Manhattan Associates, Inc.
Q2 2009 Earnings Call Transcript

Published: 22 Jul 2009

[Operator:]

Good afternoon, my name is Abigail and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manhattan Associates second quarter 2009 earnings conference call. All lines have been placed on mute to prevent 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, July 21st, 2009. I would now like to introduce your hosts for today, Mr. Dennis Story, Chief Financial Officer and Mr. Pete Sinisgalli, Chief Executive Officer of Manhattan Associates. Gentlemen, you may begin.

[Dennis Story:]

Thank you, Abigail and good afternoon everyone. Welcome to Manhattan Associates 2009 second quarter earnings call. Before we launch into the results discussion, I will review our cautionary language and then turn the call over to Pete. 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 into our profitability exclusive of unusual adjustments. Our Form 8-K filed today with the SEC and available from our website www.manh.com contains important disclosure about our use of non-GAAP measures. 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 will turn the call over to Pete.

[Pete Sinisgalli:]

Thanks and welcome to our second quarter 2009 earnings call. I will start the call by taking you through an overview of the quarter in the first half. Dennis will then get into the details of our financial results. I will follow with additional details about our business to provide our outlooks for the balance of 2009, and then we will be happy to answer your questions. As we announced in early July, the global economic recession continued to hurt our license revenue results in the second quarter. In fact, we closed the first half of 2009 having assigned no million dollar deal compared with seven deals of this size closed in the first half of 2008. That said, sales activity was substantially higher in Q2 than in the first quarter. Customers and prospects are meaningfully engaged with us. In fact, going into the last couple of weeks of June, I was quite optimistic about our potential financial results for the second quarter. But as the quarter wound down and proved to be very difficult to get ink on contracts for larger deals. Our win/loss rate continues to be strong. The companies continued to be reluctant to make capital commitments in this environment. As Dennis will cover in his remarks, we continue to execute well on essentially everything within our control. Unfortunately, finalizing customers and prospects commitments for capital expenditures in this environment is somewhat outside our control. We believe we have been selected by several companies that will make million dollar plus license fee commitments to Manhattan but the question remains when. Given our substantial active pipelines for the third quarter and fourth quarter and our continued strong performance on everything within our control, we continue to be optimistic about our third quarter and full year financial results. I will speak more about our outlook for the balance of 2009 following Dennis’ comments. Dennis?

[Dennis Story:]

Thanks Pete. I will cover adjusted financial results first and then provide a summary of our GAAP earnings. As Pete mentioned, persistent macroeconomic uncertainty continued to put pressure on revenues as we saw, final contracts for license deals again delayed. However, while Q2 revenue performance approximated Q1 2009, earnings and operating margins nearly doubled over Q1 benefiting from aggressive expense management to protect margins and earnings in this tough environment. We delivered $0.14 of adjusted EPS. Doubling EPS performance sequentially over our first quarter 2009, adjusted EPS of $0.07. Versus the prior year, adjusted EPS was down from $0.42 in Q2 2008 as the first half of 2008 preceded the global economic collapse. This is a very tough comparison. We have posted adjusted net income of $3.2 million in the quarter, which is down 69% from Q2 2008 but up 87% sequentially over Q1 2009. There is no question that our business is not immune to the economic downturn as freezing capital investment across industries. However, we encourage investors to consider key takeaways from our Q2 performance that clearly indicate the strength of our business in a tumultuous economy. First, we have a proven track record of managing expenses and taking prudent actions necessary to protect earnings. Q2 2009 total expenses decreased 29% over Q2 2008 and we nearly doubled operating margins sequentially from 4.7% last quarter to 8.8% this quarter. Two, our services margins continue to be world class as we aligned capacity with demand. We delivered services margins of 57.2% this quarter compared to 54.7% in Q1 2009 and 52.3% in Q2 2008. Three, our operating cash flow is very strong. We generated $10.8 million in Q2 bringing our year-to-date total to $23.5 million. Four, our balance sheet continues to support long term strategic flexibility and stability with a cash position of $91 million up from $89 million in Q1 2009. Five, our capital structure is efficient and well managed. We have no debt and our operating cash flow has enabled us to self-fund $20 million in accretive share repurchases year-to-date. And six, finally, our heritage commitment to supply chain leadership sets us apart. We have the financial and operational strength to maintain meaningful strategic investments and R&D that deliver competitively superior solutions. Now, I will cover the operating results. Q2 revenue performance was almost a carbon copy of Q1 2009. For the first half, we are coming off tough 2008 comparisons as these were strong license quarters for Manhattan and the full hammer stroke of the global economic collapse did not manifest itself until the second half of 2008. Against this backdrop, total Q2 revenue of $58.4 million decreased 35% compared to last year. Two percentage points of this decline is due to currency fluctuations making the revenue decline absent this impact 33%. Revenues were down about 35% in each of Manhattan’s geographic segments. Our Americas segment reported total Q2 revenue of $47.4 million down 36% over Q2 2008. AMEA Q2 total revenue was $7.8 million declining 35% off a very strong Q2 2008 and total revenue on our Asia Pacific operation of $3.2 million declined 35% from Q2 2008. Now, looking at license revenue performance, $4.1 million in Q2 reflects the decrease of 79% or $15.2 million compared to $19.4 million closed in Q2 2008. We believe this reflects the continued caution on the part of decision makers to commit to meaningful investments given macroeconomic uncertainty. In the Americas, Q2 license revenue was $2.4 million down $12.9 million or 85% over Q2 2008. In AMEA, license revenue totaled $1.1 million in quarter, which was down about $1.4 million over Q2 2008 and APAC delivered license revenue totaling $704,000 for the quarter down from $1.7 million in Q2 2008. Shifting to services, total Q2 services revenue of $49.4 million decreased 21% over Q2 2008 and sequentially declined 3%. 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 conserve capital due to current market conditions which hampers professional services revenue performance. Looking at our services revenue components, our professional services revenue in Q2 totaled $30.8 million declining 28% compared to Q2 2008 and declining 5% sequentially. Maintenance revenue for the quarter decreased 4% over Q2 2008, equating to a 1% decline on a constant currency basis. Sequentially, maintenance was up 1% over Q1 2009. For the first half of 2009, maintenance revenue of $37.2 million was down 1% over the prior year. Excluding currency impact, maintenance grew 2% in the first half of 2009 compared with the first half of 2008. Like other software companies in this economic environment, we are experiencing pressure from customers to reduce maintenance and we have experienced some customer bankruptcies as well and of course collections timing is also being shaped by the current economy. But so far, we are managing effectively through these impacts. As a reminder, we recognized maintenance renewal revenue on a cash collection basis. So we can experience revenue lumpiness from quarter-to-quarter. Overall, though, the good news is our maintenance retention rates continue to track at 90 plus percent and we have retained all significant customers. Of particular importance with respect to our services disciplines, we continue to efficiently manage our capacity to protect margins. For the quarter, adjusted consolidated services margins were 57.2% up nearly 500 basis points compared to 52.3% in Q2 2008 and up 250 basis points sequentially from Q1 2009. Our year-to-date services margins are 56%, up 600 basis points from 50% margins posted in the first half of 2008. This reflects the expense actions executed proactively to date to align capacity with demand combined with lower bonus accruals. On a normalized bonus accrual basis, our services margins would likely be tracking in the 53% to 55% range. Despite the 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 drive customer satisfaction and strategic market advantage. Consistent with our first quarter earnings call comments and based on our expense actions to date for the full year 2009, our goal is to achieve a 300 to 400 basis point improvement year-over-year in services margins, so about 53.5% to 54.5%. Moving on to adjusted operating income, Q2 adjusted operating income of $5.2 million declined $10.3 million over Q2 2008. Operating margin for the quarter was 8.8% versus 17.1% in Q2 2008. Given our license revenue challenges over the past several quarters, the more relevant benchmark is how we are performing on a sequential basis. Despite a 4% sequential revenue decline, we delivered Q2 adjusted operating income of $5.2 million with an operating margin of 8.8% nearly doubling our performance over Q1 2009, operating profit of $2.8 million at a 4.7% margin. Our performance reflects our focus on taking prudent expense reduction actions to protect earnings and R&D investment. Our adjusted operating expenses, which include sales and marketing, R&D, G&A, and depreciation were $26.9 million for Q2 2009 down 26% over Q2 2008 and down 9% sequentially. Lower operating expenses in the quarter were driven by lower headcount and lower performance based compensation. Overall, we are well positioned for positive margin expansion once our license engine starts humming. Given the attractive leverage opportunity of license margins combined with our lower expense base. Memories can run short in the worst recession post World War II. But as a reminder, from 2003 to the first half of 2008, five and a half years, Manhattan posted double-digit revenue growth in 19 out of 22 quarters during this period. We have continued to invest in extending the competitive advantages that underlie this performance and believe that as macroeconomic conditions improve our customers and prospects will want to leverage those advantages. So, for the full year 2009 with our vigilance around expense management, our goal is to achieve operating margins on the range of 8% to 13%. Improved second half license revenue will be paramount in delivering our 2009 operating margin goals as well. That covers the operating results, now, for a few below the line items in GAAP EPS summary. We reported in other income a loss of $403,000 for Q2 compared to $650,000 of income in Q2 2008. The year-over-year change was driven by $100,000 swing from FX gains in Q2 2008 to an FX loss position in Q2 2009. The year-to-date swing from an FX gain to an FX loss was $2.8 million. Apples to apples this represents a $0.08 negative impact year-over-year to our year-to-date EPS performance. For your reference, as part of our supplemental disclosure, we have added a breakout detailing the other income components under item number six. I also want to note that we continue to efficiently manage our capital structure. We have no debt and our $91 million in cash positions as well from a liquidity standpoint. On the tax front, we lowered our year-to-date effective tax rate from 33.5% to 32.5% as we benefited from an FX loss to the repatriation of cash from an international subsidiary. We estimate our effective rate for the balance of the year will remain at 32.5%. For the quarter, diluted share was $22.4 million shares down 10% over Q2 2008 and down 3% sequentially. We repurchased about $578,000 common shares at an average price of $17.34 in the quarter totaling $10 million. That leaves $15 million remaining under our current share repurchase authority. For 2009, we are estimating quarterly and full year diluted shares to approximate 22.5 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. Now, on a GAAP basis, we reported a GAAP EPS loss of $0.02 in Q2 compared to $0.37 in Q2 2008 with lower revenues driving the difference. In addition, Q2 2009 GAAP EPS includes a $3.8 million pretax restructuring charge or $0.12 EPS impact. Excluding the charge, GAAP EPS in Q2 was a positive $0.09. 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, let us get on to cash flow and the balance sheet. For the quarter, we delivered Q2 cash flow from operations of $10.8 million bringing our year-to-date total to $23.5 million. Our DSOs for the quarter were 61 days. We invested about $500,000 in capital expenditures in Q2 bringing our year-to-date total to $1.4 million, which is down 75% over our comparable spend of $5.6 million in 2008. We estimate 2009 capital expenditures to be in the range of $3 to $5 million. Our cash and investments at June 30, 2009 increased to $90.8 million compared to $89.2 million at March 31, 2009 and $88.7 million at December 31, 2008. Cash and investments increased over the 2008 year-end even after self-funding $20 million in share repurchases in the first half of 2009, and deferred revenue which consists mainly of maintenance revenue built in advance of performing the maintenance services was approximately $33 million at June 31, 2009 compared to $33 million at December 31, 2008. So that covers the financial results. Just to recap, the macroeconomic environment continues to generate persistent headwinds on the demand environment to which we are prudently managing the business. We have the financial 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 service 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 our balance sheet metrics remain strong with about 95% of our net operating assets and cash and investments in zero debt which provides financial stability to weather economic uncertainty. So, thank you for your time and I will turn the call back to Pete.

[Pete Sinisgalli:]

Thanks Dennis. The fact that we did not close any million dollar license agreements in the first half of 2009 meaningfully impacted our results. Deals of this size generally reflect a strategic upgrade in our buyers’ supply chain operations. Unfortunately, in the current economic, prospects in our target market were not prepared to make such commitment in the first half of 2009. While I am disappointed in our license revenue results for the second quarter, I am pleased with the efforts of our selling teams around the world. I believe our teams gave 110% effort in the second quarter and while that effort did not lead to the results we had had hoped for in Q2. I am confident it will eventually result in closed deals for Manhattan. It is simply difficult to predict when. As I mentioned earlier, we were actively engaged in several million dollar deals right up to the end of the quarter and remain actively engaged in each of those cases. I am confident we will eventually get those signatures, hopefully in Q3. Our professional services organizations around the world continue to perform well. In addition to posting solid financial results, the teams continue to drive improvements and customer satisfaction. In the second quarter of 2009, our global services team helped customers go live with our solutions in more than 85 sites. Our ability to help customers create and execute sophisticated supply change strategies continue to strengthen this quarter as we issued several releases of our products in June. These include warehouse management for open systems, inventory optimization, extended enterprise management, supply change intelligence and billing management. Our R&D teams around the world did an exceptional job of meeting our objectives for these releases, delivering quality software on time and on budget. Headcount at the end of the quarter was about 1,900, down about 150 from March and down about 400 from Q2 of last year. Today, we have 65 people in sales and sales management with 55 of those serving as sales reps. That is right in line with the sales staff levels I shared with you during our April call. Overall, I believe our staff levels today are about right to meet existing customer needs and to fulfill the growth and demand we expect over the next several quarters and in to 2010. Let me now provide some color on our outlook for the rest of 2009. We are optimistic about our financial prospects for Q3 and Q4. Other than our license revenue performance, we are executing well in all areas of our Company and have confidence in our forecast for those areas and our license revenue pipelines are substantial for Q3 and Q4. However, as evidenced by our license revenue results in Q1 and Q2, forecasting the close rates of deals in our pipeline in this economy is challenging and because license revenue carries about a 90% gross margin, it has a very large impact on our overall financial results. Therefore, due to economic uncertainty and a lack of clear visibility into pipeline opportunity close rates, we are going to suspend the guidance for the balance of 2009. We will revisit providing guidance once the market is stabilized. So to summarize, while disappointed in our first half license revenue results, I am pleased with our ability to deliver in essentially every area of our business. All indications are that we continue to earn our customers’ confidence and support and I believe that will eventually translate into impressive financial results. Until capital spending improves, we will stay focused on improving customer satisfaction, enhancing our software and services and improving our overall competitive position, all while we continue to aggressively manage expenses to weather this economic storm. While this recession is painful, I am confident we are doing the right things to be well positioned to capitalize on top and bottom line growth opportunities as economic conditions improve. Thanks and operator, we will now take questions.

[Operator:]

Your first question comes from the line of Michael Huang - Thinkequity.

[Michael Huang:]

First of all, in terms of the activity levels that you saw on Q2 which were better than in Q1, which product areas seem to be the, which product areas seem to be poised to rebound first and is there any difference in activity level across geographies and verticals?

[Pete Sinisgalli:]

Sure, we are happy to take that Michael. As Dennis mentioned in his comments regarding geographies, we had about the same performance in each of those three geographies in the second quarter overall with each down about 35% overall revenue. I do not think there was a material difference in geographies in terms of the product categories, particularly the larger deals coming down the stretch at the end of Q2. We had a number of multi product deals that in those conversations leveraging our supply chain execution solutions as well as some of our inventory optimization and planning opportunity, so a mix of items. But as you know, the majority of sales of our solutions tend to be in the supply chain execution phase, largely our warehouse management solutions, extended into five management solutions, supply chain intelligence solutions and transportations solutions and we see that activity by going forward from here.

[Michael Huang:]

Okay. I am not sure if you had the chance to take a look at JDA's result reported last night but they also announced that the demand environment is improving versus Q1 and the private planning optimization is an area of strength. So, are you seeing anything that would suggest that your planning and optimization area could be an area that could rebound first in the second half of the year?

[Pete Sinisgalli:]

JDA's results were actually quite encouraging to us. Obviously, they had a very strong quarter with strong license revenue which I think is a good indication of future market's appetite for enterprise solutions that will help them improve infrastructure and operating effectiveness. We compete with JDA in just a couple of application spaces. From what I can discern from their results, the majority of their success in Q2 was in planning and optimization at the store level of operation. So, in those areas where we do not compete, they had from what I could tell the strongest success. But that, as I said, is encouraging to us. We have a number of common customers purchasing different solutions from one another but a number of common customers and as markets get more comfortable releasing capital, I think that is a good sign for all of us.

[Michael Huang:]

Okay. But with respect to just your kind of the replenishment allocation areas that you guys have been focusing some more resources around, are you seeing any encouraging signs that you might be seeing some better adoption ahead on those areas?

[Pete Sinisgalli:]

Yes, I would think in line with my comments earlier about the overall pipeline activity, I would think going forward, we will see some solid rebounds in the inventory optimization area and some of our newer solutions, as well as continued progress in our core execution solution.

[Michael Huang:]

Okay, and just from a headcount standpoint as you look for Q3, will you expect that we would be stable with Q2 levels or do you think that we might be cutting more head?

[Pete Sinisgalli:]

No, I would expect for the balance of Q3 that you will see our headcounts stable.

[Operator:]

Your next question comes from the line of Andrew [Shaw] - Raymond James & Associates.

[Andrew [Shaw]:]

Can you just give an update on the scope migration? When do you think will the WMs be getting courted over?

[Pete Sinisgalli:]

Yes, as I mentioned in my earlier comments, I am quite pleased with the progress our R&D teams are making on delivering all of our solutions. I mentioned a couple of quarters ago that we now have about 22 of our solutions on the platform as of yearend and have a couple more to move also during 2009. Most important of those is warehouse management on the platform. We do not have any publicly announced date for the release of WM on the platform, but we are making very good progress and continue to be quite optimistic about the ability of that product to be an important addition to our solution offering.

[Andrew [Shaw]:]

And then you guys gave guidance but internally, do you guys have some targets that you are still trying to hit or just given the uncertain environment with things where we stand today that it is just kind of hard to predict even internally.

[Pete Sinisgalli:]

Yes, it is very difficult to predict. We are a little bit gun shy given, at least I am, given the prognostications I gave for Q1 and Q2 and our actual results. But internally, we are not discouraged looking forward. We think we have a very good pipeline for Q3 and Q4 and I am personally not uncomfortable with our previous sort of expectations of quarterly license revenue in the $10 million to $15 million range, so $20 million to $30 million over the back half of the year. But as we demonstrated unfortunately in Q1 and Q2 forecasting the actual close rates towards in the pipeline is pretty challenging. But we are optimistic that there is a lot of good activity in the pipeline and that will close at some point hopefully soon.

[Operator:]

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

[Mark Schappel:]

On the maintenance side of our business, this is the second consecutive quarter that the maintenance business has slowed pretty considerably here. I am just wondering if you are just going to…, maybe just a little bit more details on some of the pressures that you are seeing with respect to that business.

[Pete Sinisgalli:]

Good. Dennis and I will be happy to share that question. Dennis is our chairman of maintenance, not quite chairman of maintenance but he is quite active in helping our teams around the world and managed through that. Now, one of the things that is hampering us a little bit in the first couple of quarters is the absence of strong license revenue growth and the benefit of first year maintenance. In addition to that like every one else, we are having customers interested in discussing with us their maintenance payments that I believe Dennis and the team had done an excellent job of being sensitive to our customers' needs at the same time, protecting Manhattan's value and relationships with those customers. But let me let Dennis take the balance of the question.

[Dennis Story:]

Yes, I think Pete nailed a couple of items here. First off, new license revenue is a big contributor to maintenance growth year-over-year mark. Not unlike any software company, all customers, not all customers, but a lot of customers are asking for discounts. We did the same to our vendors as well on our side so, just a sign of the economic times. The other thing to consider is that we take a very conservative revenue recognition position on maintenance renewals. We do not recognize any revenue until we get to cash, collect the cash. So, that can create some lumpiness and certainly, we have had some customers as they are feeling the stress of the economy, trying to push their payments out.

[Mark Schappel:]

Okay.

[Pete Sinisgalli:]

I am sorry, and I believe as Dennis mentioned, absent effects of maintenance revenue is up about 2% year over year.

[Dennis Story:]

And up sequentially.

[Mark Schappel:]

Okay thanks and Pete, based on your results and based on some of your competitors' supply chain vendor results out there, do you believe your product line up is broad enough or sufficient enough to go forward?

[Pete Sinisgalli:]

Yes, we certainly do. One of the things that as I have been mentioning earlier, I think some of the other companies in the space have very good products, good product lines and they compete in different markets than we do, compete for solving the needs, different areas of businesses than we do. In the core supply chain sourcing to consumption for companies with complex supply chain operations, I believe we have got a very extensive suite of solutions that can help companies meet that need. Now, in the current economic environment apparent to us and in certain cases, customers are not uncomfortable deferring some important to what we would think are important initiatives in their businesses. In previous recessions, companies actually stepped up and did more activity within the areas in which we offer solutions that we are seeing in this recession. I think the difference in this recession, this recession seems to be more driven in previous recession by the absence of capital and they are concerned about making capital commitment and while our solutions have a very strong, demonstrable return on investment, I think in a couple of cases, we have seen clients just feel uncomfortable making a capital commitment even though the ROI was quite powerful. But we believe in a not too distant future that we are starting to see some early signs of stabilization that will change in our broad suite of solutions, particularly leveraging our common business process platform will be very compelling. As Dennis mentioned, up until the last couple of quarters, we have been consistently showing double digit revenue growth and we are optimistic that when the things normalize, we will get back to that kind of a trend.

[Operator:]

Your next question comes from the line of Yun Kim - Broadpoint AmTech.

[Yun Kim:]

First, I know you do not like to answer this question but I just have to ask, did any of the large deals closed as the quarter ended?

[Pete Sinisgalli:]

Yes, Yun we do not comment on that but just to say at present that we are uncomfortable with so we will not comment on that other than to say we continue to be optimistic about closing business in the third quarter.

[Yun Kim:]

Okay, great, fair enough. Was the license that you missed simply due to a lack of million dollar deal in the quarter or did you see also weakness within your SMB business segment?

[Pete Sinisgalli:]

Yes, there were certainly some weakness in the small and medium sized business segment as well but the biggest change from previous quarter is the absence of the larger deals. As I mentioned in my prepared remarks, normally, we have $3 million or $4 million plus deals in the quarter and they average more than a million dollars per deal of course and seven in the first half of 2008, if you recalibrate for that quarter and our first half was very different. But it is what it is and we will stay focused and try to improve it but we did see some softness in the small and medium sized business as the rest of the global economy did. The major difference for us though is the absence of larger deals.

[Yun Kim:]

Okay, has the SMB business improved from Q1 level or did it continue to soften up.

[Pete Sinisgalli:]

Yes, it improved sequentially from Q1 to Q2. We were pleased by that, just did not improved enough frankly and we would expect further improvement to get back to levels of activity we have seen in the past. But Q1 was a particularly tough quarter for us activity wise. Activity in Q2, larger deals as well as small and medium sized business market was noticeably better than Q1. It did not close as much as we would have liked but the activity level is good and encourages us about the prospects in the near term.

[Yun Kim:]

Okay and then just curious on the overall health of your partner network. I know you have some large ones and small ones. How have those smaller ones bear during the last couple of quarters? Are smaller ones nailed in that, specific to that? Has there been any kind of advice taking a liability issue and then among the large partners, are they completely supportive of your solutions as well?

[Pete Sinisgalli:]

Yes, that is a great question. It is interesting, for the large partners, we are probably getting greater attention that we have ever gotten from them. There is, I am sure you know, we are having a tough time as well in the market place and are paying more attention or more interested in how we can work together. I think that is great in the near term and hopefully, we will continue to be very beneficial from Manhattan as the economy improves. Several of our smaller partners are struggling in this economy. I do think that you are all trying to be creative in how they continue to improve their value propositions for the market working with us and working among themselves. I am a little concerned in spots about the long-term health of some smaller partners. I think for the most part though they will be able to toss it out, weather the economy and continue to be strong, positive contributor to our long-term success. But there were a couple that are quite challenged at the moment.

[Yun Kim:]

Okay, is there any plans for you guys to offer some assistance if those smaller ones are kind of still with you guys or not necessarily?

[Pete Sinisgalli:]

Well, to tell you Yun, all of our partners are important to us and planning their roles but important roles for us. I do not think there is any one partner though that is material to our success. So, it is unlikely other than we continue to work with them and share possible opportunities, increase the value of our joint propositions other than the things we have done for a while. I do not see much of a need for Manhattan to step and do more than that.

[Yun Kim:]

Okay and last question, it is a hypothetical one. It looks like you are comfortable with your current headcount at the current level of business, but when the business improve, do you feel that you can add headcount to support that growth without hurting the margins or would there be a quarter or two where we can expect some modest margin hits or they ramp in testing and consulting. That is for me, thanks.

[Pete Sinisgalli:]

Yes, great question, Yun. For the most part, we depend on the ramp and the level of activity. I love that problem quite frankly but at the moment, we think we are amply staffed to handle the possible ramp ups within our field of scenarios. As you may recall from the last call, we did a few things to try to protect some additional heads in our organization, made some other cuts in other areas of the Company, unpaid vacation days and executive compensation cuts and things along those lines to make sure we retain a little bandwidth so when the market rebounded we will be able to absorb that rebound with skilled experienced resources and we continue to believe we are adequately staffed for that. That will be a pleasant challenge to have these returns and to ramp up more quickly.

[Operator:]

Your next question comes from the line of Brad Reback - Oppenheimer & Co.

[Brad Reback:]

So, Pete, just one sort of general question. At what point in your mind in the future will this go from an economic issue as this continues to an execution issue?

[Pete Sinisgalli:]

Well, that is a very fair question Brad given the results we posted in the first two quarters. I would guess if the rest of the market, bigger players in the space are having strong results and we are not and we are confident in our portfolio of products, then we have to ask ourselves a different question but I am quite confident the team we have is a very strong team and we will continue to drive great results as they have done in the past. That is a fair question.

[Brad Reback:]

But that being said, I mean, everyone has talked about June being better than the March quarter and your license business is down 20% sequentially, and all that small numbers. I am trying to marry that up with your comments about your optimism, the sales activity, but the performance.

[Pete Sinisgalli:]

Yes, and you are spot on Brad unless the deal closes, the activity is not worth much. So, having said that, we acknowledge that we did not closed several multimillion dollar deals we had hoped to close in Q2 as they close to be probably at somewhat different conversation. But at the end of the day, we are accountable for delivering result and our results in the second quarter were clearly disappointing. Having said that, we also are focused on driving this business for a long-run success and not quarter to quarter, obviously. The sequential build of quarters determines the long run success but we are very focused on making sure we are doing the right thing so that over the long run, our shareholders are richly rewarded for their investments in Manhattan and we believe that will be the case.

[Operator:]

There are no further questions at this time. I will now turn the call back to Mr. Sinisgalli for any closing remarks.

[Pete Sinisgalli:]

We would like to thank everyone for joining us this afternoon and we look forward to catching up with you again in 90 days. Thanks everyone. Good night.

[Operator:]

This concludes your conference call for today. You may now disconnect your lines.