Manhattan Associates Inc (MANH) 2010 Q4 法說會逐字稿

Good afternoon. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates Fourth Quarter 2010 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, Tuesday, February 1, 2011. I would now like to introduce Dennis Story, Chief Financial Officer of Manhattan Associates. Sir, you may begin your conference.

Thank you, Simon, and good afternoon, everyone. Welcome to Manhattan Associates 2010 fourth quarter earnings call. 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 10-K for fiscal 2009 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 manh.com, contains important disclosure about our use of non-GAAP measures. In addition, 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.

Good afternoon, everyone. Overall, 2010 was a very successful year for Manhattan Associates. Financial results were good, our competitive position improved, customer satisfaction increased and we are well-positioned for the future. For the fourth quarter, we posted total revenue of $71.5 million, up 15% over last Q4. And for the year, we posted total revenue of $297.1 million, up 20% over 2009. Adjusted earnings per share was $0.32 in the quarter, up 4% over Q4 of 2009, and for the year was $1.38, up 44%.

License revenue in Q4 was lower than we expected at $12.7 million as caution returned to this segment of the software market we serve, but we were still able to post solid Q4 results. Our competitive win rate remained strong all year. In head to head sales cycles against our major competitors, we won 75% of the time. I'm particularly pleased with the market's excitement over our platform-based suite of solutions. Our win rate for our new release of warehouse management on our platform was exceptional during 2010. And I believe we're very well-positioned for 2011 and beyond.

We're not expecting the economy to improve in the first half of 2011, with only modest improvement over the second half. But even in that scenario, we're optimistic about our financial outlook for 2011. We'll talk more about that later in the call. But first, I'll turn the call back over to Dennis to provide details about our financial results.

Thanks, Pete. Q4 marked our fourth consecutive quarter of double-digit revenue growth as Manhattan delivered $71.5 million in total revenue and $0.32 in adjusted earnings per share. For the full year, we grew total revenue 20% to $297.1 million, delivering adjusted EPS of $1.38 to match our 2008 record adjusted EPS year. As Pete mentioned, the 2010 mid-cycle economic slow down dampened license revenue in the second half of 2010. The good news is, customers and prospects are active in planning supply chain capital investment.

The challenge remains forecasting large deal timing as Management's investment decisions continue to be hedged by global economic caution. Some financial highlights for the fourth quarter and full year are, one, Q4 license revenue of $12.7 million, decreased from $14.3 million in Q4 '09 and is up modestly on a sequential basis from $12.1 million in Q3 2010. Full year license revenue increased 57% to $54.4 million in 2010, off of a weak 2009 comparison.

Secondly, Q4 services revenue increased 22% year-over-year, led by 34% growth in consulting revenue, as services demand continues to exceed capacity. Full year 2010 services revenue increased 13%, with consulting revenue growing 17%. Adjusted earnings per share of $0.32 increased 4% over $0.31 reported in 2009. Full year adjusted EPS of $1.38 increased 44% over 2009s $0.96 and on a GAAP basis, we delivered record earnings per share of $1.25. We continue to maintain our meaningful strategic investments in R&D, investing $0.13 of every revenue dollar. Operating cash flow continues to be strong at $14.6 million in Q4, and $50 million year-to-date. And finally, our balance sheet strength continues to support long-term strategic flexibility with cash increasing to $127 million, up $10 million over Q3 2010.

Our cash to asset ratio is 45%, and we have no debt. Finally, we invested $21 million in common stock buybacks during Q4, with our Board raising our buyback authority to $50 million in January of 2011. That covers the key highlights. On to the details.

Q4 total revenue performance of $71.5 million increased 15% over the prior year quarter on the strength of service's revenue growth. All of our geo segments posted total revenue growth for the quarter and full year. Our Americas segment continued its momentum posting its fourth consecutive quarter of double-digit revenue growth of 13%, totaling $59.6 million. Internationally, EMEA totalled revenue of $7.3 million for the quarter, increased 10% over Q4 2009, and APAC posted it's strongest revenue quarter for the year at $4.6 million, up 65% over 2009 on strong license growth.

For license revenue, in the quarter, Americas recognized $10.3 million, down from $13.1 million in Q4 2009, and up 3% sequentially over Q3 2010. A positive sign post in the Americas for Q4 and full year is the favorable year-over-year trend in mid-sized deal activity, meaning those deals in the $250,000 to $900,000 range. EMEA's Q4 license revenue totaled $407,000, posting its weakest quarter of the year as the western European economy continues to experience a sluggish recovery.

And finally, our APAC team delivered strong Q4 license revenue totaling $1.9 million. Services revenue of $52 million in the quarter increased 22% over Q4 2009 and was down 3% sequentially from Q3 2010, due to the Q4 seasonal holiday period. Our consulting services continued to experience solid demand, with revenues of $30.2 million, increasing 34% over Q4 of 2010. Q4 2010 maintenance revenue totaled $21.8 million, increasing 8% over the prior year.

2010 full year maintenance revenue of $81.9 million grew 6% over 2009 on strong license revenue growth, solid cash collections, and retention rates of 90% plus. As a reminder, we recognize maintenance renewal revenue on a cash basis, so the timing of cash collections can cause inter-period lumpiness from quarter to quarter in maintenance revenue recognition. Consolidated services margins continue to be strong as we posted 51.8% for the quarter and 54% for the full year 2010. Sequentially, Q4 margins are down from Q3 2010 on the combination of Q4 seasonal holidays and hiring to fulfill demand.

As you know, the year-over-year margin comp is not meaningful due to the macroeconomic dislocation. We expect 2011 services margins to be in the 53% to 54% range, slightly lower than 2010, with the on-boarding of new hires driven by strong demand. That being said, we're targeting our cost of services to increase by about 5% sequentially in Q1 2011 versus Q4 2010, due to the onboarding of new hires, the partial reinstatement of our 401(k) match, and the seasonally high FICA expense, offset somewhat by the refresh of bonuses to target.

In comparing year-over-year services margins in Q1, do not forget the $2 million of deferred services revenue that we recognized in Q1 of 2010. That had no associated direct expense impact. Moving onto adjusted operating income. Q4 adjusted operating income totaled $10.1 million with strong operating margin of 14.1%. On a full year basis, we delivered operating margins of 15.7%, a 230-basis point improvement over 2009 margins of 13.4%.

As we discussed in our Q3 2010 earnings call, since we introduced restricted stock as a component of our equity compensation program in 2007, we have consistently included restricted stock expense and adjusted earnings, which is inconsistent with the practice of other software companies. As we shared in our last call, our research of other publicly traded software companies, including all of our comparison companies for our 10-K and proxy filings, confirm the prevalent practice is to exclude all stock-based compensation, that's stock options and restricted stock, from adjusted earnings. If you exclude restricted stock expense from our adjusted earnings, 2010 adjusted operating margin is 18%, which is the more accurate comparison against our software peers.

For historical comparisons, this same analysis shows adjusted operating margins in 2009 of 14.8%, 2008 was 14.2%, and 2007 was 15.6%. To provide you with a more meaningful software comp as reference, we've added a detailed break out of our restricted stock expense, by quarter and full year, for 2007 through 2010, and Item 10 to our supplemental schedule in today's earnings release. In addition, we added Item 11, which provides the total equity-based compensation expense, that's options plus restricted stock, and earnings per share impact for years 2007 through 2010.

So with all that said, starting in 2011, we will begin reporting adjusted earnings in accordance with the prevalent practice in the technology sector, excluding 100% of all equity-based compensation expense. Our 2011 earnings per share guidance will reflect this change. Finally, to assist you with year-over-year comparisons of financial performance for our revised reporting, we added Item 12 in our supplemental schedule, which reconciles from our historically reported adjusted results to the revised adjusted results, excluding restricted stock for the follow adjusted P&L lines. That would be operating profit, operating margin percentage, net income, and diluted adjusted EPS.

Moving on to a discussion around Q4 operating expenses for 2010. Our adjusted operating expenses, which includes sales and marketing, R&D, G&A, and depreciation, were $29.3 million for Q4 2010, down 2% sequentially from Q3 2010 and up 18% over Q4 2009, due to an abnormal comp. As previously discussed, this increase was planned to absorb performance-based compensation tied to improved results, restoration of normalized base compensation following short-term reduction initiatives executed in 2009, and higher restricted stock expense associated with the change in our equity incentive program.

On a sequential basis from Q4 2010 to Q1 2011, we expect our operating expense run rate to increase about 4%, driven by the previously mentioned incremental FICA, 401K, partial reinstatement and head count additions to address R&D capacity, and attrition replacement, somewhat offset by the refresh of bonuses to target levels. Regarding income tax expense, our adjusted effective tax rate for the quarter was 30.4% and 33.5% for the full year, compared to a 2009 effective tax rate of 33.2%. The lower Q4 rate was driven by Congressional approval of the R&D tax credit legislation that was passed in December of 2010. For 2011, we're currently estimating an effective tax rate of 34.5%.

Transitioning to diluted shares. For the quarter, diluted shares totaled 22.35 million shares, up from 22.1 million shares in Q3 2010, driven by option exercise activity, and higher common stock equivalents associated with the higher Q4 average stock price. During the quarter, we re-purchased 680,000 shares of Manhattan common stock at an average share price of $30.92, totalling $21 million. For the full year, we re-purchased 2.7 million shares, at an average price of $28.15, totalling $76.5 million. Option exercises for the year totaled 1.6 million shares, generating net cash proceeds of $36.4 million to the Company.

As mentioned earlier, in January of 2011, our Board approved raising our share repurchase authority limit to a total of $50 million. For 2011, we're estimating full year diluted shares to total about 22.5 million shares. We currently estimate Q1 2011 diluted shares to be the same as our exit in Q4 2010 at 22.35 million shares, with the balance of the year rising to an average of 22.5 million shares per quarter.

Our estimates do not assume any common stock repurchases and depend on a number of variables such as stock price, option exercises, forfeitures, and share repurchases, which can significantly impact our estimates. On a GAAP basis, Q4 2010 GAAP diluted earnings per share of $0.29 increased 12% over $0.26 in Q4 of 2009. 2010 GAAP diluted earnings per share of $1.25 was a record year, besting 2007s record of $1.13. Our GAAP performance is driven by the strength of adjusted operating results. A detailed description of GAAP to non-GAAP adjustments can be found in the supplemental schedule reconciling selected GAAP to non-GAAP measures in our earnings release today.

Now, moving on to cash flow and balance sheet metrics. For the quarter, we delivered cash flow from operations of $14.6 million bringing our full year 2010 total operating cash flow to $50 million, down from $58.3 million in 2009, primarily driven by working capital build and trade receivables. Our accounts receivable balance has increased about $10 million from December of 2009, on license and services revenue growth. Our DSOs continue to be solid at 61 days, compared to Q3 DSO of 60 days. Capital expenditures were $1.5 million in the quarter and $5.9 million for the year. For 2011, we estimate capital expenditures to be about $6 million to $8 million. Our cash and investments at December 31, 2010, totaled $127 million, compared to September 30, 2010 cash of $117 million. Deferred revenue, which consists primarily of maintenance revenue, billed in advance of performing the maintenance services, was $45 million at December 31, 2010, compared to $37 million at December 31, 2009.

As discussed in Q3 2010, as part of our $1 million plus license deal with a very large global information technology provider, we agreed to certify our solution on that client's technology platform for the next five years. We will recognize the revenue rapidly over the term of the contract, beginning with our delivery of the certified software to the client at the end of the Q1 2011. Our deferred revenue balance as of December 31, includes $700,000 that has been collected from this client.

Additionally, we have collected and deferred $2.4 million of revenue associated with customer commitments to provide certain product functionality. We anticipate that these commitments will be fulfilled and revenue will be recognized in 2011, beginning in Q2. So, to recap as we close the chapter on 2010 we posted a fine rebound year, of course, off an aberrant 2009 comp. We grew total revenue 20% and adjusted earnings per share 44%, while delivering an operating margin of 15.7%.

But before I turn the call back to Pete, let me cover 2011 guidance. We are restating guidance on an annual basis only, providing total revenue and earnings per share guidance for non-GAAP adjusted EPS and GAAP EPS. Here's our rationale on this. While economic risk seems to have diminished, global turbulence still exists and we expect it to persist in 2011.

On the positive side, conditions are seemingly improving for meaningful large deal investments with the cost of money being quite low, inflation pressure in commodities such as cotton, food, and fuel prices, and corporate balance sheet strengthening, particularly with $2 trillion plus of cash, excluding the non-financials. Meanwhile, we continue to invest in innovation to take market share and deliver consistent earnings growth and margin expansion. So for 2011 revenue, we are forecasting to grow total revenue at roughly 2x the market growth rate of 5%. Our current annual guidance for total revenue is to deliver $325 million to $330 million, which represents 10% to 11% growth.

With our view of economic risk concentrated in the first part of the year, we expect Q1 total revenue to grow in the low single digits against Q1 2010 revenue, which I'll remind you included about $2 million of recognized deferred services revenue from 2009. So apples to apples, excluding that $2 million of deferred revenue from the Q1 2010 base revenue, we're assuming Q1 2011 year-over-year growth to be about 5%. For the balance of the 2011 year, we are forecasting our quarterly revenue to be about equal on a quarter-to-quarter basis, adjusting for slightly lower Q3 license revenue and Q4 traditional services revenue decline driven by seasonal holidays.

And finally, once again, as a reminder, the $2 million of deferred revenue recognized in Q1 of 2010 dropped straight to the bottom line generating $0.05 of EPS benefit that will not recur in Q1 2011. So for 2011 adjusted earnings per share, we expect to deliver $1.77 to $1.82, representing 12% to 15% growth over 2010 adjusted diluted EPS of $1.58, which has been revised to exclude all equity-based comp. Based on our full year revenue guidance and intra-year planning assumptions, we expect adjusted EPS to be about flat with Q1 of 2010, and quarterly EPS for quarters two through four to be roughly equal.

For 2011, GAAP earnings per share, we expect to deliver $1.45 to $1.50, representing 16% to 20% growth over 2010 GAAP diluted EPS of $1.25. The $0.32 full year EPS difference between GAAP and non-GAAP adjusted EPS represents equity-based compensation, that's options plus restricted stock expense, and intangible asset amortization expense from previous acquisitions. The per quarter EPS impact of these items is estimated evenly at about $0.08 per quarter.

I spoke to our adjusted operating margin goals in the Q3 call. For 2011, we continue to focus on year-over-year adjusted operating margin expansion, and are targeting a 100 basis point improvement over 2010. So, that covers the 2011 guidance. Now I'll turn the call back to Pete for the business update.

Thanks, Dennis. First, a bit of color on the deals we closed in Q4. Our one large deal in the quarter was with an existing customer for our warehouse management solution. We had, and continue to have, a strong pipeline of large deals we're working. But we've been challenged getting clients across the goal line. The current environment doesn't provide much of an opportunity cost to putting off decisions, so several large deals continue to wait in the balance. The good news is, we've been selected in many cases and simply await the client's final decision to close the contract.

Hopefully, we'll see a stronger push to move forward over the balance of 2011. While mid-size deals continue to move along well, we need the larger deals to fuel the kind of results we think we can achieve over a multi-year period. For comparison, in 2007, we closed 16 deals of $1 million or more in recognized license revenue, 15 in 2008, five in 2009, and nine in 2010. We're confident the markets we serve will bounce back to levels exceeding previous years and we're poised to capture a greater share of that activity.

In the near term, we're very focused on closing large deals but acknowledge we must work with our clients on their timelines. Overall, about 70% of license fees in the quarter were tied to warehouse management solutions, and 30% tied to our other solutions. Similarly, existing customers made up about 70% of license sales in the quarter and new customers about 30%.

The one large WMS deal to an existing customer in the quarter had a meaningful impact on these statistics. For the year, about 60% of license revenue was for our WMS software and 40% for the rest of the solutions in our portfolio. Similarly, 60% of the year's license revenue was from existing customers and 40% from new clients. Together, the retail, consumer goods, and logistics service provider verticals were, once again, strong contributors to our license fees and made up more than half of license revenue for both the quarter and the year.

We had a successful quarter adding new clients and expanding our relationship with existing clients. The companies that have permitted us to share their names with the public are included in our press release. As you may recall, we rolled out our warehouse management solution on our supply chain process platform early in 2010 and offered it only in the Americas, where it was very well-received during the year.

We won 12 new clients for our platform-based WMS solution. Essentially, did all of the key competitive WMS deals in the Americas in 2010. Of course, we also won additional business with our I-Series and Microsoft-based warehouse management solutions as well. Today, we have three clients live on our platform-based WMS solution, and expect to have several more live by our next quarterly earnings call. I'm very pleased with the strong year we've had helping clients utilize the power of our solutions.

For the quarter, we had more than 60 customer sites go live with our software, and for the year, more than 300 successes. Following the successful roll out in the Americas of our warehouse management solution on our platform, in 2011, we'll roll out that solution to our Europe, Middle East and Africa geographies as well, and expect to have similar success winning key deals in that region.

For the year, we invested about $40 million in research and development, which is about 13% of our total revenue. And because we house about two-thirds of our R&D team in India, where costs are lower, we're able to dedicate over 600 people, or about one-third of Manhattan's overall staff, to research and development. I'm quite pleased that in all product areas we delivered new, more robust, more efficient solutions to our markets in 2010. I believe our significant investment in our supply chain process platform clearly distinguishes us from all other competitors and positions us for a strong future.

For 2011, we'll continue to invest about 13% of revenue in R&D, as we push to further distance ourselves from other solution providers. At the end of the year, we had about 1,925 employees around the globe. That's about 50 more than we had at the end of the third quarter and just over 100 more than at the end of 2009. Essentially all of the head count growth during the year and the quarter was in our professional services group. We finished the year with 66 people in sales and sales management, with 56 of those quota carrying sales reps. That's down two sales reps from the Q3 figure and up two sales reps from the Q4 2009 figure.

In early January, we announced the promotions of Dennis Story to Executive Vice President and Chief Financial Officer and Eddie Capel to Executive Vice President and Chief Operating Officer. Both men do an outstanding job for Manhattan Associates. While Dennis' responsibilities are unchanged for 2011, Eddie picks up responsibility for our Europe, Middle East and Africa and Asia-Pacific regions, as well as our Americas professional services operations. He also retains responsibilities he had in 2010 for R&D, customer support, and product management. Our Americas sales operation under Jeff Mitchell continued to report to me. Eddie's new role aligns operational responsibilities worldwide and allows us to further improve the quality and efficiency in our solutions and services.

Turning our sights now to 2011, we're planning for a relatively stable global sales environment with a global supply chain market growing at about 5%. While we know how to perform well in that type of climate, we're also confident that when the market economy begins to heat up, and delayed projects get mobilized, we'll continue to capture a significant market share and drive even further improvements in our financial results.

With an attractive pipeline for both large deals and mid-sized deals and a strong and improving competitive win rate, we look forward to 2011 and beyond. As we did in 2010, we remain focused on delighting our customers, delivering market leading innovations in our software, and extending our sustainable competitive advantage through our platform-based approach to supply chain excellence. With that, operator, we'll now take questions.

(Operator Instructions)Your first question comes from the line of Terry Tillman with Raymond James. Your line is open.

Yes, good afternoon, guys. Thanks for taking my questions. Pete, I guess the first question just around the license business in the fourth quarter. You gave a lot of color there, but maybe you could help us reconcile what is seemingly a pretty solid budget flush situation for many companies.

And also, assuming that if some of these large deals had slipped the retail, are still part of retail focus, your sweet spot, I would think that they'd want to sign those deals in the quarter so they can get going on the implementations and be done before holiday season next -- or in '11. So can you maybe help us understand a little bit more on the weakness, if there was any common corollaries between these deals that slipped?

Yes. Sure. Terry, I'll be happy to. It's a great question, and we were disappointed with the overall closed license revenue results in the fourth quarter. But please, frankly with the activity we had particularly in the Americas. The large deal activity level is quite good, and we believe we have preference in many deals that just weren't -- we weren't able to close in Q4. I guess one of the differences between Manhattan Associates and probably other companies that participate in the technology space and the software space is a majority of our deals are for our warehouse management software.

And Terry, as I think you know well, in many cases, for larger deals in the WMS space the overall capital requirement for clients is, in many cases considerably greater than the software price they purchase from Manhattan.

I'll give you one example of a deal in the quarter, I can't give you too many particulars. But we had one deal that we thought could close in Q4, that was more than $1 million in license revenue for Manhattan Associates, but because this well known prospect is transforming their supply chain, the total capital required for their board to approve the supply chain transformation program was closer to $50 million in total. And so -- and that's one example. They're not always that dramatic, but that was certainly an example that impacted us in Q4.

And in this current environment, I think people are taking their time before making those kind of capital commitments. As you've noticed over the last couple of quarters, we've had good success in our mid-sized deals that generally don't require that kind of a capital commitment. But in the larger deals, particularly the supply chain transformation deals, there's often a bigger capital commitment than just the commitment to Manhattan Associates. So while we were disappointed in the Q1 close rate, we were quite pleased with the activity level. And as I suggested, please, with the number of instances where we believe we've been chosen or preferred, and confident when the client is ready to make the decision to move forward and sign a contract, we'll be the provider of choice.

Well, when we look at the top line growth guidance for 2011, and if I'm operating under an assumption that's accurate, that license revenue could be similar to, or at least in the ballpark of the total revenue growth. It sounds like large deals though will be an important swing factor. I guess, what gives you confidence in the 10%-ish type growth in license revenue? Is the pipeline for the larger deals, and/or the medium sized deals, notably better or at least better than heading into 2010 the levels were?

Yes, actually, Terry the pipeline is quite strong, certainly compared to heading into 2010. I'd tell you the one challenge we have, in some regards, it's larger than we'd like, frankly, because of our -- the timing of closing deals. We would have liked some of those deals in the pipeline of closed in Q4, and frankly, in Q3. Having said that, we're pleased with the large deal activity in the pipeline, as well as mid-sized deals. So we're optimistic that activity level in our space is going to be good over the next couple of years and the question becomes how much of that will close in the near term.

Okay. I appreciate the color. And then just one last question just relates to when the folks are moving to WMS on the platform, I know it's still early and we've got a small sample size, three live and a couple more going live. I know it's hard because it's only about five so far, customers, but any, any early signs of when they're upgrading, clearly there's probably service revenue attached to it, but did you see with those customers a conversation that was provoked then around to other products, add-on sales? And have you seen any kind of up selling that has occurred with those first five? And/or do you think that's a phenomena that'll happen with maybe, let's say, the next wave of upgrades to the platform? Thank you.

True, Terry it's a very good question. Thanks. It is, as you suggested, a little early to be drawing major conclusions. But I am quite optimistic about our ability to sell additional solutions to clients that move to the platform. We've had several of the early adopters of platform mention that one of the key things that encouraged them to move to the platform is their ability to get more of their supply chain solutions on the common technology stack. So, I'm cautiously optimistic that will happen in the near term, but quite confident over the intermediate term that we'll see significant additional activity because of the strength of our platform offering.

Your next question comes from the line of Yun Kim with Gleacher & Company. Your line is open.

Thank you. Hello, Pete. Can you talk about, just overall, just quality of your sales force? Maybe the turnover rate, if you had any? And then also the level of experience and the maturity level of your sales force? Do you feel comfortable with the level of sales experience that you have currently within your sales force right now?

Yes, Yun, sure. Be happy to answer that question. I would say the first comment I would make is, I would certainly not draw any conclusion about our slight disappointment in our license revenue result in Q4 with the quality of our sales force. I'm very pleased with the strength and depth of our sales team. A couple of specifics to reinforce that, we probably have the most tenured, experienced application software sales force in the world. The average tenure for our sales team is, with Manhattan Associates, is about ten years.

Now, the reason that we have such good tenure and strength in our sales team is we do grow several of our sales associates up through the ranks of professional services. So our sales team, more skilled sales or experienced executives, have in many cases worked for us for several years in things like professional services, customer services, product management, solution consultants, and have evolved into market leading sales reps. So we've had very, very low attrition this year in our sales team and have a lot of great domain knowledge and experience in our sales team and I'm highly confident when customers are ready to put ink to paper, a lot of that ink will be on Manhattan Associates contracts.

Okay. Good to hear. Thanks. And then, in terms of your hiring plan for your services organization this year, can we expect -- obviously, you mentioned that the demand is outpacing capacity right now. Can we still expect Q1 to be the low point in terms of services margin for the year, even though you're still hiring? And then also, can you confirm that the services revenue in Q1 will be up sequentially?

Yes. Hello, Yun, it's Dennis Story. Of course, services revenue will be up sequentially. Just pretty typical of traditional trends in the Company, Q4 seasonal holiday period, services revenues decline as clients are not doing implementations in their busy cycle, so we'll see a sequential increase there. In terms of margins, my full year guidance was 53% to 54%. Typically Q1 -- and Q1's pretty good margin-wise because you're getting the ramp. Generally, Q4 is your lower services margin profile.

Okay. I thought you mentioned that in Q1, you expect the cost of services to be up 500 basis points?

That's right. That's right.

Okay. Okay. So the question is, would that be the low point for the year in terms of services margin?

No.

Okay.

Q4 will be our low point.

Okay. Got it. Thank you, Dennis, and then while I have you here, I want to make sure that I got the flow out of the revenue balance in Q1 and Q2 correct. You said you expect to see $700,000 in Q1 from that large deal that you closed in Q3 --

No.

Did you say -- what?

No . The seven hundred, the seven

Okay.

The $700,000 will be, it'll be recognized ratably over the five year period of the contract, and that amortization will likely start in Q2. Or that recognition.

Okay. But --

Just for clarification, Yun. That $700,000 was not the entire cash that client will pay us for software. That was the first payment. That was what Dennis was relating to. It was a larger deal than that. And that larger deal, in total, we recognized over five years.

Okay. Great. And then, then what's the $2.4 million in revenue that you also referred to within the deferred revenue balance that you just said you expect to start recognizing in Q2 then?

Yes. That's some clients that -- some business that we closed in 2010 with promised functionality that didn't exist in the base software. So, we're prevented or precluded from recognizing revenue until we deliver that to the customers. And that'll, that'll come sometimes in Q2 and we've already factored that into our overall revenue guidance.

And that'll be -- so the whole amount will be recognized in Q2 then?

No. It will begin in Q2.

Begin in Q2, all right. Great. Thanks for the clarification. That's it. Thanks.

Thanks, Yun.

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

Hi, good evening.

Hi, Mark.

Hi, Dennis, starting with you. I didn't catch your comments regarding your 2011 operating expenses in your prepared remarks. I was wondering if you could just repeat those comment?

Yes, the -- what we talked about is, is a 4% increase sequentially from Q4, 2010 to Q1, which is pretty typical. You have your FICA, your merit promotion increases, we've got a 401(k) restatement, and then some of that's partially offset by our bonus reset for the new year.

That's only applicable to Q1 then?

That's correct. That's correct.

Okay. And then also on, on your tax comments with respect, I think Q1 you mentioned was going to be 34.5?

Yes.

Is that just for Q1 or is that for the year?

No, we're forecasting 34.5% for the year right now.

Okay. Great. And moving on.

And Q1 as well, Mark.

Thank you. And Pete, is it fair to assume that you have enough sales capacity for probably the next 12 months or so in your view?

Yes. The 66 in total I mentioned head count that we've got and about 56 of those quota carrying reps I think is fully capable of delivering on our license revenue expectations for the year.

Okay. Thanks. And I guess if I go back a couple of quarters ago, there was a lot of comments regarding multi-channel merchandising, some of the changes there driving some of what -- some of the demand in the WMS market in particular. I was wondering if you're still seeing that or if that's still a factor in your business?

Yes, sure, Mark. Yes, it is. It's a big push of a lot of activity that we have going on within our sales channels at the moment. Very true in the Americas, but also becoming a bigger factor in Europe as well. And we're optimistic that, that will continue to grow in each of those markets and ultimately also become a meaningful factor in Asia-PAC. We had a couple of nice deals close in Q4, that qualify in that mid-size range that the multi -- our multi-channel expertise and solutions were the competitive differentiator separating ourselves from some competitors for those deals. So, that is an important growth opportunity for us over the next couple of quarters and years.

Okay. And then finally, I think a couple quarters ago, you came out with a product called [Field Scout] which was basically a mobile solution. And I was wondering if you could just give us a update on that product and whether there's any meaningful traction you're getting in that yet?

Yes. Yes. It's still early in its evolution, Mark, so we really don't have any market success that we point to at the moment. But we're quite optimistic about some of our mobile technology abilities to help our customers turn their businesses into mobile supply chains, whether that's store workers, warehouse workers, anyone within their supply chain to enable their supply chain to be more flexible, adaptable, and have greater visibility. So we're enthusiastic about Field Scout and the way we can deploy that over the next couple of quarters and years. But it's very early in its existence with Manhattan.

Thank you. That's all for me.

Thanks, Mark.

(Operator Instructions)And your next question comes from the line of Alan Weinfeld with Kern Suslow. Your line is open.

Hi.

Hello, Alan.

Hello, Alan.

Hi, guys. Glad to see you have so many meetings with hopefully those large deals you're talking about at the National Retail Federation and I'd also like to really say good job on the promotions. I know people aren't on the conference call, but I did talk to them earlier in the month and well deserved.

Great. Thank you, Alan. No, we thought the National Retail Federation show was a great success for ourselves and optimistic that will help build real opportunities for us. But thanks for stopping by the booth while you were there.

So I remember when your company, maybe I'm dating myself, had 20% operating margins. Is that an unrealistic goal for the future? Or can we get back there in a few years when you say we're going to have an economy that's back to normal or growing say 3% instead of 1.5?

Sure. Sure. Well, Alan, we've had a goal of getting to a 20% operating margin, a three year goal of getting to a 20% operating margin, that we continue to strive for. Dennis had mentioned earlier in his comments about our change of the way we publish adjusted earnings per share to exclude the impact of restricted stock. That adds about two percentage points to the adjusted operating margin. Because we're going to continue to operate on an apples to apples basis, that revises our three year goal from a 20% operating margin to a 22% operating margin goal.

So, we certainly think that's possible and that's what we're trying to strive for. We think if you look over the last couple of years, absent that major dip in the macroeconomy, we've made good progress and we're optimistic we're on the right path to get to a 22%-ish operating margin in the next few years.

And you've made some acquisitions in the past in replenishment, even some that have gotten you closer to the inside of the store. I know you've bought back some stock at, I think an attractive price, and it looks like you've been authorized for another $50 million. But do you think there's also opportunity to get more inside the store where you're clearly own the market as far out of the store as you can be. Is there too much competition in there? I don't see Oracle or SAP as terrible competition in the store. What do you think about that?

Yes, thanks for asking.

With the $127 million in cash.

That's for asking that question, Alan. It's a great question. We probably should have thought about including more comments in our prepared remarks. There's also a question that Mark alluded to in his question about our multi-channel retail strategy and it's our ability to be able to help our clients do more wherever they're distributing product from, whether their customers are buying online, shipping from a warehouse, buying online want to pick up at the store, buy online return to the store, any of those different permutations.

The multi-channel retail strategy is an important part of our competitive differentiator. And frankly, also tying back to Mark's question, Field Scout or mobility solution will give us additional capability to help store employees help clients throughout the retail chain. So we're quite excited about that and very excited about our distributed order management solution that helps clients manage distribution of product through all of their different channels.

So, we certainly think we have a real opportunity to extend further into the supply chain out to the store, out to the store shelf and we're making some important investments to be able to do that well. We haven't made an acquisition, as I think you know, Alan, in a few years, it's not that we're not looking, or trying. We're working very hard to find the best use of our cash to improve shareholder value. And if the opportunity presents itself to make a strategically important acquisition, we're very much inclined to do that.

In the interim period of time, we have bought back shares to give our shareholders back some of the rewards we're getting from market performance. And with the authorization from our Board this quarter, at $50 million, we will look for opportunities to continue to do that. But, we're quite excited about the possibilities for our Company.

We think we're well positioned, we think the R&D investments we've made over the past couple of years are really paying off, and believe our competitive position gives us a great opportunity to capture share. A little disappointed that Q4 license revenue wasn't better than it turned out. But continue to be quite optimistic about our ability to drive a very strong financial performance and shareholder return over the next couple of years.

Sorry, folks, we're running a little long this evening. We look forward to speaking with you in about 90 days. And if you have any questions, certainly reach out to Dennis and myself. We'd be happy to grab you. But thanks very much for participating in our Q4 conference call. Look forward to speaking in 90 days. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.