Manhattan Associates, Inc.
Q1 2009 Earnings Call Transcript

Published: 22 Apr 2009

[Operator:]

Welcome to the Manhattan Associates first quarter 2009 earnings conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, April 21, 2009. I would now like to introduce Pete Sinisgalli, President and Chief Executive Officer of Manhattan Associates, as well as Dennis Story, Chief Financial Officer. Dennis Story, you may begin your conference.

[Dennis Story:]

Welcome to Manhattan Associates 2009 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 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 2008 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 and to our profitability exclusive of unusual adjustments. Our Form 8-K filed today with the SEC and available from our website www.manh.com contains important disclosure about our use of non-GAAP measures. In addition, our earnings released 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.

[Pete Sinisgalli:]

I'll cover an overview of our first quarter of 2009. Dennis will follow with details of our financial results, and I’ll wrap up with our outlook for the balance of 2009 and our financial guidance. And of course we'll be happy to answer your questions after our prepared remarks. As we noted in our April 2nd press release, first quarter 2009 license revenue was well below our plan. Our competitive win rate during the quarter continued strong, however, there just weren't enough businesses comfortable with the global economic outlook to commit capital to improve their supply chains. The financial impact of the shortfall of license revenue was substantial as our gross margin on license fees is about 90%. As a result, our EPS result for the quarter was also well below our plan. The Q1 license sales result in a downward revision by most economists of the macro environment for the remainder of 2009 has led us to revise our outlook for the last three quarters of 2009 and the full year. We've also adjusted our expense outlook for the balance of 2009 to reflect our revised revenue outlook. Earlier today we made the difficult decision to eliminate about 100 positions in Manhattan Associates and took other actions to lower expenses for 2009. We expect the positive financial benefit of these actions to substantially offset our reduced revenue expectation for 2009. Importantly, the expense cuts will not material impair our ability to make key investments in research and development to further extend our competitive advantages. I'll provide details of our plans and cover our outlook for Q2 and 2009 following Dennis's remarks.

[Dennis Story:]

I will cover adjusted financial results first and then provide a summary of our GAAP earnings. As Pete mentioned, the difficult macroeconomic environment continues to put pressure on revenues and consequently earnings. As we saw license deals continue to push due to lack of economic visibility, we delivered $0.07 of adjusted EPS in the first quarter compared to $0.35 in Q1 2008 driven by lower revenue. Adjusted net income of $1.7 million in the quarter decreased 80% over Q1 of 2008. There is no question that our business is feeling the impact of this unprecedented economic downturn, however, we encourage investors to consider key takeaways from our Q1 performance that clearly indicate the strength of our business in a tumultuous economy. Number one, we have a strong track record of managing expenses wisely and taking prudent actions necessary to protect earnings, Q1 2009 total expenses decreased 25% over Q1 2008 and are down 15% sequentially over Q4 of 2008. Number two, our services margins continue to be world class. We delivered services margins of 54.7% in Q1 compared to 51.5% in Q4 2008 and 47.9% in Q1 of 2008. Number three, our operating cash flow is very strong. We generated $12.7 million in Q1 more than doubling Q1 2008 operating cash flow of $6.1 million. And number four our balance sheet continues to be very solid. Of our $89 million in total cash and investments, $86 million is highly liquid. Five, our capital structure is efficient and well managed. We have no debt and our operating cash flow enabled us to self-fund $10 million in accretive share repurchases this quarter. And number six, our heritage commitment to supply chain leadership sets us apart. We continue to invest meaningfully in R&D to enable our customers to design and operate strategic supply chains that create sustainable competitive advantage. Now, I'll cover the operating results. Total Q1 revenue of $60.8 million decreased 31% to last year, three percentage points of this decline is due to currency fluctuations making the revenue decline absent this impact 28%. Lower license and service revenues across all segments accounted for 80% of the year-over-year decline. From a global perspective, our Americas segment reported total Q1 revenue of $50.8 million down 30% over Q1 2008 revenues of $72.1 million. AMEA Q1 total revenue was $7 million declining 42% off of a very strong Q1 2008 and total revenue in our Asia Pacific operation declined 29% from $4.2 million in Q1 2008 to $3 million in Q1 2009. License revenue performance for Q1 was $4.9 million down 73% or $13.4 million compared to $18.3 million in Q1 of 2008. A tough macroeconomic environment deteriorated worse than we planned and was clearly expressed in the volume of Q1 deals, in particular we signed no million dollar plus deals as companies continued to delay investment decisions. In the Americas, Q1 license revenue was $3.8 million down 72% over Q1 2008. In AMEA, license revenue totaled $445,000 in Q1, which was down about $3.1 million compared to a strong Q1 2008 comp. APAC delivered license revenue totaling $650,000 for the quarter down from $1.3 million in Q1 2008. Shifting to services, total Q1 services revenue of $50.8 million decreased 15% over Q1 2008 and sequentially declined 6%. Consistent with the past several quarters, the services revenue decline can be attributed to a slowdown in services demand in the wake of lower license revenue and slower upgrade activity. Customers continue to preserve capital due to market liquidity concerns and this in turn continues to hamper professional services revenue performance. Looking at our services revenue components, our professional services revenue in Q1 totaled $32.3 million declining 22% compared to Q1 2008 and 4% sequentially. Maintenance revenue for the quarter increased 2% over Q1 2008 and on a constant currency basis increased 6% over Q1 2008. We recognize maintenance renewal revenue on a cash collection basis, so sequentially we can experience some lumpiness, which explains the 8% decline from Q4 of 2008. Collections timing, of course, is largely being influenced by the current economy. Overall, though, our maintenance retention rates remain strong tracking at a healthy 90% plus. Despite lower services revenue, we continue to manage our capacity to protect services margins. For the quarter, adjusted consolidated services margins were 54.7% up 680 basis points compared to 47.9% in Q1 of 2008 and up 320 basis points sequentially from Q4 of 2008. This reflects the expense actions taken in Q4 2008, lower headcount and lower bonus accruals. Despite these intermediate term challenges, we are pleased with our continued ability to deliver strong services margins and expect to continue to perform solidly in this area as we leverage our capacity to continue to drive customer satisfaction and strategic market advantage. Based on the Q2 actions announced today, we are targeting a 300 to 400 basis point improvement year-over-year in service margins, so full year margins of about 53.5% to 54.5%. Moving on to adjusted operating income, Q1 adjusted operating income of $2.8 million declined $8.2 million over Q1 2008 on lower license revenues. Operating margin for the quarter was 4.7% versus 12.5% in Q1 2008 reflecting the significant impact of license revenue operating leverage with 90% margins. Despite a 73% or $13.4 million decline in license revenue year-over-year, strong services margins and solid business management kept us in the black for the quarter. Our adjusted operating expenses, which include sales and marketing, R&D, G&A, and depreciation were $29.4 million for Q1 2009 down 20% over Q1 2008 and 14% sequentially. Lower operating expenses in the quarter were driven primarily by lower headcount and lower performance based compensation. That covers the operating results, now for a few below the line items and GAAP EPS summary. We reported in other income a loss of $233,000 for Q1 compared to $2.3 million of income in Q1 of 2008. The year-over-year change was driven by a $2 million swing from FX gains in Q1 of 2008 to an FX loss in Q1 of 2009. Apples to apples this represents a $0.05 negative impact to year-over-year Q1 EPS. For your reference, as part of our supplemental disclosure, item number six provides a breakout detailing the other income components. We continue to efficiently manage our capital structure. Our adjusted effective income tax rate was 33.5% for the quarter compared to 34.75% in Q1 of 2008. Diluted shares for the quarter of $23.1 million were down 7% over Q1 of 2008 and down 2% sequentially. In the quarter we repurchased about 679,000 common shares at an average price of $14.74 totaling $10 million. That left $5 million in remaining share repurchase authority from the board's $25 million authority approved in October of 2008. Under this authority, we have repurchased a total of $1.3 million shares at an average price of $15.03 lowering our common shares outstanding by 5%. This month our board increased our share repurchases authority from $5 million to a total of $25 million. For 2009, we are estimating quarterly and full year diluted shares to approximate 23 million 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. On a GAAP basis, we reported GAAP EPS of $0.01 in Q1 compared to $0.30 in Q1 2008 with lower revenues driving the difference. 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. That covers the P&L, now on to cash flow and the balance sheet. For the quarter, we delivered Q1 cash flow from operations of $12.7 million increasing 108% over Q1 2008 cash flow of $6.1 million. Our DSOs for the quarter were 68 days. Our capital expenditures for Q1 totaled $873,000 down from $2.7 million in Q1 2008. We estimate 2009 capital expenditures to be in the range of $6 to $9 million. Our cash and investments at March 31, 2009 were $89.2 million compared to $88.7 million at December 31, 2008 and $72.8 million at December 31, 2007. Cash and investments is up from year end even after self-funding $10 million in share repurchases in the quarter. Deferred revenue, which consists mainly of maintenance revenue built in advance of performing the maintenance services, was approximately $36 million at March 31, 2009 compared to $33 million at December 31, 2008. The increase is driven by our business growth and our continued 90% plus maintenance retention rate. So that covers the financial results. Just to recap our core message, the macroeconomic environment is tough and we are managing the business accordingly. Unlike some of our competitors, we have the foundational strength in our business to weather these challenging times while still investing in our solutions and customer satisfaction and in resources strategic to our market advantage. We continue to manage expenses aggressively to protect our earnings. We continue to deliver superior services margins. We continue to invest in our supply chain solutions to position us to take share when the market turns. We continue to generate strong operating cash flow and we continue to carry a very strong balance sheet with about 85% of our net operating assets and cash in investments with zero debt providing the financial stability to weather this downturn. Now, I'll turn the call back to Pete for the business update and the outlook for the remainder of 2009.

[Pete Sinisgalli:]

Clearly companies in Manhattan's core markets are approaching strategic investments very conservatively as they try to manage the impact a turbulent economy is having on their businesses. While we typically close $3 to $5 million plus deals each quarter and have about half our license revenue driven by new customers, in Q1 we saw a marked difference. We had no license revenue transactions greater than $1 million and existing customers made up about 80% of total first quarter licensees. With the overall market challenges, new customers and large potential deals sat on the sidelines. While professional services revenue was down year-over-year, our services organizations executed well. During the quarter, we took more than 70 client sites live on our solutions and our research and technology teams continue to make solid progress on our product and technology roadmaps. Lastly, at the end of Q1 we had about 2,050 employees, which is a decrease of about 50 people since the end of Q4. That wraps up our comments about the first quarter. During our earnings call last quarter, I mentioned that our 2009 outlook was based on a view that the first half of 2009 would be similar to the last half of 2008, but that the second half of 2009 would show some improvement. Well, like a lot of others, I got that wrong. The global economy in Q1 was a lot worse than it was in the second half of 2008 and most economists now have revised down their forecasts and do not expect improvement in the second half of 2009. Our revised outlook for 2009 reflects that view. Given a reduced outlook for revenue in 2009, we've taken actions to lower costs to better manage and match to a lower revenue forecast. I'll now cover details of those actions. In addition to reducing costs, our actions have two primary objectives. The first is to continue to invest to enhance our long-term future. And the second is to do what we can to protect jobs so when the economy improves we have trained staff on hand to meet increased customer demand. Our plan for 2009 was based on an assumption of a higher level of market activity than what we now forecast so we have excess capacity. When assessing ways to correct for this, we distinguished between resources we could reasonably expect to be fully utilized within the next 12 months and resources we did not think we could fully utilize within those 12 months. Earlier today, we eliminated about 100 positions, did not meet the hurdle of being fully utilized within 12 months. For the capacity that could be needed sooner than that, we protected those positions by taking other actions to generate savings about as great as we would have realized had we eliminated those positions as well. We did this because we think it's important to our long-term plans and to customer satisfaction to be prepared for some level of market rebound. Almost all of the eliminated positions were in the United States and about half were in our professional services roles. We also adjusted our America sales team to deliver the same market coverage with four fewer sales managers and five fewer sales reps than we had on March 31st. On March 31st, we had a total of 76 sales and sales management positions with 61 of those being sales reps. Today, we have 67 sales and sales management positions with 56 of those at the sales rep level. We also eliminated some positions in the United States R&D and G&A functions. I don't believe the R&D reductions will have a material effect on our ability to deliver on our product and technology development plans. To address short-term excess capacity, we've taken actions that fall into four categories. First, we've reduced executive compensation for the balance of the year by lowering the salaries of my direct reports by 10%, my salary by 25%, and the fees paid to our Board of Directors also by 25%. Second, we've implemented a program in the United States requiring all associates to take eight unpaid vacation days over the balance of 2009. That works out to one day per month for May through December. Third, for the balance of 2009, we've suspended our match of our 401(k) contributions. And fourth, we've implemented a number of other initiates around the world to reduce cost. We estimate that the actions we've implemented for the balance of 2009 allow us to retain somewhere between 75 and 100 positions we would have needed to eliminate to achieve equivalent cost savings. Retaining these positions should prove very helpful when the marketplace rebounds and we can respond with experienced people more quickly. The combination of the headcount reduction and the expense savings should allow us to save about $9 million over the last eight months of 2009 or add about $0.25 to adjusted EPS for the year. The restructuring cost of the headcount reduction will be about $4 million. It will be booked in the second quarter and the cost is not included in our adjusted EPS guidance. While these actions are quite painful, I believe the team at Manhattan Associates is quite confident of our long-term future. And while these steps are difficult, they do position us well to weather the macroeconomic turbulence and come out the other end considerably stronger than our competitors in the supply chain space. Let me now shift to our view of the second quarter and full year guidance. Our outlook for the balance of 2009 includes the financial benefits of our cost restructuring actions. I believe we continue to execute well and manage effectively everything within our power. The one area where our ability to control outcomes is most limited, particularly in this environment, is close rates on license software. Therefore, our financial outlook for 2009 is largely determined by our assumptions for license revenue for the balance of the year. We were quite disappointed with our Q1 license revenue results. And while we don't believe the market has recovered, we do expect some improvement in the second through fourth quarters. Our pipeline for Q2 and the rest of 2009 is solid. The key question is what portion of the pipeline will close? And I believe that depends on the macroeconomic environment and customers and prospects confidence in the direction of the economy. To accommodate this uncertainty, we have recast our outlook with a low end view and a high end view at assumed different pipeline close rates. Both ends of the range assume a close rate well below our historical average but above what we experienced in Q1. At the low end, we assume license revenue of about $10 million per quarter for the balance of the year. And at the high end, we assume license revenue per quarter of about $15 million. We're not providing license revenue guidance but just trying to provide greater transparency about the key assumptions we've used to arrive at out EPS guidance range. So specifically, for the second quarter we expect adjusted EPS to be in the range of $0.15 to $0.30. Last year we achieved $0.42 in the same quarter. For the full year, our revised EPS adjusted guidance is to be in the range of $0.80 to $1.20. This compares to our previous guidance of $1.23 to $1.48. For 2008, we achieved adjusted EPS of $1.38. So to summarize, while we're disappointed in our Q1 financial performance, we're quite upbeat about our long-term future. The difficulties of this recession are certainly affecting Manhattan Associates. However, we believe when the inevitable rebound in the market occurs, we will be much better positioned than any of our competitors and will capture significant market share across supply chain management. Operator, we'll now take questions.

[Operator:]

(Operator Instructions) Your first question comes from Michael Huang from Thinkequity.

[Michael Huang:]

Hey, guys, a couple questions for you. The first one, so if you think about $10 million of license revenue through the balance of the year on the low end, what would be the biggest lever to drive that kind of modest improvement relative to what you did in Q1? Would it be large deal improvement or is it activity with new customers, or is there something else that you are doing from a sales messaging standpoint that could help you achieve that?

[Pete Sinisgalli:]

You know, Michael, I would think the most important variable in front of us is a stable or a somewhat stable macro environment. One of the things we wrestled with in the first quarter was some of the conflicting messages about the financial segment, the ability to borrow and the impact that had on our customer base. So I would suggest to you that leading variables certainly outside of Manhattan's control is the overall macro economy and having some stability in the economy. I think over the last four weeks or so we've started to see some of that and we're cautiously optimistic that that will hold, but I think the biggest variable will be the ability of our customers to have some confidence in the environment in which they're working. Now, having said that certainly we would expect in more normal times, as we have in the past, to have several million plus dollar deals in the quarter, historically we've had three to five and historically Q2's been a strong quarter for us for license fees. We'd also expect in a more stable economy that new customers would be willing to commit capital to supply chain improvements, in particular in some cases since those initiatives have been delayed for several quarters. So we would think a combination of a more stable macro environment would lead to several large deals closing in the quarter, and more new customers willing to commit to important supply chain initiatives.

[Michael Huang:]

So when you actually look you at the cross-section of your pipeline, can you talk a little bit about the various vertical exposures that you have and maybe help us understand the product mix within there, as well? Specifically, I was hoping to better understand how much of that pipeline is with retailers and how much is outside of that and would you feel more comfortable in one vertical versus another?

[Pete Sinisgalli:]

Yes, it's a great question. Our pipeline generally very closely reflects our historical close experience for both products and verticals. So for instance, if you look at our pipeline today, you'd see more than half of our pipeline is clients that fall into the consumer goods, retail and third-party logistics categories. And you'd also find a good proportion, about half of our pipeline in the area of distribution management. Historically, those have been about our close rates, or close statistics for those verticals and product categories and our pipeline reflects that, as well.

[Michael Huang:]

And then so with respect to the balance of 2009, do you expect close rates to be better versus historical than any of those product areas? So for example, is it easier to get a transportation management deal done now versus in the past relative to warehouse management?

[Pete Sinisgalli:]

Yes, our assumptions are across the board that our close rates for the balance of 2009 by vertical and by product will be below our historical achievements. So certainly, in certain areas there's a couple of product categories where in this environment we'd expect to see a little bit better success than perhaps other environments, inventory optimization, some of the labor management solutions. I think when the economy begins to stabilize we'll see good responses in those areas. But I would expect our close rates for distribution management, transportation management, or to lifecycle management, and so forth over the balance of 2009 we're planning for those to be lower than what we've experienced in the past.

[Michael Huang:]

Last question for you, so with respect to what you've seen so far in Q2, have you had any success getting any large deals get done, or is there anything that gives you confidence that you'll be able to get a couple or several done in Q2?

[Pete Sinisgalli:]

We won't provide specific comments on that, as we've never had in the past, but I will tell you that, as I mentioned in my earlier comments, the stability, or the appearance of stability in the economy over the first couple of weeks of April are an encouraging sign. The key variable or one of the key variables we wrestle with is our client's confidence in the economy going forward, and as their confidence builds, our ability to close business will build, as well. So I think the level of stability seen, at least so far in the first part of Q2 gives us incremental confidence in our ability to meet our goals for the quarter. Thank you, Michael.

[Operator:]

Your next question comes from Terry Tillman – Raymond James.

[Andrew Shaw for Terry Tillman:]

Hey, guys, this is actually Andrew Shaw on for Terry. The first question for you in terms of scope, where are you guys in terms of the number of modules that have been kind of ported over there, and also on that, when will the core WMS be moved over?

[Pete Sinisgalli:]

Yes, it's a great question. And I think we mentioned at the last quarterly call, Andrew that 22 of our products have been migrated over to the supply chain process platform. We were quite pleased with that progress. As I think most of you probably know, we have not yet completed the migration of our warehouse management solution to that platform. We don't have an announced date for that, but I will tell you we are making very good progress and are looking forward to the day when we can announce the launch of WMS on the platform. We're making good progress, and we're just not at a point yet where we're announcing a date for that.

[Andrew Shaw for Terry Tillman:]

Okay. And then what kind of margin benefit long-term do you think this offers once you get the rest of the module moved over?

[Pete Sinisgalli:]

Yes, we would think margin benefit would come in two primary areas. I think once we have all the products on the platform our ability to increase sales will be noticeable. I think we'll have a very compelling value proposition, both from a total return on investment, as well as a customer's total cost of ownership, the ability to leverage our five broad categories of products on a common business process platform with common business objects and to optimize across those application sets, we think will be very powerful to the customers that we target, and believe revenue growth should be enhanced by that. In addition to the opportunity to grow revenue more quickly, there will be some internal cost efficiencies that could be gained, some in the area of research and development, but certainly also in other areas of our company as we focus on a technology stack that we think will be a powerful go-forward strategy.

[Andrew Shaw for Terry Tillman:]

Okay. And then just last question for you, is there any thought on maybe having more of a subscription like offering that can maybe make the required upfront commitment less onerous for struggling retailers or the like?

[Pete Sinisgalli:]

We've examined that over the years and have had mixed experience with that. As you may know, we have a subscription-based offering for our transportation solution and our replenishment, or inventory optimization solution, and have customers utilizing both of those product sets on a software to service subscription basis. We've had some solid success there with those two applications. We've evaluated the opportunity to offer more of our services on a subscription basis. And at the moment, the marketplaces and the applications we provide haven't lent themselves to software as a service. That's primarily because we target large organizations that would like to capture the economies of scale of purchasing the application for themselves, as opposed to playing on a subscription basis. And because most of those larger organizations do want to be able to modify, customize or tailor a solution for their specific business process. And that's more common in supply chain than in other areas of enterprise applications, but having said that, our team is constantly talking to our customers, prospects, industry experts, technology experts to stay on top of the latest evolutions and the benefits of cloud computing. And we'll continue to modify our position as customers demand it.

[Operator:]

Your next question comes from Brad Reback – Oppenheimer.

[Brad Reback:]

So when we get to the other side of this, whenever that is, what type of leverage should we expect in the business? Will a lot of these cuts that you've made be able to stay in place or does the service margin go back to that 51% range and some of these other cost savings you'll have to make up, so maybe there's a little limited leverage for a period of time there?

[Pete Sinisgalli:]

There probably would be limited leverage other than, no, I think we'll see greater leverage coming from the license revenue rebound. Obviously, with a 90%-ish, 90% plus gross margin on license revenue, that has the most material impact on our overall margins. So we'd expect license revenue acceleration would have a nice positive impact on our overall margin. Our services margins, we've done a bit of analysis on this and believe we currently have, if not the best, about the best in the world for professional services organizations. So while we believe we can continue to improve, we don't believe the opportunity to improve there is dramatic. But one of the things we're looking forward to is the time where there's greater customer demand for our services offerings and we'll continue to be able to expand the revenue growth there. And obviously, as the license revenue grows, the maintenance revenue will grow and maintenance revenue has a very high gross margin, as does license revenues. So the combination of accelerated license revenue growth and maintenance growth, we think will positively affect the overall margin. But you're right Brad, on the services basis, I think our team does a very good job of managing that and believe that there's some upside to that but probably not dramatic.

[Brad Reback:]

And Pete, on the maintenance side, and Dennis, you mentioned that there's some lumpiness you saw on a cash basis. I was looking back over the last three years, and for the most part the business has been flat-topped, sequentially. I think there was one quarter where it was down $100,000. That's a fairly significant decline. Have those payments come in thus far in the month of April? Are there bankruptcies? What caused that dramatic amount of lumpiness?

[Dennis Story:]

So Brad, a couple things, primarily we changed that accounting about a year ago, so that's going to impact some of the, when you look at the historical trends, but it's really not an area that I'm concerned about. It's just the economy and just managing that through with our existing customer base. So the timing is we've done a great job with overall cash flow, and I don't have any significant concerns. It's just timing.

[Operator:]

Your next question comes from Mark Schappel – the Benchmark...

[Mark Schappel:]

Pete, starting with you, could you just, given the fact that your gross margins meaningfully increased in the quarter, is it fair to assume that you saw the revenue shortfall of Pruitt pretty early on in the quarter?

[Pete Sinisgalli:]

Well, Mark, one of the things we noticed going back to last fall it was pretty clear that the economy wasn't going to be as strong in 2009 as we hoped. So as you may recall we took actions in October to reduce headcount and cut some other costs to better position ourselves for 2009. So we certainly were expecting more challenges than we saw in the first part of 2008. So I think we were at that time appropriately aggressive in right-sizing the company. What has changed though since the middle part of Q1 is our outlook on the balance of 2009 no longer has us expecting an improvement in the second half of the year, so that was largely the reason for the actions we announced a little while ago. But we do think we're reasonably well positioned to weather the economy, continue to invest substantially in research and development in our product and technology roadmaps, and believe we'll be a strong company once we come out of the economic turbulence.

[Mark Schappel:]

In your prepared remarks you mentioned that your competitive run rates continue to be strong and I was wondering if you could just go into a little bit more detail on this.

[Pete Sinisgalli:]

We do, I think, a pretty good job of mapping our competitive wins and losses against five larger companies that we compete with often. And, as has been the case over the past couple of years, in the quarter we won about two out of every three deals we competed in. So we've historically had about a two-thirds win rate, and in Q1 we had about that same two-thirds win rate. The challenge, of course, there just weren't enough deals for we and our competitors to fight over in Q1. But we feel our win rate continues to be solid and importantly solid in the most important deals, the strategic deals that are up for grabs in the supply chain space.

[Mark Schappel:]

And then Dennis, a question for you, I did not catch the warehouse management to non-warehouse management mix. Could you just repeat that?

[Dennis Story:]

The warehouse management was about 60% in the quarter, non-warehouse 40%, so 60-40.

[Operator:]

Your next question comes from Yun Kim – Broadpoint AmTech.

[Yun Kim:]

I apologize for the background noise, I am at a conference. The obvious question, could you just talk about the status of those deals that did not close in the March quarter? Whether some of them have simply been pushed out until the customers IT budget has been sent or are you just being delayed until the environment improves out there, which could mean that it could be next year before you [inaudible].

[Pete Sinisgalli:]

Yes, I'll be happy to, Yun. We’ll give you our best perspective on that. In many cases the deals have been postponed until customers are more confident with the macro environment. So in several cases deals have been reviewed by senior management or budgeted for 2009. Teams have been identified within the customers to begin the implementation and roll out programs, but the decision makers are just not comfortable or confident in the moment with what they see over the next nine months and the prospects for their business, so they're withholding making capital commitments in many cases. But we're confident in more than a few cases we've been selected as the vendor of choice, and once those companies get confident that their businesses are on sound footing, we expect those deals to close. So for the most part they've been deals that have been pushed off until a better economic time arrives. Now, in some cases that means customers will not start those programs until 2010, but we believe there's enough activity in our 2009 pipeline certainly to achieve the goals that we talked about a few moments ago.

[Yun Kim:]

So is it fair to say that for the rest of the year you are expecting the number [inaudible] to be down quite a bit from last year and most of the [inaudible].

[Pete Sinisgalli:]

Your question broke up a little bit, Yun. I think I got it but let me repeat it because I'm not sure anybody else on the call had the same difficulty we did. Your question I think said over the balance of the year are we expecting large deals to close at a lower rate than in the past and the difference to be made up by small mid-size deals? Is that your question? At the moment, our mixed pipeline, close rates and so forth assumes about the same balance of larger deals to mid-size deals as we've had in the past. Now we're assuming both will be down from prior years in the 10 to 15 minute range that we are using as a high and our low end kind of general expectation. But we're expecting our balance to be about the same, but not material different from that.

[Dennis Story:]

Yun, that would be 10 to 15 million.

[Yun Kim:]

I just wanted to throw out a fairly open ended question here. How do you feel about your current business model in terms of the services mix? I think the maintenance revenue as a percentage of total revenue is relatively low but is a typical industry average, and then also your ability to penetrate your market opportunity today with the current job in marketing strategy. Do you see an opportunity perhaps invest more aggressively in some smaller regional consulting vendors than [inaudible] you have already made some type of consulting maybe perhaps using acquisitions to license your business model. I just wanted to throw some of those questions out there.

[Pete Sinisgalli:]

That's a very good set of questions. We debate that internally regularly. What is the most attractive go-forward business model and how can we modify our business to increase the return to shareholders. We believe the space we compete in the supply chain optimization space has a very good opportunity for both application software and its maintenance associated with it, as well as a services business. As mentioned earlier about software as a service delivery mechanism, many of our customers would prefer to buy software on a perpetual license basis, pay maintenance, but also help us implement that software to lead to improved supply chain performance. The ability to modify, localize, customize and tailor the software to their specific supply chain work flow gives us a meaningful competitive advantage, I believe, in our market space. So while the services mix is a higher percentage of overall revenue than in most enterprise software categories, I believe our services mix is a real competitive advantage for Manhattan. So ballpark we have about, if you exclude our hardware business, about 25% of our revenue generally is licensees, 25% maintenance fees, and about 50% professional services and I believe that's one of the things that really does give us sustainable competitive advantage. Some of the big guys, the SAPs and the Oracle's of the world will have a hard time competing with our supply chain solutions largely because of the depth and breadth of our services teams and their capability to increase the value of our software. So we think that revenue mix, while it is a little bit unconventional for a software company, gives us sustainable competitive advantage. Having said that, we're constantly looking for acquisition opportunities to complement our supply chain product footprint. As we said on a couple of calls, we'd be very open to finding a complementary product category or vertical market expertise that would allow us to further differentiate our solutions from the market space. We're constantly kicking around different potential opportunities and, as most of you probably know, in this economic environment there are probably more distressed properties that are on the market than under normal conditions. So we're trying to be aggressive looking at what's available and will be aggressive if there's something that makes good sense for us. So we are looking at those opportunities, specifically, Yun, to your question about acquiring a smaller services company. That probably has less appeal to us, primarily because the expertise we need is specific to supply chain domain. And while there are a few specific supply chain services companies, there aren't that many that would be a very good match to our specific focus. But we're open to any and all opportunities to increase the value of our franchise and increase the value of the services and solutions we bring to our customers. So if you have anything specific you think we should consider please forward it to Dennis or myself. Thanks everyone for joining our call, we greatly appreciate the time and look forward to speaking with you again in about 90 days.

[Operator:]

This concludes today's Manhattan Associates first quarter 2009 earnings conference call. You may now disconnect your lines.