 than in Q3. As Dennis mentioned, the continued strength of the Indian Rupee and higher than expected revenue mix to lower margin hardware revenues leads us to expect our full year of 2007 operating margin to be flat to modestly higher than 2006 rather than the 50 basis point improvement we had previously expected.

With our strong year-to-date results and a solid Q4 outlook, we are increasing our EPS guidance for the full year. Our previous guidance called for adjusted EPS of $1.27 to $1.31. We are raising that by $0.02 at the bottom of the range and $0.03 at the top of the range to $1.29 to $1.34. Our 2006 adjusted EPS result was $1.08. So the new guidance range represents growth between 19% and 24%. The revised annual guidance translates into Q4 adjusted EPS of between $0.35 and $0.40 per share. Our Q4, 2006 adjusted EPS was $0.31. So our guidance range represents growth of 13% to 29% for the quarter. At our board of director's meeting last week, the board authorized a $50 million share repurchase program. We had 25 million remaining in the previous program and that has been replaced with a new $50 million program.

In addition, at the meeting the board approved adding two new directors. Pete Kight and Dan Lautenbach. Pete is Chairman and Chief Executive Officer of CheckFree Corporation. CheckFree is a Nasdaq company that leads the market for eCommerce solutions for financial institutions. Dan Lautenbach spent most of his career in executive leadership positions at IBM, including leading worldwide sales for the software division. We're excited to have Pete and Dan join our board.

To summarize we're pleased with our progress to date and confident that we will be able to deliver strong financial results for many years to come. Our strategy to be the global leader of supply chain solutions that optimize the supply chains of market leading companies, is dependable and is set to create substantial shareholder value. Industry analysts forecast the global supply chain management solutions market to be a $6-plus billion market in 2007. According to the analysts, we are the third largest player in the space based on revenue. The two largest are SAP and Oracle with about 10% market share each compared to our 4% global market share. The remainder of the market is highly fragmented and largely occupied by companies that will not be able to compete successfully over the next several years. Many of them are struggling mightily today and are being rolled up by one another or positioning to be rolled up.

Over the last several years, we have consistently achieved growth rates above the market and taken substantial market share while continuously increasing profits. As I mentioned earlier, Q3, 2007 marks our 12th consecutive quarter of double digit revenue growth. With a highly fragmented market and the globe leading solutions in that market, we believe we can consistently grow revenue and market share at rates similar to what we've achieved the past 12 quarters for many years to come, and we look forward to sharing that success with our shareholders. Operator, we'll now take questions.

(OPERATORS INSTRUCTIONS) Your first question comes from the line of Philip Alling with Bear Stearns.

Thanks very much. First question from me, with respect to the EMEA performance, we've had a couple quarters now of stronger growth there. Could you give us a sense as to what is driving the improved performance in that region and should investors be of the view that is sustainable?

Sure, Phillip. Great question. We believe generally two things are contributing to the improved results we shown in Europe in Q2 and followed up with a strong Q3. Firstly, over the past three or four quarters we made some meaningful changes in the way we operate that business and the personnel leading those operations. We believe that's having a noticeable positive impact. Secondly, we believe the economies in the Europe have improved as well. We've certainly benefited from that. We believe looking forward that the changes we made in the business should continue to drive improved operations out of EMEA and we expect the economies in Western Europe, in particular, but also in Eastern Europe to continue to show about the kind of growth they shown the past couple of quarters and expect Manhattan to continue to post good results from that part of the globe.

Asia-Pac, the revenue performance was down year over year. Are there some sort of additional sales people you want to devote to that region? How should we be thinking about performance on a going forward basis in Asia-Pac?.

Yes. A couple of things for Asia Pacific as well. We were very fortunate a couple years ago to win the business of a large client in Australia, Coles Meyer. We have a very positive relationship with Coles Meyer and we're continuing to expand that relationship as we roll out our solutions to more and more of their sites. Having said that though, the majority of the work for Coles Meyer is behind us. We'll have meaningful relationship with them in 2008 and 2009, but we had very extensive, particularly services business, relationship with them in the past couple of years. The reduction in services revenue with Coles Meyer is the primary driver of the reduction in overall revenue for Asia Pacific.

Now, to offset that, we made a number of incremental increases in our sales team around the Asia Pacific region and expect to see those paying off as early as Q4 of 2007 and certainly for 2008. As we've mentioned in earlier calls, early stage for supply chain management in the Asia Pacific region, particularly China, India and those markets, we believe being in those markets early with a physical presence is important to establish first mover advantage and we believe we are doing that. At the same time, we expect our financial results in those markets to be a little bit inconsistent. Little bit spotty depending on the deals we close in any particular quarter. We believe it's a very important investment for us in the long run, both in terms of its own potential financial results but also as Asia is an important site for many of our global partners to source products. So, while we do have a little bit of inconsistency in the Asia Pacific region, it's a relatively small contributor to our overall performance but one we believe can contribute significantly in the long run.

What are the plans regarding the quota sales reps, the count is down 6.25, so should expectations be that you're going to be replacing those people? Or you're just sort of reallocating your resources among your existing staff and going to work with what you have?

Yes. We are going to try to replace that staff and maybe add one or two beyond that if we can. You may recall from previous calls we were targeting to finish the year with about 70 quota carrying sales reps. I'm not sure we're quite yet there, given our end of September results, but we were continuing to recruit people. We added some people already in Q4. So we do expect to move up from the end of Q3 result, but probably will not get to the full 70. So, somewhere between the 59 and the 70 that we targeted, probably midway in that range would be solid on our part.

Okay. So you made some comments on the outside of the call about the number of quarters in a row which you had double digit top-line growth and so forth. Given your view of the pipeline as it is now, is it your view that there should be -- that investor should have any changed view about sort of the growth prospects of Manhattan going forward?

At this time, Philip, we continue to be quite confident that we will be able to grow over the next period of time similarly to what we grown over the past 12 quarters. Double digit revenue growth. More than twice the market growth rates are sort of the general expectations we are setting with the outside world. We believe, as I mentioned in my summary comments, that there is substantial market share to be captured by ourselves and other companies over the next couple of years and believe we are well positioned to do that. So, our sense is we should continue to grow revenue over the next couple of years similar to what we've demonstrated over the past couple of years.

Okay. That's helpful. And a final question for me. On the working capital drag on your cash flow what you had in the quarter showed -- is it your expectation that's a short-term phenomena or how should we be thinking about the operating cash flow going forward and the working capital drag on it?

I will let Dennis add his color to this. Our sense, we dug into this substantially. Obviously, we think we could have done a little bit better in cash flow from ops in the quarter and would have liked to have been a day or so lower in the DSOs. Having said that, we dug into it to make sure we fully understood what's happening within the business and are very confident that our quality of receivables continues to be very high and it's essentially a timing issue. Dennis, anything you'd like to add to that?

Yes, Phillip, I like to kind of peg a base line of about 10 million and build off of that. As I mentioned on the call, my fundamental belief is DSOs of about mid-70s, 75 days if we can beat that, we'll do it. Q4 obviously is always a tough quarter just because of the fact that we -- it's our largest revenue quarter. But we are very much in alignment with the business and we got stated goals and we think we will execute.

All right. I appreciate it. Thanks very much.

Thanks, Phillip.

Your next question comes from the line of Terry Tillman with Suntrust.

Good afternoon, gentlemen. First question, Pete, relates to (Evonte) I think the quote was $4 million year-to-date license fees which I think you said was double year-over-year. Can you maybe talk about what is driving that kind of growth and could we see that kind of acceleration or continued strong trends as we move into '08?

Sure, Terry. Great question. Yes. I mentioned we had year-to-date license revenue growth of about $4 million from the software products that we acquired with the (Evonte) acquisition about two years ago and that growth rate was about double the prior year. Actually, it is close to -- it's 90% is the actual number. We believe we are making good progress in the planning space. We've acknowledged on a couple of these calls in the past that we got off to a slower than expected start when we acquired (Evonte) and we've been working to improve that ever since.

Since we acquired (Evonte), we've doubled the resources dedicated to (Evonte) for research and development and believe we've made considerable progress in building out our forecasting, planning and replenishment solutions. I believe our solutions today are world class and can compete against anyone in the space. That's not to say we don't have more work to do. We're going to continue to work to build out our solutions, provide the greatest functional solutions in the market space. All based on a common supply chain platform that allows companies to enjoy the benefits of multiple solutions from Manhattan Associates at a low total cost of ownership.

Over the past couple of quarters we've had good success cross selling our planning applications into our install base. I think you know we have a very large install base of supply chain execution customers. When we acquired (Evonte), part of the strategy was to take their planning applications and to sell those into our execution install base and we believe we are well positioned to continue to do that. So, on a year-to-date basis, almost doubling versus the prior year, we'd expect to see good solid growth from that business as we penetrate our install base. Ultimately, we think we'll be well positioned to compete very effectively in the marketplace to take market share from other competitors as well. For the time being, very focused on a rich opportunity, we think, in the planning application space.

Okay. And then in terms of the seasonality of the licensed business, could there be a scenario where fourth quarter license is the largest of the year? Or are you starting to see normal seasonality where the second quarter tends to be the strongest quarter for license fees.

Terry, we don't give specific license revenue guidance. We think seasonality of the last year or two probably about right. Q2 and Q4 always the biggest for us and we expect that to be the case again. My sense is that until the deal is closed we really won't know where it comes out. But Q2 should be a solid license quarter for us -- I'm sorry, Q4 should be a solid license quarter for us.

I'm lost in my notes and my numbers here, so I need clarification. The Americas license revenue, was that up 3%? If it was only up 3%, can you explain why the growth was single digit there?

Yes. That's correct, Terry. It was 3% in the quarter, 13% on a year-to-date basis. We believe we have a very nice pipeline for the Americas for Q4 and frankly looking into 2008 timing is always an issue when deals close and so forth. Having a very strong quarter in Europe, having a nice quarter in Asia Pacific gave us a little luxury we didn't need a gang buster quarter out of the Americas. In Q3, we could manage that business on a more natural space on Q4 and beyond. May appear it was a little softer than folks would have expected. We believe that Q3 results for the Americas was fine and look forward to a solid Q4.

Okay. Just one last one relates to margins because I think you're clearly articulating that there's sustained license growth. I think folks will say, what about margin leverage and I know, Dennis, you've given a lot of the foreign currency challenges, the restricted stock. But at some point is there something you can do for the model, assuming those factors don't change and there is still a head wind. Is it the Lima platform or at some point we're going to start getting some margin leverage then which could help out in terms of further accelerating the EPS growth or keeping the EPS growth at a higher rate than the revenue growth.

That's a great question. We are a little frustrated as well by the unplanned four events that have affected our margin. Quite frankly, we're not disappointed that we've been able to achieve higher than expected hardware sales. We believe that is a nice value added benefit to our customers and it's nicely profitable for us as you will see in the supplemental schedules. We make about a 20% margin on the hardware that we resell and, importantly, it helps drive overall customer satisfaction. So, we are not disappoint in the results of that. We are quite pleased.

As Dennis pointed out in his comments, the overall effect that has on operating margin is negative. Having said that and the impact of the Rupee, looking forward we continue to believe in the 2010 timeframe, we should be able to achieve an adjusted operating margin of 20% that continues to be our goal. We think some of the things we've experienced this quarter and on a year-to-date basis are transitory and will work our way through those and be able to deliver on that expectation in that timeframe, so we continue to believe that R&D is leveragable. Sales and marketing are leveragable. Our geographic footprint getting further momentum out of Asia Pacific and Europe is leveragable, the new products will continue to perform strongly and we are quite confident and optimistic that we will be able to hit that 20% margin in 2010 and show improvement all along the way.

Your next question come from the line of Robert Schwartz with Jefferies & Company.

Hi, this is Mark [Hillman] in for Robert Schwartz. Hi, guys. Great quarter. Question for you, Pete. You talked a bit earlier about a sort of a new replacement cycle. I was wondering if you could put a little more color around what you're seeing there, in terms where the longstanding WMS replacement cycle is and this new replacement cycle online for (inaudible) systems.

Yes. Sure. Be happy to, Mark. Over the past couple of years we have seen in the WMS space a meaningful replacement cycle. In 2005 and 2006 our WMS business was growing by 20% each year. In 2007 we're growing a little slower than that overall, but still in the mid to upper teens for WMS on a year-to-date basis as people upgraded their warehouse management solutions.

In 2007, we've seen a bit of a new phenomena in a number of the largest retailers are taking a revised look at how they run their direct-to-consumer businesses. And those large retailers are recognizing that their legacy WMS solutions aren't well fitted to meet the growing needs of a direct-to-consumer business and are looking for our help. So, during this past quarter alone, we had three very important large U.S. retailers who chose Manhattan Associates WMS for their dot-com offerings. We are quite pleased by that. We expect that trend to continue as more and more companies look for better ways to operate their existing and emerging businesses.

Okay. Great. And speaking of large retailers, SAP announced that they had a pretty major move with Wal-Mart. Does that have any competitive impact for you as far as you see it?

No, actually it did not. We think that's a good move on Wal-Mart's part and, as I mentioned in my prepared remarks and many cases, we've sold supply chain solutions to companies that have chosen SAP as their ERP and we like to believe we will continue to do that. I'm not saying specifically that Wal-Mart is one of those ones that we sold it to, but we do believe that there are numerous Manhattan Associates customers that have chosen either SAP or Oracle for backbone ERP solutions, financials or HR, have have chosen Manhattan for supply chain.

Okay. Great. And just one last question. If you look at your mix of customers, as far as sort of customers by revenue size, are you seeing any trends in that mix, ie, are you seeing more demand from mid-sized customers or smaller customers? You also had the announcement of a relationship with Kinetic Square as a master of ours. If you could touch on what you are seeing in terms of customer demand and any impact that has on your partner or challenge strategy.

Yes. Overall the demand seems to be similar between mid sized companies and larger companies. We had, as Dennis mentioned in his remarks, year-to-date13 million plus deals which is close to double of the large deals we had in 2006. So certainly the large deal activity picking up. But the mid market activity is picking up and I think they're equally contributing to our growth. Kinetic Square and a number of other partners are very important for us to cost efficiently serve smaller companies. So, we're leveraging a very positive relationship with Kinetics in the U.S. and in other markets as well as similarly situated companies in the U.S. and, in particular, in other global markets to help us deliver our state of the art supply chain solutions to smaller companies in a cost effective matter, and we expect that to continue to improve. In many of those cases those channel partners are focused on our Microsoft-based solutions and we believe they are very effective mechanism to distribute that product.

Great. Thanks very much.

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

Hi. Good afternoon. If I could just follow up on the retail vertical maybe more broadly, it sounds like there is a secular trend that's creating a lot of demand in the change the way that your customers are dealing with the direct-to-consumer businesses. Do you think that is sort of sustainable into next year and given that from an in-demand perspective there have been some questionable data points out of the retail, some of the larger retailers most recently target. Do you have any commentary about what people are saying from a top down perspective about spending for next year?

Yes. It's a great question, Adam. So far at this point we haven't noticed any material change in their plans to invest for capital expenditures next year. Obviously, most of the business we closed in Q3 was business we were working for a little longer period of time. You probably noticed in our press release target was one of the customers, new customers that we added in the Q3.

Right.

We believe some of our initiatives, the type of initiatives Manhattan Associates supports are important in strong economies and in balancing economies. So we believe we can continue to grow nicely and either in type of economic situation. Obviously, a rising tide lifts all boats and we much prefer an improving economy. But we believe we have opportunities to drive efficiencies for our partners even in a little bit tougher times as retail may experience going forward. So what we've seen so far is no net overall diminished in our retail customer base appetite for supply chain solutions, but we're trying to keep a very close track of that.

And if I could shift for a minute to the cost side, you mentioned in your prepared comments one of the factors in the services margin is head count adds which have been increasing a little bit faster than revenue growth. Presumably not withstanding the fourth quarter seasonality you're going to see improved utilization of the head count you just added. Can you walk us through how you think about utilization and head count on a going-forward basis around professional services?

Yes. That's a great question, Adam, and good observation on your part. We did add quite a few new recruits over the summer and we were quite aggressive in getting to the best campuses in the U.S. and around the world to add talented staff to our services organization as well as our R&D teams both here in the United States and around the world. That team did have a slight negative impact on our overall services margin in Q3. And you correctly point out that we would expect to see all of the things being equal, those newer people more productive in Q4. The one challenge we have is the seasonality factor where a number of our customers, particularly retailers, are very focused in Q4 making sure they meet their sales goals and, therefore, we tend to have somewhat less services revenue in Q4 than in Q3.

I would expect as we head into Q1 and Q2 we will see that utilization and that gross margin for services revenues improve modestly. We do believe, just as a point of reverence, that our services revenue and services head count should track pretty closely. We believe a services margin in the business in which we run supply chain management, a services margin in that 51, 52% that Dennis mentioned earlier is an attractive services margin and that we can effectively meet our customers expectations and drive a profitable business by keeping our services gross margin in that range. We will keep a close eye on it and we will look to improve the productivity of new hires. We are quite pleased with the new staff that's joined us there. Very enthusiastic and hungry and pleased to be part of the team.

Terrific. Thank you.

Thank you. Operator, we have time for one last question.

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

Thank you. Congratulations on the quarter.

Thanks, Mark.

Quick question on the sales reps. Are you noticing any change in the competitive landscape for hiring reps? I'm trying to understand why you haven't been able to grow to the pace that you expected?

We have not seen a noticeable difference in the competitiveness for sales reps. Quite frankly we're disappointed we haven't found enough of -- everyone will tell you this, the right kind of people. We want people who are hungry, aggressive, but also have domain knowledge in supply chain and can make a meaningful contribution, and we've had some pretty good success in hiring some pretty good people. We are not overall disappointed, but we would like to fill up a couple of key spots in Q4 and our teams are focused on doing, but we have not seen any additional competitive pressure or any unusual difficulty. It's just a tougher space than we'd like.

Okay. And then on a large deal, the million dollar deal, if I look at your performance this year compared to last year, a much larger percentage of revenue is coming from those large deals. Is that just because you moved the bar a little bit and you're not really more exposed to the large deals? They're just slightly larger? How do you think about that and what's going on with the business? Help me understand that, if you would.

Sure. I would be happy to, Mark. Actually, we don't disclose all the data, but if you had all of the data you'd notice that our large deals, while there are many more of them, almost double last year. The overall contribution to our quarter liscense revenue is not that different than in previous quarters in previous years. So, if you look at the overall 2007 revenue contributions in the 13 million-plus deals as a percent of total liscense revenue compared to the six plus -- seven deals or so we did last year year-to-date, the overall percentage is higher in 2007, but not meaningfully higher. So, I think it's more of a balancing of the portfolios and, quite frankly, we have been quite pleased with the skills of our sales management team and being able to manage accounts and work on the timing of closing that business and while bigger deals, if you do not close them, have a bigger negative impact on you, I do believe our team's pretty good at understanding what's going on and balancing those risks and trying get the deal's fruition in the timeframe in which we forecast them.

Okay. That's very helpful color. Thanks a lot.

Our pleasure, Mark. Thank you for the question. Thank you all for attending the call. Look forward to speaking with you in 90 days. Good night, everyone.

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