Manhattan Associates Inc (MANH) 2008 Q1 法說會逐字稿

Good afternoon. My name is Molly and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates' quarter one, 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this call is being recorded today, April 22, 2008. I would now like to introduce Dennis Story, Chief Financial Officer of Manhattan Associates. Mr. Story, you may begin your conference.

Thank you, Molly and good afternoon, everyone. Welcome to Manhattan Associates' 2008 first quarter earnings call.

Before we launch into the results discussion, I will review our cautionary language and then turn the call over to Pete Sinsigalli, 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 you are cautioned that these forward-looking statements involve risks and uncertainties and 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 2007 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 8-K filed today with the SEC and available from our website, www.manhattan -- or manh.com contains important disclosure about our use of non-GAAP measures. Also, our earnings release filed with the form 8-K reconciles our non-GAAP measures to the most directly comparable GAAP measures. Now I'll turn the call over to Pete.

Thanks, Dennis.

I'm pleased to share with everyone highlights from our first quarter of 2008. Dennis will follow with more color on these results and I'll wrap up with an overview of our outlook for the balance of 2008 and our financial guidance. And, of course, we'll be happy to answer questions after our prepared remarks. This call should provide a good opportunity for everyone to ask questions. Over the past few months, five analysts that covered Manhattan Associates have left their firms. Since several of them tended to be quite active in the Q and A section of our call, their departures should present an opportunity for everyone. We look forward to your questions.

I'm quite pleased with our performance in the quarter, particularly with respect to license revenue and earnings per share. We achieved total revenue of $88.3 million, an increase of 13% over the prior year, all of which is organic. This is our fourteenth straight quarter of posting double-digit revenue growth. Our ability to grow our top line revenue and our earnings per share impressibly, consistently and organically is a testament to our market leadership and to the bottom line value companies derive from our solutions. License revenue for the quarter was $18.3 million which was 33% better than the prior year. You may recall from our last call that we had two deals push from Q4 2007. Both of those closed in Q1 and are reflected in our license growth rate. We also achieved a first quarter record adjusted earnings per share of $0.35, an increase of 52% over Q1 of last year. I'll now turn the call back over to Dennis to provide details on our financial results.

Thanks, Pete.

Despite the global macroeconomic pressures that are tightening budgets and lengthening purchasing cycles, Manhattan delivered record revenue and earning per share performance in the first quarter. EPS and net income highlights for the quarter were as follows. We reported Q1 2008 adjusted EPS of $0.35 today representing a 52% increase over our Q1 2007 adjusted EPS of $0.23. Adjusted net income in the first quarter increased 31% to $8.7 million over Q1 2007. Our adjusted EPS performance exceeded the consensus EPS estimate of $0.27 for the quarter by $0.08 reflecting very strong operating results combined with non-operational FX gains. On a nonoperating basis, four of the eight sets were driven by $1.6 million in FX gains reported in other income. Approximately $1.3 million of these gains are non-cash unrealized gains due to the weaker dollar. These FX gains were triggered from translation of intercompany loans established from cash funding of our international operations due to significant appreciation primarily in the euro and the yen in Q1 2008. Details of the currency impact by quarter are included in the supplemental information schedule we provided in today's earnings release.

So, excluding the FX gains adjusted EPS grew 35% to $0.31, $0.04 better than the consensus estimate with $0.02 derived from strong operating results and $0.02 attributed to lower diluted shares. On a GAAP basis, we reported record GAAP EPS of $0.30 in Q1, an increase of 58% compared to Q1 2007, very strong EPS performance in the quarter. On to revenue and operating results. As Pete noted, we delivered record Q1 consolidated revenue totaling $88.3 million representing 13% growth over the prior year quarter and marking our fourteenth consecutive quarter of double-digit revenue growth. Excluding the impact of currency, Q1 top line growth was 12%, so the top line currency impact was a favorable one percentage point in the quarter.

The Americas region continued a solid performance delivering record Q1 revenues totaling $72.1 million with growth of 5% over last year's quarter. EMEA and APAC operations delivered combined Q1 total revenues of $16.2 million increasing 66% over the prior year led by record performance in our EMEA segment. EMEA had an outstanding quarter delivering record revenue and operating profit. Q1 revenues increased 106% to $12 million marking this region's fourth consecutive quarter of sequential revenue growth. Asia-Pacific reported Q1 total revenues of $4.2 million, increasing 7% over Q1 2007, also on strong license revenue performance. License revenues for the quarter were a record $18.3 million representing a 33% increase over Q1 2007.

As Pete mentioned, this increase reflects our closing of two significant contracts that we expected to close in Q4 2007. So, perhaps a more meaningful growth comparison can be seen by combining license revenue from Q4 of 2007 and Q1 2008 and then comparing that with the combined license revenue from Q4 of 2006 and Q1 2007. This analysis yields a license revenue growth rate of 13%, still more than double the overall market growth rate noted by industry analyst firms. In a tight economy, our Americas region posted license revenue for the quarter of $13.4 million, on par with our Q1 2007 performance. We are encouraged by the fact that while we expect macro economic challenges to persist, our 2008 deal pipeline continues to look solid in the Americas and, in fact, across all geographies. EMEA posted its strongest quarter in the history of our company logging record license revenues of $3.6 million, more than 10 times 2007's $300,000 license revenue. APAC also had a strong start to 2008 delivering license revenues of $1.3 million compared to $54,000 in Q1 of 2007. This was APAC's first $1 million plus license quarter since Q2 of 2006 and while the totals are smaller than in our other regions, this marks the fourth consecutive quarter of sequential license revenue growth for APAC.

Moving on to services revenue, consolidated services revenue in the quarter was $59.8 million, increasing 9% over Q1 2007. Both Americas and EMEA posted record results while APAC services revenues declined largely because license sales which drive services revenue were lower for mid-2006 to mid-2007 and we completed our work through the go live of a large client in the region. The Americas segment continues to show strong services performance and delivered record Q1 services revenue of $49.2 million, growing 7% over the prior year quarter. EMEA also delivered record Q1 services revenue of $8 million or 54% growth over Q1 2007 reflecting the momentum of large license deals signed over the last four quarters. And finally, our maintenance revenues for the quarter increased 13% over Q1 2007 to $18.1 million. Our double-digit growth in maintenance revenues stems from the increased volume of new license deals and maintenance renewals. Our maintenance retention rates continue to track at a healthy 90% plus.

For the quarter, consolidated services margins were 47.9%, down 480 basis points compared to 52.7% in Q1 2007. Two primary factors are at play here. First, as we have done in prior quarters, we continued to invest significantly in growing our services teams in Q1 to protect and enhance our ability to satisfy customer needs. Fueled by strong license revenue growth in the prior quarters and our commitment to customer satisfaction, we increased our services headcount by 22% year-over-year, second, the lower margins reflect the more intricate services work required as our sales mix shifts from our Heritage System I platform to our Open Systems platform.

Overall, we continue to be pleased with our services business performance and demand outlook. For Q2 and full year 2008 we expect services margins to range from 49% to 51% as we continue to see open systems increase its share of our sales mix. This is slightly lower than the original 2008 target range we gave on the Q4 2007 call by 51% to 52%. On adjusted operating income, our operating leverage in the quarter was very strong as we posted operating profit growth of 20% on top line growth of 13%. Q1 2008 adjusted operating income was $11 million compared to $9.2 million in the prior year quarter. Excluding the negative currency impact of $470,000 driven by $619,000 of rupee appreciation adjusted operating profit grew 25%. Adjusted operating margins were 12.5% increasing 70 basis points over Q1 2007. Excluding the currency impact, operating margins were 13.2%.

We are very pleased with our Q1 2008 operating margin improvement over Q1 2007 and we continue to target a 50 to 100 basis point improvement in operating margins for the full year 2008. Our adjusted operating expenses, which include sales and marketing, R&D, G&A and depreciation, were $36.7 million for Q1 2008, up $3.1 million over the prior year quarter. About half of the increase was driven by currency, restricted stock expense and variable compensation accruals. The balance of the expense increase in the quarter represents additional headcount investment in our India operations, sales and marketing and in G&A to support the business growth. Operating expenses were 41.6% of the total revenue compared with 42.9% in Q1 of 2007. Excluding currency, 2007 operating expenses were 40.8% total revenue.

Now that covers the operating results. So let's go through a few below the line items. We reported other income of $2.3 million in the quarter of which $1.6 million was from FX gains discussed in my earlier comments. The balance was interest income, which decreased by nearly half over 2007 on lower cash balances. While interest income was in line with our estimates, we certainly did not estimate the impact of FX gains driven by the weaker dollar. Our estimate of other income for the remaining quarters of the year is about $500,000 per quarter which is an estimate of interest income only. Barring further weakening of the U.S. dollar, we are not forecasting any significant FX gains or losses. Our effective income tax rate for the quarter was 34.75%, in line with our expectations and down versus 35 1/2% a year ago. We expect the rate to remain at 34.75% for the full year.

Diluted shares outstanding for Q1 2008 decreased 1.1 million shares sequentially, from 26 million shares to 24.9 million shares driven by two factors, our share repurchase program and lower dilution from common stock equivalents as the average share price drops 16% from Q4 2000 to Q1 2008. During Q1 2008, we repurchased about 543,000 shares of our common stock totaling $12.4 million at an average share price of $22.76. Including the 2007 year we have repurchased 4.1 million shares totaling $112 million at an average price of $27.35. We currently have $12.6 million remaining in share repurchase authority. We are estimating our diluted shares for the remainder of 2008 to be approximately 25,750,000 shares per quarter which lowers our previous full year estimate by 750,000 shares. These estimates depend on a number of variables such as stock price, option exercises, forfeitures and share repurchases that can significantly impact our estimates. The current forecast estimate does not assume any common stock repurchases for the remainder of 2008.

On to cash flow. For the quarter, we delivered solid cash flow from operations of $6.1 million, more than doubling cash flow from operations over Q1 2007. Our DSOs for the quarter increased to 82 days compared to 79 days in Q4 2007 as you would expect, given our record revenues in the quarter. Our capital expenditures for the quarter totaled $2.7 million in line with last year appear Q1 spend of $3 million and for 2008, we continue to estimate capital expenditures to be in the range of $9 million to $11 million. Our cash and investments at March 31, 2008 totaled $64 million compared to $73 million at December 31, 2007. The decline was driven by our $12 million in share repurchases in the quarter partially offset by cash flow from operations.

Deferred revenue, which consists mainly of maintenance revenue billed in advance of performing the maintenance services was approximately $36 million at March 31, 2008, up from $33 million at March 31, 2007. The increase is driven by our strong business growth and our continued 90% plus maintenance retention rate. We continue to carry a strong balance sheet with 60% of our net operating assets in cash, the rest in working capital, primarily receivables and zero debt to complement our solid earnings growth and strong cash flow. That covers the financial results. Now I'll turn the call back to Pete for the business update and outlook for the remainder of 2008.

Thanks, Dennis.

Our Q1 financial results were solid and positioned us well for 2008. We had a successful quarter, adding new clients and expanding our relationships with existing clients. Our earnings release notes some of the major ones that have given us permission to disclose their names. We signed four deals this quarter of $1 million or more in recognized license revenue. Two of these were with new customers and two were existing clients. For two of the four, Warehouse Management was the lead product. For another, transportation management was the lead product and replenishment was the lead product for the fourth March deal. The replenishment deal was with an existing client and shows the power of our suite of optimization solutions and our ability to leverage our install base.

About 50% of the total first quarter license fees were generated from new customers and the remaining 50% came from sales to existing customers. License fees for our Warehouse Management Solutions for the quarter were about 50% of our total license fees and about 50% was from non-Warehouse Management solutions. For the quarter, our Warehouse Management solutions license revenue grew by about 20% over 2007 as we continue to take share in this space. Our non-WMS products grew by more than 50% over Q1 of 2007. As Dennis mentioned, we posted very strong license revenue growth in EMEA and APAC and reported about flat license revenue in the Americas. It's worth pointing out, however, that the United States portion of the Americas posted license revenue growth of a little more than 10% in Q1 versus Q1 of last year. That growth was offset by a decline in license revenue recorded in Q1 for the Americas region outside the United States. Overall, I'm quite pleased with the Americas license revenue results for Q1.

The retail, consumer goods and logistics service provider verticals were once again strong contributors to our license fees and combined for more than half of license revenue for the quarter. Our professional services organizations around the globe continue to perform well. Our services revenue result was a first quarter record, but as important,, the teams did a good job increasing overall customer satisfaction. In fact, during the quarter we took more than 50 client sites live on our solutions and while services gross margin was down versus the prior year, it was about in line with our internal plans as we continue to build our teams to meet and exceed our clients' expectations. Clearly one of the attributes that differentiates Manhattan from our competitors is the quality and depth of our professional services organization and we intend to extend our lead in this area while remaining a market leader for services gross margins.

As you might be aware, we will be hosting our annual supply chain conference momentum May 18th through the 21st in Orlando. We expect this year's conference to be the most heavily attended in our history and more than half of the content will be delivered by supply chain leaders in our customer base. We think this half reflects on the continued strength Manhattan Associates' customer base and continues to provide an opportunity for us in the future. With 14 straight quarters of double-digit revenue growth, more than two time the market growth, I believe it's clear we're winning the battles in the trenches today and importantly, I believe our product and technology strategies and the investments we're putting behind them position us very well to ensure we win the wars of the future. During Q1, we continued to make solid progress on our product and technology road maps. At the end of Q1, we had a little more than 2,250 employees which is an increase of with 20 people since the end of Q4. This growth was primarily in our services and sales organizations. We finished the quarter with a total of 87 people in our sales organization of which 65 are direct sales reps. The 65 is an increase of nine sales reps from the end of 2007.

Our first quarter results were very strong, especially given global economic pressures and our outlook for 2008 remains positive. Our continued optimism is based on a sales pipeline that looks solid worldwide for Q2 and for the balance of 2008 and overall, our competitive position continues to improve as our teams execute well, keep costs in line and deliver on the performance commitments they have made. As positive as we are about our company, we can't help but be concerned about overall macro economic challenges. We believe the economic and competitive value of our supply chain solutions resonates strongly in a tight economy, but we will monitor market and economic conditions closely. Let me now shift to our view of the second quarter and full year financial guidance.

Our outlook for the second quarter is positive. With our Q2 expectation for licensed revenue larger than our Q1 result and with the difficulty of accurately predicting the precise timing for closing software deals, we are widening the range of our EPS guidance for Q2. For the second quarter, we expect adjusted EPS to be in the range of $0.36 to $0.44. The low end is flat with 2007's Q2 result while the high end represents growth of 22%. For Q1, we had guided adjusted EPS of $0.22 to $0.28 cents. Our actual result was $0.07 better than the high end of our range. For our revised full year guidance, we will roll that $0.07 Q1 positive variance into the forecast and maintain our previous expectation for the remaining three quarters. Therefore, for the full year, we are raising our outlook for adjusted EPS $0.07 to a range of $1.54 to $1.60. This reflects an adjusted EPS growth rate of 18% to 23%.

So to summarize, I'm quite pleased with our Q1 performance and we're confident about the opportunities ahead of us in 2008 and beyond. Operator, we'll now take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Aaron Schwartz with JPMorgan. Mr. Schwartz, your line is now open for questions.

Sorry. Can you hear me?

Yes. We hear you fine, Aaron.

Sorry about that. I had a question on the services margins. I know you've provided quite a bit of commentary on that, and understanding you've invested heavily in that segment. Can you talk a little bit about if the margins are more a function of your planned investments or if there is, in fact, a timing difference in terms of the mix shift to open systems?

Yes, Aaron. It's a combination of both, as you obviously caught from our comments during the prepared remarks. Headcount in services is up about 22% year-over-year while overall services revenue is up about 9%. So, we certainly have continued to invest in services headcount growth recognizing that it's one of the primary competitive differentiators of Manhattan versus the competition, but secondarily, some of the product mix does put some additional pressure on our services margin. One other comment that's probably worth making, what we're anticipating over the balance of 2008 is the likelihood of some delays in system upgrades due to economic pressures which will probably put some additional pressure on our services business. So we're anticipating that due to economic conditions, services upgrades may be delayed in some cases which will put some timing pressure on our overall services business, but the good news there, of course, is those upgrades will occur and we'll capture that revenue but we're anticipating at the moment that the combination of a little bit of investment in our services business and some of the timing of some services revenue will put a little pressure on our services margins going forward.

And that being said, have you gotten through the heavy lifting in terms of the services investment, so should we expect that to decelerate going forward?

Yes, we have.

Okay, and then just a question on the Americas license growth. I know you talked about the U.S. relative to the broader Americas. Can you talk about the hiring in the direct sales side? I think you said that you expected to add about with 12 for the year. You're mostly through that. Is that largely in the Americas or is there anything that's changed there to get to the flat overall license growth?

Yes. We mentioned on the last earnings call that we'd add about a dozen sales reps around the world. That they'd primarily be in the United States since that's where most of the license revenue opportunity is. In the first quarter, we added about nine reps around the world with about the majority being in the United States. So we do think that, as I mentioned in my comments, the U.S. portion of license revenue in Americas was up a little bit more than 10%. We'd like to think that we can continue to sell through in a difficult environment and encourage the new reps to participate in some of that new opportunity and contribute to full year results, but as you can imagine, people that have just joined the company will likely be less productive than some of our experienced sales reps and certainly, our outlook for the balance of 2008 reflects that.

Right. I guess what I was getting to is, do you think the growth in the Americas is more a function of the economy or were you, in fact, maybe under resourced from a sales perspective?

It's tough, Aaron, quarter-to-quarter to comment specifically on one quarter's outlook. We think we have a solid pipeline for the balance of 2008 across the different products suites in the Americas. We certainly hear the same things everyone else hears about different segments of the economy and I'm cautiously optimistic that we'll be able to work through that. Having said that, I don't think we had missed opportunities either in first quarter this year or the fourth quarter of last year because we were understaffed in the sales team.

That's helpful. Thanks for taking my questions and congratulations on the quarter.

Thanks, Aaron.

Your next question comes from the line of Brad Reback with Oppenheimer.

Hey, guys, how are you?

Good, Brad. How are you?

Good, good. I know you won't give specific items with respect to revenue, Pete, but we are up against a fairly significant comp from last year on the license line from the second quarter. Should we, much like you guys talked about 4Q and 1Q added together looking like a 13% growth rate, should we look at sort of an average for the first half of this year versus the first half of last year?

Yes. I'm not sure that would be an accurate measure, Brad, only because the first quarter this year was quite, quite strong. Last year's first quarter was solid. Last year's second quarter was quite strong. So, I think there would be a little bit of an apples and oranges comparison that might unfairly lower expectations for Q2 of 2008. Now, we clearly have most of the quarter in front of us and our results are far from definitively predictable at this point, but I think that calculation that you just described would probably be a little bit more conservative than we feel at the moment. Having said that, there's a lot of work to do. We did have a very strong Q2 last year. We did a little more than $23 million in license revenue of Q2 of last year. So we've got a lot of wood to chop to be able to deliver on our expectation for Q2 of this year. However, we believe the pipelines look solid and our sales teams are performing well. So we're cautiously optimistic that we will be able to have a quarter that delivers adjusted EPS in that $0.36 to $0.44 range.

Okay, okay. And, just to pick up on a comment from the previous question, the hiring and the services business that's sort of 20%, that will moderate here fairly significantly going forward?

Yes. You should expect by and large that our services headcount should grow in line with our services revenue, by and large. So we did have some opportunities to hire some talented people in different parts of the world and I took advantage of those opportunities, but as a general rule, obviously that's a bill by hour business. We will try very hard to match headcount growth with revenue growth. Now and again, we'll have some opportunities to hire some talented people that would distort that perhaps a little bit and at other times we may see greater productivity because we are able to increase some of the performance of our team, but I think by and large, our gross margin for services is as good or better than any other company on the planet. So we're quite pleased with the performance of our team. We're just looking for opportunities to continue to extend our sustainable competitive advantage in that area.

Okay. And on the commentary around potential delays, have customers indicated to you at all yet that they're thinking of pushing out, or is that just a cautionary prudent comment?

Well, every quarter, every year will have a couple of customers that delay for a lot of different reasons. So, so far we've seen about the normal level of delay. That could be because they're opening new stores or adding a new product line. There's a lot of reasons for it. So, so far in Q1 we've seen about the normal level of delay in upgrades, but we are being a little bit cautious given our customer base and the challenges some of them are going through.

Excellent. Thank you very much.

Thanks, Brad.

Your next question comes from the line of Yun Kim with Pacific Growth Equities.

Thank you. Obviously, you had good execution in Q1, but obviously, with a downtick in the economy. Do you see higher risks associated with your sales execution and sales pipeline expansion in your core retail and CPG verticals? And then also, if you can talk about your progress in your current sales pipeline outside of your core retail and CPG vertical as well.

Sure, be happy to. We feel pretty good about our overall pipeline both in the retail CPG space and outside the retail and CPG third party logistics provider space. We do believe we executed well in the first quarter in sales to our targeted markets in the U.S. and Asia-Pac and in Europe. So I think the sales teams executed well in all areas. We certainly talked to the same folks you guys talk to, read the same news articles, watch the same television programs and hear a lot of the concerns retailers and consumer goods companies are expressing about the economy and some of the impact on their businesses, so we continue to be concerned about that. However, at at same time, we mentioned this a couple times in the past, our solutions tend to drive very real demonstrable cost savings in transportation costs, in labor costs, in inventory carrying costs and because of that in most times, difficult economic times, solutions like ours move up the priority list because they have demonstrable ROI in a very manageable time period. So the payback period is usually quite attractive. So we believe even though retail CPG and some other vertical markets may be struggling a little bit, we believe, given our pipelines and the activity we have in the marketplace, that we can sell through some of those economic difficulties as we have in Q1. In Europe, we don't yet seem to be seeing many of the same economic challenges we're seeing that are generally exhibited in the U.S. and the same is true in Asia, off a much smaller base for us. So, we think with the geographic distribution we have, the different vertical markets we serve, the different products we deliver, solutions we deliver and the demonstrable ROI, we have an opportunity to continue to perform well in a challenging economic environment.

Great. Thanks for that detail, Pete. Can you also give us update regarding the non-WMS product line that seems to be doing very well. Like transportation, obviously, that saves a few costs. EPN, replenishment, they all have been growing much faster than WMS products consistently over the past few quarters. What is the secret sauce there and any interesting trends that you're seeing regarding the size of these non-WNS deals?

Yes. As I mentioned, two of the $1 million plus deals in the quarter were led by non-WMS products and two were led by WMS Solutions. So we feel that's a very good mix. Transportation, specifically in some vertical markets, we were tending to do very well and we would like to think we'll continue to do very well. Obviously, with the cost of oil continuing to rise and the pressure that puts on companies' transportation costs and optimization solution in transportation has a great appeal. So we think that we've had some good success, had a very nice win this quarter. So, that was quite helpful.

Same is true in areas like replenishment and order management. We've had some very good success with extended enterprise management. We think those applications continue to grow well and as we mentioned on previous calls, one of the great assets we do have is a very satisfied installed base of Warehouse Management customers that we can cross-sell our solutions into. So, we think part of the reason we're very pleased with the WMS Q1 growth rate of 20% year-over-year, even, frankly, more excited about a 50% plus growth rate in the non-WMS solutions and believe our solution suite gives us some natural competitive advantages in the marketplace that we believe is extendable.

Thanks. And finally, just going with those services (inaudible) here, I guess since you guys had a good quarter I guess it a good time to bring this up but, what is the leverage there in the services margin and when can we start to see this leverage and how much improvement do you think you need from the current level to get yourself into a -- to about 20% operating margin or do you think the 20% operating margin can only be achieved through faster license revenue growth?

Well, actually, I think Dennis has covered this on a couple of calls. I'll throw in a couple of comments and he can add to it. We think that we will get to the 20% operating margin in 2010 by a number of factors. The primary factors will be greater leverage of our operating costs, sales and marketing, research and development and general and administrative costs as we continue to grow overall revenue and gross margin dollars. We don't believe our operating expenses will grow nearly as quickly. Secondarily, we think our international operations, which generally have lower operating margins than the United States operation, as those business units continue to grow rapidly, they'll be able to contribute more to the overall margin. In terms of the services margin, the one thing I would suggest, we have a very attractive services margin overall. It's as good as anyone else in the industry that we can track and we try to track everyone and believe our services gross margin is the envy of the industry.

Having said that, we do believe that there are opportunities over time for our services gross margins to improve primarily in our non-WMS solutions, our newer solutions where we have less experience, less install base and we are frankly trailing some new ground. So, as we get greater mobility in those market spaces, we do think there's upside in the services margin, particularly to those areas. Be very hard for us to improve our WMS services margin and our I Series business unit. We think that's better than anyone on the planet, but we do think in other areas, we have a chance to do better.

I mean just to follow up on that comment, are you guys opposed to doing any deals that might be sizable deals that could increase the license revenue contribution overall, just to change the margin structure or is some sort of that type of acquisition or that would not necessarily meet the criteria overall?

Again, we're open minded to any M&A activity acquisition that can improve shareholder value, so we wouldn't exclude any. I don't think we'd particularly bias our analysis, though, for a license revenue focus business unit that might give the appearance of an improved operating margin. Clearly, if there were benefits to our customers, our shareholders and our employees, we're open minded to any approach, but I don't think we'd try to, for lack of a better word, rig the system by looking for a particular acquisition that would change our overall revenue mix just to post for public consumption a higher margin.

Thank you very much, Pete.

Thanks, Yun.

Your next question comes from the line of Atul Bagga with Think Equity.

Hi, guys, thank you for taking my call. A quick question. Can you add more color on (inaudible). Maybe some quantitative information, how does it look versus three months, six months ago? And a follow-up to that, can you also talk about the close rates and how the close rates have been training .

Sure, be happy to. We don't provide specific numbers for our pipeline, but we believe our pipeline is quite attractive at this point in time and comparable to what we've seen over the past year or two. Different parts of the world a little different than others, but by and large, we believe we've got an adequate pipeline given our historic close rates to be able to deliver on the guidance we've provided for Q2 and for the balance of 2008.

And in terms of close rate, are they consistent over the last six months? Are you seeing any changes there?

Yes. I would suggest to you that our close rate has improved a bit over the past six months. Part of the reason for that is, I believe, our competitive position has improved. So, I'm not sure the overall market has grown, that there are more deals being done in total. As I said in previous calls, the market growth rate most analysts see in the space is somewhere in that 6%, 7% range. We're growing two X that on a regular basis 14 quarters in a row or so, I think, is the math. So obviously, we're taking market share and that generally would indicate that they're closing at a higher rate than any of our competitors or that we have in the past.

Got you. Got you. Also, you talked about adding the sales, 15 reps in Q4, nine in Q1. How long does it take for these sales reps to become fully productive?

Just to clarify, we didn't add 15 reps in Q4. What we said on the Q4 call was for 2008, we expected to add about a dozen reps for 2008.

Got you.

So, so far in 2008 in the first quarter we've added nine sales reps. Generally speaking, a sales rep will take anywhere from three months to nine months to become productive and that generally is dependent upon their experience level when they join the company. If they've joined us from a direct competitor, obviously they're at the learning curve a lot more quickly. If about they've joined us from a business that is quite similar to ours, but not a direct competitor, it takes a bit longer to get all the specifics down. So somewhere in that time frame. So quite frankly, people that we add to the sales team in 2008, we're not banking on a contribution to meet our results for 2008.

Got you. And in terms of the sales quota, is it the same as what it has been before and can you talk a little bit on that?

Comparable, but it varies based on their area of focus. So, we have selling teams that focus on different product groups and different geographies. Generally speaking, the sales representatives in the United States that are focused on selling Warehouse Management have a higher quota, dollar quota than sales representatives that are focused on selling our non-WMS products, obviously no surprise there in terms of our market strength, so, that's a logical outcome and I would suggest that our quotas are about in line with what they were last year, maybe a little bit higher across the board.

Perfect. Thank you.

Thanks, Atul.

Your next question comes from the line of Mark Schappel with The Benchmark Company.

Hi. Good evening. Congratulations on the quarter. Pete, in your prepared remarks, you noted that EMEA had a specially strong quarter and I was wondering if there were any additional product localizations that were released in the quarter or was this just a function of a good performance from the other sales force?

Yes. Actually, it was just a very good performance by the sales team. We did not expand on the quantity of products that we offer in the EMEA marketplace in Q1. I think the team just executed very well. I would suggest that our competitive position in Europe has improved substantially over the last three, four quarters. Our win rate has increased substantially over that time period and our pipelines look solid is as well. So, I think Steve Smith who heads up our EMEA operation has done a spectacular job at getting that team focused and executing well and we're quite pleased with our performance there.

Okay, thanks. And regarding the new sales reps that were hired in the quarter, were the bulk of them located overseas?

The majority would be in the United States.

Okay, okay. And then finally, on the competitive front. Could you just comment on any of the impact you're seeing from some of the upstart on-demand Supply Chain vendors, if any, for that matter?

So far we haven't seen much, quite frankly. There are a, I guess there's one on demand WMS vendor. There are a couple of transportation on-demand vendors and for the most part, not much in other areas of Supply Chain management. We do occasionally bump into a couple of the on demand transportation management solution vendors. As I think you probably know, Mark, we also offer an on-demand transportation solution and announced, I think last week, a new addition to our customer base for that solution suite. So, we continue to be competitive in that space as well as with an on premise application sale, but we've not seen much increase in the on-demand competitive profile in the Supply Chain management space.

Okay. Thank you.

At this time we have time to take one more question and your final question come from the line of Tom Carpenter with Hilliard Lyons.

Good afternoon, Pete. Good afternoon, Dennis.

Hi, Tom.

Follow-up to the last question. It looks like you guys are starting to gain a lot of traction in EMEA and will be there shortly and APAC. I saw on your customer win list you had an international company or two. Can you give us some insight into overseas that still mainly U.S. companies that are doing business over there if you're starting to increase your win rate among local domestic companies in those markets? Thank you.

That's a great question, Tom. It's a combination of both and we think that combination of both is quite attractive. I'll use a couple of quick examples for you. Our first entry into the Asia-Pacific region, we leveraged a couple of large global companies and in particular, a few logistic service providers that have global reach to start getting some traction in markets and that initial traction has allowed us to get some references in those markets that allow us to compete more favorably for local clients. An example of that would be in China, during the quarter we announced the addition of Metersbonway, which is a large retailer in China, to our portfolio of companies in China using our solutions. We're quite pleased with that win in the market and believe that kind of profile will allow us to be successful with other retailers in China.

So, it continues to be a nice combination of in market global players providing positive references for us that give us more credibility in those markets and we think that will continue to expand. We also have a couple of very nice global customers that are rolling out our solutions in new markets for us and we're quite excited about the potential those new geographies can bring to our success. Over the past year or so, we've had some nice success in the emerging markets like Russia, south Africa, the Middle East and are starting to see some additional traction in some of the southeast Asia markets. So, we believe that combination of having large global players leveraging our solutions around the world, as well as the opportunity to sell to local players based on good references from the large global players, is a real upside possibility for Manhattan.

Okay. Fantastic. Thank you.

Thank you, Mark. I'm sorry, thank you, Tom. I'd like to thank everyone for joining us for the call, appreciate your questions and look forward to speaking with you in about 90 days. Good night.

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