Manhattan Associates Inc (MANH) 2007 Q4 法說會逐字稿

Good afternoon, my name is Rachel and I will be your conference facilitator today. At this time I would like to welcome everyone to the Manhattan Associates fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, February 5th, 2008. At this time, I would I like to introduce Mr. Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin your conference.

Thank you, Rachel. And good afternoon, everyone. Welcome to Manhattan Associates 2007 4th quarter earnings conference call. Before we launch into the results discussion, I will review our cautionary language and then turn the call over to Pete Sinisgalli our CEO.

During this call, including the question-and-answer session, we may make forward looking statements regarding future events or future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risk 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 10K 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 an 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 8K 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 8K reconciles our non-GAAP measures to the most directly comparable GAAP measures.

Now I'll turn the call over to Pete. Thanks and welcome to our 4th quarter 2007 earnings call. A quick note for you. For those of you that got the press release from Manhattan, right as it was released at four o'clock, somehow the word revenue was included in the headline twice. The headline should read "Manhattan Associates Reports Record 4th quarter and Full Year Revenue and Earnings."

I'll start the call by taking you through some of the highlights for the quarter and Dennis will provide details of our financial results. I'll follow with additional observations about our business and provide an overview of our outlook for 2008. Dennis will conclude our prepared remarks with our financial guidance for the full year and first quarter of 2008 and we'll be happy to answer your questions.

We had a solid fourth quarter and full year 2007. License revenue for the quarter was $18.6 million, which was lower than Q4 2006 by about $400,000 dollars. Two large deals of $1 million or more, we thought would close in the quarter, were delayed. But otherwise, we're pleased with our license revenue results. We expect both of the delayed transactions to close in 2008. Total revenue for the quarter was $85 million an increase of 12% over the prior year. This marks our 13th consecutive quarter of double-digit year-over-revenue growth. For the quarter, we achieved adjusted EPS of $0.37 an increase of 19% over Q4 of last year. For the year, we finished with licensed revenue of $73 million, which represents 10% growth over 2006 and total revenue of $337.4 million which represents an increase of 17% over last year. Adjusted EPS for the full year was $1.30 up 20% from last year. Overall, '07 was the best year in the Company's history.

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

Thanks, Pete. Manhattan continued its momentum, delivering record Q4 and full year 2000 revenue and earnings per share performance despite two large license deals slipping to 2008. We reported record Q4 2007 adjusted EPS of $0.37 today, representing a 19% increase over the Q4 2006 and for the full year, we delivered record adjusted EPS of $1.30 representing a 20% increase year-over-year. On a GAAP basis, we reported record GAAP EPS of $0.33 in Q4, an increase of 94% compared to Q4 2006. Excluding 2006 Q4 legal settlements year-over-year GAAP, EPS growth was 27%. Full year 2007 GAAP, EPS was $1.13, increasing 64% over 2006. Full year GAAP, EPS increased 38%, excluding our Q4 2006 legal settlements and charges associated with the Evant acquisition and technology investment write down.

As you know, we have a large R&D center in Bangalore, India which drove significant pressure on operating margins and earnings per share in 2007 due to currency appreciation and the rupee. The rupee appreciation for the full year 2007 generated a $0.07 reduction in EPS and $0.02 reduction in Q4 2007. The impact averaged about $0.02 a quarter beginning in Q2 when the rupee started its rise, appreciating 9%. We are prepared for some negative impact in Q1 2008 as well, which I will detail when I discuss guidance. Details of the currency impact by quarter with a standalone breakout for the Indian rupee are included in our supplemental information schedule and today's earnings release.

Now on to revenue and operating results. Despite somewhat lower licensed revenue for the quarter in the Americas, overall we delivered record Q4 consolidated revenue totaling $85 million dollars, representing a 12% growth over the prior year quarter, marking our 13th consecutive quarter of double-digit revenue growth. Consolidated revenue for the full year was also a record $337.4 million dollars, growing 17% over 2006. Excluding the impact of currency, Q4 top line growth was 10%, and year-to-date growth was 15%. So the top line currency impact was a favorable 2 percentage points in the quarter and full year.

The America's region continued its solid performance, delivering record Q4 revenues totaling $70.4 million dollars, with growth over 9% of last year's quarter. On a year-to-date basis, America's consolidated revenues grew 17%. Our EMEA and APAC operations delivered combined Q4 total revenues of $14.6 million dollars, increasing 30% over the prior year led by our AMEA segment. For the full year, AMEA and APEC combined total revenues increased 14%, delivering $53.1 million dollars in total revenue. AMEA had an outstanding year delivering record Q4 revenues and full year revenues of $10.7 million and $36.8 million respectively, representing a 52% increase over Q4 2006 and full-year revenue growth of 35% over 2006. APEC's Q4 total revenues of $3.8 million were down about 300,000 from Q4 of 2006 on lower services revenue and full-year revenues were down about $3 million.

License revenues for the quarter were $18.6 million representing a 2% decline from Q4 2006. Full-year license revenues of $73 million increased 10% over 2006. Our Q4 decrease was solely isolated to the Americas, which was down 8% over the prior year quarter.

As Pete mentioned, we had two large deals slip out of 2007. If those two deals had closed, we would have posted double-digit license revenue growth for the total Company. America's license revenues for the full year increased 7% to $61.7 million dollars, and our deal pipeline is very solid across all geographies, leading into 2008.

AMEA posted record Q4 license revenues of $2.7 million dollars, up 30% over the prior year quarter. And for the full year, AMEA delivered record license revenues of $9.3 million, resulting in a 76% year-over-year increase. APEC albeit small, posted the strongest license revenue quarter since Q2 of 2006, delivering more than $800,000 of license revenue. Our consolidated services revenue in Q4 was $57.1 million dollars, increasing 14% versus Q4, 2006. While full year 2000 service revenues increased 16% to $226.2 million. Both Americas and AMEA posted record results. The Americas segment continues to be strong, delivering its 12th consecutive quarter of double-digit revenue growth, with record Q4 services revenue of $46.7 million, growing 12% over the prior year quarter. We had one less billing day in the quarter versus Q4 2006, which equates to about two percentage points of growth impact on the quarter. All in all, we delivered a strong quarter. For the full year, America services revenue, increased 18% to $187 million. Since 2005, we have grown America's services revenue at 18 plus percentage a year, adding an incremental $55 million dollars to our top line. This pace largely reflects our success in closing meaningful, strategic accounts over the past three years. AMEA delivered Q4 services revenue of $7.5 million or 63% growth over Q4 2006. And for the year, increased services revenue 23% to $25.6 million. AMEA logged its second strongest services revenue quarter, since Q3 of 2004, helping to drive at 29% increase in international services revenue.

You may recall that last quarter, AMEA delivered Q3 services revenue of $7.4 million. This marks two consecutive quarters of $7 million plus of services revenue and the strongest second half services revenue performance in AMEA history.

Maintenance revenues for the quarter, increased 7% sequentially and 15% over Q4 2006 to $18.1 million dollars, year-to-date maintenance revenue increased 15%, totaling $67 million. Our double-digit growth and maintenance revenue stems from the increased volume of new license deals and maintenance renewals. Our maintenance retention rates continue to track at a healthy 90 plus%.

Now I'll discuss services margins. Consolidated services margins in the quarter were 50.7%, versus 51.7% in Q3, 2007 and 52.8% Q4 2006. Sequentially compared to Q3 2007, our Q4 margins are seasonally lower due to the Q4 holidays reflecting lower billable utilization. As it relates to the 210 basis point decline over Q4, 2006, a couple factors continue to drive this interplay. First we have increased our services head count by 22% year-over-year to support escalating demand for our services expertise driven by our record growth. Second, margins reflect the more intricate services work required as our sales mix shifts from our Heritage System I platform to our open systems platform. Our year-to-date services margins were 51.6% versus 52.8% in 2006. Overall, we continue to be pleased with our services business performance and demand outlook. For 2008, we expect services margins to range from 51% to 52% as we continue to open systems increase its share of our sales mix.

Moving on to adjusted operating income. Adjusted operating income for the quarter increased 1% to $13.3 million dollars, compared to $13.1 million in the prior year quarter. Excluding the negative currency impact of $658,000 dollars, driven by $725,000 dollars of rupee appreciation expense, adjusted operating profit growth was 6%. Adjusted operating margins were 15.6% up sequentially from Q3 margins of 15%, but down from Q4, 2006 margins of 17.3%, due to the following factors-- one, revenue mix due to lower license revenues accounted for about 200 basis points in the quarter, two; currency driven by the rupee appreciation lowered margins 100 basis points and three; restricted stock expense added another 50 basis points of margin compression. Excluding the currency impact alone, operating margins would have been 16.6%, which is very strong considering our soft quarter in America license revenue, and a seasonally challenging quarter in services due to holiday hours. Under restricted stock, 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 a ratio of 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. And for the full year adjusted operating margins were 15% compared to 15.7% in the comparable period last year. Excluding the impact of currency, the restricted stock expense and revenue mix, margins would have been 230 basis points higher at 17.3%. The rupee appreciation had about 100 basis point impact on the full-year operating margins as well.

Just to recap on the rupee appreciation impact on the operating income for the year. The impact in Q1 was nil. In Q2 we were hit with 10% appreciation year over year, and then 14% in both Q3 and Q4. Taking the full-year average rupee appreciation to 9% and totaling $1.9 million dollars of expense impact to our operating income. This equates to a $0.04 hit to EPS. Not too shabby in delivering record EPS for the year, given that the rupee sharp rise began in Q2 of 2007, we do expect the margin impact to carry into Q1 of 2008. At Q4, 2007 rates, this will equate to about another 100 basis points of year-over-year margin pressure in Q1, 2008.

Our adjusted operating expenses which includes sales and marketing R&D, G & A and depreciation, were $34.6 million dollars for Q4, 2007, flat sequentially, and up $3 million over the prior year quarter. Almost half the increase was driven by currency and restricted stock expense. The balance of the expense increase in the quarter representing additional head count investment in our India operations, sales and marketing, and in G&A to support business growth. Full-year operating expenses were 41.4% of total revenue compared with 42% in 2006. If you exclude the 2007 currency impact, 2007 operating expenses were 41.1% of total revenue. So, that covers operating results. Now, I'll discuss taxes, shares and cash flow. Our effective income tax rate for Q4 in the full-year 2007 was 35.5% the same as we reported through Q3 year-to-date. For 2008, we are forecasting a 34.75% effective tax rate as we continue to leverage tax planning strategies to drive our rate lower. Diluted shares outstanding for Q4, 2007 decreased 3% sequentially to 26 million shares reflecting the impact of our share repurchase program. Year-to-date diluted shares of 27.3 million were down 2%, and Q4 we repurchased 896,000 shares of our common stock, totaling $25 million and an average share price of $27.90. For the year, we repurchased 3.6 million shares totaling $100 million, at an average price of $28.05 cents. We currently have $25 million remaining in share repurchase authority.

We are estimating our diluted shares for 2008 to be approximately 26.5 million shares per quarter and for the full year. These estimates depend on a number of variables such as stock price, option exercises, forfeitures and share repurchases, which can significantly impact these estimates. The current forecast does not assume any common stock repurchases in 2008.

Cash flow for the quarter we delivered record Q4 cash flow for the quarter, we delivered record Q4 from operations totaling $15.7 million. Our DSO's for the quarter were 79 days, compared to 80 days in Q3 of 2007 and our year-to-date cash flow from operations was $38 million compared to $44 million in 2006. As you know, we came out of the starting blocks a little slow in the first half with our collections. The slow collections was compounded with absorbing $3 million in legal settlements, reached in Q4 of 2006, $4 million of incremental income tax payments made in the first half of 2007, and higher working capital attributed to record revenue growth. Our collections for the year increased 2% over -- 10% over 2006; however, our first half collections were up only 3% while our second half collections increased 17% year-over-year, so we ended the year with very good momentum. For 2008, we expected to achieve double-digit growth in operating cash flow, trending at about the same growth rate as our earnings. Our capital expenditures for the quarter totaled $1.5 million, bringing our year-to-date cap-ex spent to $9.4 million compared to $9.6 million in 2006. And in 2008 we expect capital expenditures to be in the range of $9 million to $11 million dollars. Our cash and investments at December 31, 2007 totaled $73 million, compared to $82 million at September 30, 2007 and $130 million at December 31, 2006. The decline from December of 2006 was driven by our $100 million of share repurchases in 2007, partially offset by cash flow from operations.

And finally, deferred revenue, which consists mainly of maintenance revenue billed in advance of the performing the maintenance services, was approximately $32 .5 million dollars at December 31, 2007, up from $30.5 million at December 31, 2006. Again the increase is driven by our strong business growth and our continued 90% plus maintenance retention rate.

Our financial condition heading into 2008 is very solid with a strong balance sheet with no debt, solid earnings growth potential and strong cash flow. Now, I'll turn the call back to Pete for the business update.

Thanks, Dennis. In Q4, we signed three deals of $1 million or more, in recognized license revenue. Two of the three were with existing customers and all included Warehouse Management solutions, plus two of the three also included one or more additional Manhattan solutions. I'll share more about one of these later in my comments. While we certainly would have preferred to close the two additional million plus deals we were working in Q4, we do expect both to close in 2008. Multiple products are included in these two deals with Warehouse Management being an important component.

We had a successful quarter adding new clients and expanding our relationships with existing clients. New customers included Anna's Linens,Gainey Transportation, J. Nipper, Metersbonwe, Sigma Electric, SPAR Retail, Whirlpool and Vitamin Shoppe. Meaningful sales made to existing customers include Aaron Rents, American Eagle Outfitters, Belk, Casual Male, Conair, Converse,DHL, Dick's Sporting Goods, Elektra, Jones Apparel, KGL Logistics, Kohl & Frisch, Liberty Hardware, Matahari, McKesson, NYK Logistics, Nestle, Safeway, T-Mobil, Teva Pharmaceuticals, and TNT Fashion. New customers generated about 40% of 4th quarter license fees and the remaining 60% came from our existing customers. For the year, the ratio was also about 40/60. License fees for our Warehouse Management solutions for the quarter, were about 50% of total license fees and 50% from our non-Warehouse Management solutions. For the year, at this ratio, was also about 50/50. Full the full year, our Warehouse Management solutions grew by about 2% over 2006, tempered by the delayed deals.

I'm pleased to report that our non-Warehouse Management product license revenue grew by 20% over 2006. Our planning forecasting and replenishment applications posted total license revenue of $4.3 million in 2007, a 65% increase over the prior year. We believe we are now in a much better position than 12 months ago and are bullish about the success these solutions will contribute in the future. The retail consumer goods and logistics service provider verticals were once again strong contributors to our license fees and combined for more than half of license revenue for the year.

Let me take a moment here to bring you up to date on our product strategy and our approach to delivering the best solutions in the marketplace. Like most companies, we continue to review, make or buy opportunities and over the past few years, have largely selected make decisions. We have been and continue to seek acquisition candidates that compliment our product and technology road matches, but since our acquisition of Evant in September 2005, we have not found an opportunity that fits our strategic direction. That direction is to be the global market leader of a complete integrated suite of supply chain solutions that optimizes supply chains for our customers and at an attractive total cost of ownership. We haven't recently identified an appealing opportunity to buy a company to advance our strategist we have been investing in building out our comprehensive suite of supply chain solutions. During December we released the latest version of a supply chain optimization solutions which we believe further distances Manhattan from all competitors. To emphasize our progress, a few weeks ago, we announced a new branding for our solutions portfolio called SCOPE. SCOPE stands for supply chain optimization from planning through execution, and I believe highlights our sustainable competitive advantage. SCOPE provides our customers with deep rich functionality across the supply chain on a common technology platform, which we call our supply chain process platform. By uniting rich applications with common platform data and processes we give customers the opportunity to optimize individual components of their supply chains and to optimize a cross function of their supply chains at a low total cost of ownership. I believe no other company has the capacity to do this as well as Manhattan. In addition to our supply chain process platform, SCOPE includes our five solution suites, one, planning and forecasting, two, inventory optimization, three, order lifecycle management, four, transportation lifecycle management, and five, distribution management. SCOPE also includes platform applications that fit on top of our solutions to deliver event management, supply chain intelligence and supply chain visibility across our solution suites.

We've also introduced cross suite solutions which combines solutions and components to address specific supply chain challenges. An example of a cross suite solution is our January announcement of Flow Management. Flow Management enables companies to synchronize all aspects of product distribution, from forecasting and inventory planning to allocation and distribution. Simply put, Flow Management enables the company to make distribution decisions based on realtime market conditions in order to route inventory to the channels and locations that will be most profitable. Flow enables a company to easily adjust distribution and inventory as supply and demand change. As a result, companies become more flexible, reducing required inventory levels, warehouse labor costs and transportation costs while increasing the level of service to the customer.

One of our million plus dollar deals we completed in Q4 is a good example of this powerful combination. This high profile company already uses SAP as its ERP system, but we were selected over SAP for supply chain. The company is seeking to improve inventory optimization and reduce transportation costs while balancing customer service level as cross all business channels. They need the ability to optimize fulfillment of customer orders from multiple distribution locations while maximizing the cost benefits of scale. They want to consider network capacity, transportation costs, inventory levels and multichannel service levels in a single optimization algorithm. After a detailed presentation they selected Manhattan Associates and SCOPE with Warehouse Management, Labor Management, Slotting Optimization, Distributed Order Management and Transportation Management Solutions, all leveraging the sophisticated and common optimization engine in our supply chain process platform. We're particularly pleased with this win as we believe it validates our vision and product strategy.

Now back to a few more metrics. At the end of the year, we had a little more than 2,200 employees around the globe. That's an increase of about 25 people since the end of Q3. For all of 2007, we added about 300 associates, about 200 of those in billable consulting positions. We finished the year with 56 quota carrying sales reps, which compares to 59 at the end of Q3 and 61 at the end of Q4, '06. We plan to add about a dozen reps in 2008, primarily in the Americas.

2007 was a very good year for our company, and our outlook for 2008 is positive. While we expect a more challenging macro economic environment in 2008, historically our company has performed well in such an environment. Our solutions help companies optimize their supply chains and that leads to impressive cost savings, historically, cost savings move up the priority list. So far, we've not seen any material change in the buying environment and our pipelines for 2008 looks solid across geographies.

While we don't provide revenue guidance, I did want to give you some insight into our view of revenue growth for 2008. Once again we expect to grow revenue at twice the market growth rate. We've been achieving that pace the last few years and expect to continue to in 2008. Market analysts project the growth rate for 2008 of somewhere between 5% and 7%. Therefore two times that growth ends up at 10% to 14%.

Now we'll turn it over to Dennis for specifics on our EPS guidance.

Thanks, Pete. For the full year 2008 we anticipate adjusted earnings per share of $1.47 to $1.53, which represents a growth range of 13% to 18% with the mid point of about 15% growth over the $1.30 we achieved in 2007. While we are confident in our pipeline, we have expanded our guidance range from our traditional $0.04 to $0.06 as we factor in the global macro economic environment. Our annual guidance also absorbs the $0.05 of restricted incremental stock impact from year two awards, under the Manhattan Associates Equity Comp Program. the $0.05 impact equates to approximately $1.9 million of incremental pre-tax expense for restricted stock vesting to be expensed routably throughout the year. For 2008, we expect to improve operating margins by about 50 to 100 basis points over 2007. If you recall in 2007, we guided a 50 basis point margin improvement and we're challenged with the rupee appreciation which drove a 100 basis point decline in 2007 margins versus 2006. I'll also point out that we expect interest and other income to be about $2 million lower than 2007, driven by lower interest income on lower cash balances resulting from our share repurchase program.

As I mentioned earlier, our effective tax rate on an adjusted net income and GAAP basis will be 34.75%. For the first quarter of 2008, our adjusted EPS guidance for Q1 2008 will be in the range of $0.22 to $0.28 with the mid point of $0.25 representing about 9% growth over the $0.23 we posted in Q1, 2007. This guidance includes absorbing about $700,000 or $0.02 of rupee appreciation expense impact. As does our annual guidance our Q1 guidance reflects some caution regarding the global macro economic environment.

Consistent with previous years, Q1, EPS and operating margins decline on a sequential basis from Q4 to Q1 due to lower license revenues, combined with renewed FICA expensing and merit increases. As you all know, all Manhattan employees receive their merit increases effective January 1. In addition for 2008, we will have the incremental impact of year two of our new equity comp program. We estimate the incremental expense of these items to total approximately $3 million pre-tax, which equates to about $0.07 of adjusted EPS. The $3 million is split roughly 50/50 between cost of services and operating expenses. In addition, the rupee at Q4 exchange rates by approximately $700,000 . The balance of the adjusted EPS sequential decline will be in lower services margins driven by product mix so you'll see services margins remain in the low 50s versus the 52.7% we posted in Q1, 2007 and we will have lower interest in other income as I mentioned in the annual guidance.

Thus for Q1 operating margin, we expect about a 50 basis point improvement in our consolidated operating margins over Q1 of 2007.

Now I'll quickly cover GAAP, EPS guidance. For the full year, GAAP 2008 GAAP diluted earnings per share, we anticipate $1.26 to $1.32 which represents a growth range of 12% to 17% with the mid point of 15% growth over the $1.13 we delivered in 2007. We expect the full-year GAAP diluted earnings per share consistent with 2007 to be approximately $0.21 per share lower than adjusted earnings per share, which principally excludes purchase amortization from acquisitions and stock option expense under FAS 123-R.

Now I'll turn the call back over

Thanks, Dennis. Overall, I'm quite pleased with our 2007 performance and excited about the future. Our 2007 performance continue to out pace others in the market and we're confident we'll continue to extend our market leadership in 2008 and beyond. We believe we've made considerable progress in establishing ourselves as the best in class supply chain solutions leader. We also believe the investments we've made in our products, technologies, customers and our people position us well for future growth, and we believe our shareholders will be rewarded for our success. Operator, we will now take questions.

(OPERATOR INSTRUCTIONS) And we will pause for just a moment to compile our Q & A roster. Our first question comes from Adam Holt. Sir, your line is open.

Thanks very much, good afternoon, guys. I had two questions, one about the quarter and then one about the outlook. You mentioned you had two larger deals that slipped out of the quarter. I was wondering if any common denominator around, what deals got pushed and what gives you confidence they're going to close in the 1st quarter, and then I have a follow-up on the outlook.

The two deals that slipped, there was no common outcome or common denominator that encouraged both, not to close in the quarter, we think they were both company specific issues and that we believe will get resolved in 2008 and hopefully in the 1st quarter of 2008. There was no overall macro economic issue they were wrestling with. We think in both cases they need a little more time to cross all their T's and dot all their I's, we believe we're selected for their projects and look forward to working with them in 2008.

Great. And then just quickly if I could on the outlook. You noted that your pipelines in North America are are strong heading into next year, and I believe you said that the majority of the head count will also be in North America. Do you think you have the opportunity to grow license revenue faster in counter '07 than you did in counter '07 in North America? I guess an ancillary question would be, where then are you reflecting some of the caution around the macro?

Right now we're being -- we think fairly conservative in our outlook for 2008. There's a lot of macro economic issues in the United States, which is our biggest market. We get about 75% of our overall revenue from the U.S., and about 25% outside the U.S., so we are being somewhat cautious on what might transpire over the next 11 months or so. Having said that, the U.S. pipeline does look strong. We feel quite good about our ability to continue to take market share in the U.S. and, of course, around the world as well, and are optimistic about 2008. We are cautiously optimistic that 2008 could turn out to be a stronger year than anyone is currently forecasting, and would love to see faster license revenue growth in 2008 than we're currently forecasting or that we experienced in 2007. But in the current conditions, we think a little conservatism is probably appropriate.

Terrific, thank you.

Thanks, Adam.

Your next question comes from [Omar Balaki]. Sir, your line is now open.

Good afternoon. I just wanted to get an update on transitioning the various modules on to the new architecture, the open systems architecture, how is that progressing, and whether or not there will be any margin implications for '80 and '09.

Great question, Omar, thank you. We are making, I think, very solid progress in porting,moving, evolving our solutions to our supply chain process platform. This is an evolving three-year road map, we're a couple years into that road map. We have a little more work to do in 2008, probably part of 2009, but we're quite pleased with the progress, our R&D teams, product management teams have been making in formulating that long term strategy. There will be important efficiency gains in '09, 2010 and beyond based on evolving our solutions to a common supply chain process platform. We more importantly believe that there will be significant benefits to customers from a common supply chain process platform. The support staffs they'll need to support the applications, the opportunity to optimize, using common algorithms across applications and the opportunity to better meet their customers expectations. More than that, there will be more efficient R&D expense on Manhattan's part as well.

Okay, in terms of the WMS replacement cycle, what inning do you guys think we're in right now?

Probably if you ask most folks, probably middle of the game. Probably somewhere in the middle of the game. Most folks will tell you about half the market, probably more than half the market is using home grown solutions, so I certainly think that half of the market probably needs to be addressed over the next couple years. You may say it's a little earlier in the game than the halfway point as well. Since some customers have purchased packaged applications are on packaged applications that are a little bit older, and less well supported by vendors than say a Manhattan solutions. We still think there's plenty of life left in the WMS replacement cycle and expect to take large parts of the market share over the next several years.

Have you guys seen any pause from tier one retailers or customers with making large up tick commitments.

We've not seen that yet. We like everyone else who works with that industry are trying to be quite observant, close, and stay engaged with our partners to make sure they stay on their business plans. We've not seen hesitations there. And it is kind of interesting. You have probably heard this from other technology companies, if you go back four or five years when there was a slowdown in the market and companies had cut back on their IT investments. When the market improved, those companies that cut back on their IT investments found themselves at a meaningful competitive disadvantage. If you talk to CIO's across all industries, including retail, you will find many of them are committed to not letting that happen to their companies. That while it may be a tougher macro environment in 2008 than they would have liked, they will continue to make the smart investments that better position their companies for long term competitive advantage. In that environment, I think our solutions are quite appealing. At this point we've not seen any overall hesitation in the retail marketplace, but we are trying to be quite observant of what's going on.

Great. Thank you, I'll just jump back in the queue

Thanks, Omar.

Your next question comes from Mr. Brad Reback. Sir, your line is open.

Hey, guys. How are you?

Good, Brad, How are you?

Excellent. On the service business, Pete, what types of things have to change for the margin to begin to ramp up there?

That's a great question, I think what we suffer from a little bit is a history of the exceptional performance. We've done a lot of studies working with our services teams on ways to try to improve our services margins. One of those studies compared Manhattan Associates, a services business to all of the best in class service companies, including all of the Indian services companies, Accenture, CapGemini and so forth, and we are at the very top of services gross margins of anyone in the world. So that's a pretty high standard to try to elevate from. We had the benefit four or five-years ago of basically being a single product company on a single technology stack. Our WMS on the I series platform, was a very efficient platform for conducting professional services and a more open complex environment, some of those niceties have gone away. So when we studied our services business, the -- there certainly is opportunity for improvement. There always is, but we don't think we're doing anything that makes us anything less than best in class in our services business. So if you study, if you look at -- I'm sure you don't have the time to do this, but if you look at the industry, best in class service gross margins approach 40%. If you looked at any of the big guys they would be quite envious of getting there. We are already there. So the challenge we have going forward is to try to tweak some improvements in our efficiency. Probably look at opportunities to streamline some of our processes. I don't see in the next couple years, meaningful opportunities to raise price, which is normally one way to try to improve margin. I don't see the opportunity for that given all the pressure and professional services, but we do look for opportunities to improve our services efficiencies. But I must commend the Manhattan team, we're the best in the world, and they deserve credit for that.

To just follow up on that real quickly. With just about 50% of your revenue in '07 coming from professional services, and to your credit how well run that organization is, to see meaningful margin expansion from current levels, or even moderate margin expansion, is it all 100% dependent on license pretty much?

Well there's also opportunities, I think, Brad, to get greater leverage out of our G & A expenses as well. Certainly revenue mix in '07 harmed our margin. We had solid growth in all three components of revenue. But the fastest growth came in services and hardware, which are lower margins and software, so software and if a couple deals closed that would have looked considerably nicer. Such is life. We do believe that revenue mix should help us in 2008. We also believe getting some additional growth, faster growth from the international markets will help on our gross margins and total margins if you notice margins in Asia and Europe of well below margins in the U.S., because they're younger markets for us, as we believe as we grow, we will strength our margins there. Then of course we think there is leverage in our sales and marketing, research and development and overall administrative expenses which will contribute to margin expansion in 2008 and beyond.

Great. Thank you very much.

Thanks, Brad.

Your next question comes from Mr. Michael Huang. Sir, have you the floor.

Hi, Michael.

Couple questions, the forecasting, planning, seem to have a better year, you know, in '07 relative to '06. Do you think that a customer reference ability in your sales maturity around that product offering, is it getting to a point where it's getting easier to sell?

I'm not sure I'd quite go there yet, certainly we're making incremental improvement. Probably the greatest factor in our success in '07 which we're increasing in '08 is stronger focus on awareness and leadership in that market space. We've done a couple things in '07 to reprioritize some of our efforts to get even greater focus on our place in that market space, and I believe that's paying off. Granted $4.3 million, $4.5 million of license revenue, it's not the place where we wish to be, but 65% growth is encouraging, and we believe that's an attractive market that greatly compliments our supply chain execution solutions. I know our sales guys would tell you they're work very hard. Our reputation is getting better and better, and our customer success is more visible and the combination of those two should lead to long term success.

Great. So of the two large deals that slipped. I assume that both are North America. Can you tell us whether or not those are with new customers and I guess, what is the likelihood that they could -- one of those two could close in Q1.

Yes, both were in the U.S. So both of the deals were in the U.S., as is 75% of our revenue, so that's not all that surprising. We're cautiously optimistic that one or both could close in the 1st quarter, they've not yet closed so there's no guarantees, but we're cautiously optimistic, and I'm probably not going to provide any more background on that, in fairness to the customers and so forth, until the deals are actually closed.

Okay, and the in terms of the guidance, so in terms of your assumptions around closed rates, both at the low end and high end for the year. Is it fair to say that the high end assumes, you know, no deterioration of closed rates, but the lower end assumes some deterioration in closed rates.

That would be a fair assumption, yes.

Okay. And I guess just lastly, from a license perspective, I know you touched on this earlier, what would you characterize as the key levers that could drive accelerated license revenue growth in '08 versus '07. Is it primarily focused on product or distribution or market? Thanks very much.

Very good question, again. I think one of the things that could turn out to be a catalyst in '08 is companies in a tougher macro economic environment look for the most effective way to invest their IT people, resources and IT investment dollars. Look for high probability pay backs and historically solutions like ours that are very defendable ROI's, easily quantified cost savings could move materially up the priority list. As I mentioned before, a lot of CIO's and CTO's are well aware of what happened five, six years ago, when companies cut back on their investments for the long run to try to save on the short run and learned to regret it. So our cautious optimism could be fueled by re-prioritization of key projects that would put greater urgency behind supply chain transformation programs.

Thanks very much.

Thanks, Michael.

Your next question comes from Yun Kim, your line is open.

Do you expect the same kind of seasonality of the last two years to play out this year again, with a big sequential ramp down in Q1 and back up big Q2 down again in Q3 and down a bit again in Q4. It seemed this type of seasonality didn't exist until two years ago, the time you guys started focusing on the ILS self-strategy. Do you think this is just a -- this higher level of seasonality is due to more and more larger deals that you guys are closing or focusing on, or is there -- and also whether or not there's any effort to minimize this seasonality.

Yun, this is Dennis. I'll take the seasonality comment. We expect to see the same seasonality as we've seen over the last couple years, so about the same mix of first half license and services revenues. First half, second half mix are about the same.

And just getting to your question, is it different than a few years ago? It's moderated in the last two or three years, I'll tell you, if you went back 4 or 5 years, Manhattan was more of the exception to software companies. Software companies for decades have always had strong second quarters and fourth quarters for license revenue. Manhattan if you go back four or five years, had solid first quarter license revenue. And pretty good second and good 4th, and what's basically happened over the past couple years, we were much more dependent on the retail market et, the retail vertical for our license revenue growth. And retail has -- you probably know was naturally a bigger purchaser in Q1. Q1 tends to be either the end of their fiscal year which generally ends on January 31st or the beginning of the new year, where they have bandwidth to start tackling problems after the big Christmas shopping season. Over the last couple years as our concentration in retail while still strong has been diluted a bit by other verticals coming up, some of our exposure to big swings by retail in the first quarter have been mitigated. So I think if you looked at our seasonality pattern for license revenue, it's quite similar to other application software companies. And the buyers have a lot to do with how they transact in that matter. But I believe our services business is quite predictable. The patterns you've seen over the past couple years should continue in 2008 and we believe the license revenue as a percent total revenue will be similar in '8 as it was in '07 and ''06.

Thank you very much, that was a pretty good explanation. What is your plan for the consulting headcount growth for the year?

Our head count growth for consulting should be in line with our revenue growth for consulting. As we have said overall, we expect to grow about 2X the market that would imply somewhere in the 10% to 14% range, as the consults business is a billable by hour business, you need the people to be able to perform the services to achieve the revenue. So we would expect our services head count to grow in line with our services revenue, or sale. Hopefully getting back to a common comment that Brad Reback made earlier, there's slight improvements in gross margin there that would allow us to grow a little more quickly in head count.

Lastly, I'm going to throw this one out there for you guys. In terms of your acquisition strategy, if you generate more than half of your license revenue from your existing customers, would you be more likely to make acquisitions that gives you more install base, but not much in terms of new product for technology. Along the line question, are you willing to carry on debt if the opportunity is out in?

Sure, I'd be happy to answer the question, one of the things I mentioned earlier that distinguished Manhattan Associates from anybody else in our space is focus on a product and technology strategy that we believe leads to great strategic value to the customers in our target markets. One of the things that's important about that is to stay focused on a technology strategy and a product strategy that doesn't get diluted by having a lot of odds and ends in your customer base and product portfolio. So while we're always open minded to opportunities to increase shareholder value and increase our trajectory, we're quite concerned about not making acquisitions that dilutes or are complicates our focus on our long term strategic objective that optimizes supply chains for our customers. So I think I answered your question. We'd be cautious about buying a company that we do not think adds strategic value to the company's long term future. In terms of taking on debt, in the right circumstances, we would be open minded to taking on debt for the right acquisition, we believe our cash flow from operations is quite predictable, quite strong, and has been demonstrated for years, and believe given our strong balance sheet, we have the capacity to take on some debt. Of course, we'd be cautious about that, but we'd be open minded to that if the situation was compelling.

Thank you very much.

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

Okay. Sir, your next question comes from Mr. Mark Shappel. Sir, your line is open.

Hi, good evening, Pete. Despite missing the two large deals on the quarter, your large deal business was especially strong in 2007, and I guess my question is;l to what extent in your view does a softening IT environment impact your large scale business in your view.

It will be interesting to see over the next 11 months, I'm not sure my crystal ball is much better than others. We look at the pipeline, it looks solid, conversations we're having with customers look goods. As I mentioned in the one example I used in the call, we believe our suite of solutions with the opportunity to optimize across applications is quite compelling, which should lead to even further acceleration and big deal activity for us, and particularly in an environment where cost saving initiatives may get prioritized higher, we're cautiously optimistic that our ability to close million dollar deals in 2008 will be solid. As I said, we're being a little bit cautious at the moment not knowing truly how the macro impacts may affect the marketplace, but we're quite optimistic about where the company can go and the value we bring to customers.

And regarding the large deals that you saw in the quarter, who are you seeing competitively in those deals? Any changes?

Not really, no. It's pretty much across the board as I mentioned in the example I used. We competed against SAP in that deal. In other deals it could be another WMS vendor. Certain deals it could be another forecasting replenishment vendor, other deals a transportation solutions vendor, and other geographies outside the U.S. could be a whole collection of different competitors. So there isn't any one competitor. Obviously we expect over the next three to five years to be competing more directly, more often with SAP and Oracle. At the time being there are still some best of breed solutions out there that are competitors of ours, but by and large, it's about the same folks we've seen over the past couple years.

Thanks.

Thank you, Mark. Well, just to close, we are quite pleased with our company's position. We think 2007 even with the two slipped deals was a very very successful year for Manhattan Associates. We think our position in the marketplace is compelling, we think the value proposition we bring to customers, particularly in a tough macroenvironment is particularly compelling and feel very good about our long term future. With that, let me sign off and thank you for spending time with us this afternoon. I look forward to speaking with you again in 90 days. So long.

This concludes today's conference call, you may now disconnect.