Manhattan Associates, Inc.
Q3 2009 Earnings Call Transcript

Published: 21 Oct 2009

[Operator:]

Good afternoon, my name is Maggie and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2009 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 session. (Operator instructions) Speaking on the call today is Pete Sinisgalli, CEO of Manhattan Associates and Dennis Story, CFO of Manhattan Associates. I will now turn the call over to Mr. Story. You may begin, sir.

[Dennis Story:]

Thank you, Maggie and good afternoon, everyone. It is a beautiful day in Atlanta. I would like to welcome you to the Manhattan Associates 2009 third 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 risks 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 third quarter earnings call. I will start by reviewing the highlights from the quarter, Dennis will then get into the details of our financial results, I will follow with additional details about our business and then we will move to questions. We posted a solid financial result in our third quarter of 2009. While the global economy is still sluggish, it at least appears to have stabilized. And with some level of stability, customers and prospects have begun to restart important supply chain investment initiatives. This is most clearly evidenced by our closing $3 million plus license revenue deals in Q3. And with the return of million plus dollar deals, coupled with strong expense management, we posted the best quarterly earnings per share result in our history. While we are planning for a macroeconomic environment in line with the prevailing economists' consensus that conditions won't improve much in Q4, nor throughout 2010, we are optimistic about our Q4 opportunities and our preliminary outlook for 2010. I will share more on that following Dennis's review of our financial results. Dennis?

[Dennis Story:]

Thanks, Pete. I will cover adjusted financial results first, and then provide a summary of our GAAP earnings. In our Q2 call, I noted that we were well positioned for positive margin expansion, once our license engine started to crank back up, given the attractive leverage opportunity of licensed margins combined with our lower expense base. While I wouldn't say we are firing on all cylinders, activity is incrementally better in our performance reflexes. The earnings leverage in Q3 was driven by improved license revenue performance, combined with our focus on taking prudent expense reduction actions to protect earnings and R&D investment. We delivered $0.43 of adjusted EPS, tripling EPS performance sequentially, growing 26% over the third quarter 2008 adjusted EPS of $0.34, and beating our previous record performance of $0.42, which we delivered in Q2 2008. Q3 adjusted net income of $9.6 million increased 15% over Q3 2008 and tripled sequentially over Q2 2009. While we are cautiously optimistic about signs the global economy is stabilized, growth headwinds are likely to persist in 2010. With that said, we are encouraged by the strength of our Q3 performance and believe our results reflect our supply-chain market leadership. Here are a few important highlights. First, growth. License revenue of $11.4 million included three $1 million plus deals, breaking our first half drought and we are entering Q4 with a very solid pipeline. Two, we have a proven track record of managing expenses and taking prudent actions necessary to protect earnings and strategic investments. Q3 2009 total expenses decreased 28% over Q3 2008 and year-to-date are down 27%. Our operating margins were 20% in the quarter. Three, our services margins continued to be world-class, strong capacity and demand alignment. We delivered services margins of 58.3% this quarter, compared to 57.2% in Q2 2009 and 51.3% in Q3 2008. Four, our operating cash flow continues to be very strong. We generated $15.4 million in Q3, bringing our year-to-date total to $39 million. Five, our balance sheet continues to support long-term strategic flexibility and stability, with a cash position of $106 million, up 17% from $91 million in Q2 2009. Six, 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 and accretive share repurchases year-to-date. And finally, seven, we continue to maintain meaningful strategic investments in R&D that deliver competitively superior solutions. Now, I will cover the operating results. Q3 total revenue performance of $65.3 million progress nicely on a sequential basis, increasing 12% over Q2 2009 or higher license revenue, but was down 21% over the prior quarter as overall growth continues to be somewhat constrained due to global macroeconomic challenges. Our Americas segment paved the way for our solid performance this quarter, reversing four consecutive quarters of sequential revenue decline and posting 17% sequential revenue growth over Q2. Americas' total revenue was down 18% over Q3 2008 and services revenue has continued to decline in the wake of lower traveling 12 month license revenues. On the international side, EMEA's total revenue of $6.5 million declined 35% year-over-year and APAC revenue of $3.1 million was down 33% over Q3 2008, driven by lower license sales. License revenue for the quarter totaled $11.4 million, declining 18% over Q3 2008 revenue of $13.8 million. Amanda generated $10.3 million of Q3 license revenue, while this is down 4% over Q3 2008; it is nearly double our entire first half performance. EMEA's Q3 license revenue totaled about $454,000, which was down from $1.4 million in Q3 2008, reflecting the broader macroeconomic slow down. And APAC Delaware license revenue totaling $554,000 for the quarter, down .1 $0.6 million in Q3 2008. Shifting to services, total Q3 revenue was $46.9 million, declining 22% over Q3 2008, and down 5% sequentially from Q2. This marks the fifth consecutive quarter of declining services revenue, which can be attributed to a slowdown in services demand, tied to fewer license sales in previous quarters, and slow upgrade activity due to constrained capital conditions. Looking at our services revenue components, our professional services revenue in Q3 totaled $27.2 million, declining to 3% compared to Q3 2008 and 12% sequentially. Maintenance revenue for the quarter increased 2% over Q3 2008 and sequentially maintenance was up 6% over Q2 2009. Year-to-date maintenance revenue of $56.9 million is flat with the prior year and up 40% on a constant currency basis. In this economic environment, overall maintenance growth for the year has been challenged due to lower license revenue, pressure from customers to reduce maintenance, as well as some customer bankruptcies. In addition, collections timing is also being shaped by the current economy, but so far, we are managing effectively through all of these headwinds as our maintenance retention rates continue to track at 90% plus and we have retained all significant customers. Of particular importance with respect to our services business, we continue to efficiently manage our capacity to protect margins. For the quarter, adjusted consolidated services margins were 58.3%, up 700 basis points compared to 51.3% in Q3 2008, and out from 57.2% margins posted in Q2 2009. Our year-to-date services margins are 56.7%, compared to 2008 year-to-date margin of 50.5%. Our margin performance continues to reflect the expense actions we executed proactively today to align capacity with demand, combined with lower performance bonus approvals. On a normalized bonus accrual basis, our services margins would likely be tracking in the 53% to 55% range. For Q4, in addition to our normal seasonal decline due to holidays, we expect continued downward pressure on services revenue, stemming from the combination of lower license revenues on a trailing 12-month basis, and a less active upgrade climate, given the global economic conditions. Comparable with 2008 Q3 to Q4 trend, we are expecting services revenue to be down about 10% to 12% sequentially, with Q4 margins coming in the range of 51% to 53%. 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. Now moving on to adjusted operating income. Q3 adjusted operating income of $13.2 million increased 24% over Q3 2008. Q3's operating income was up 65% over our entire first half 2009 performance. Operating margin for the quarter was 20.2% versus 12.8% in Q3 2008, and Q2 2009 margin of 8.8%. Year-to-date 2009, operating margins are 11.5%, compared to 14.2% in 2008. Our adjusted operating expenses, which include sales and marketing, R&D, G&A and depreciation, were $25.6 million for Q3 2009, down 25% over Q3 2008 and 5% sequentially. Lower operating expenses in the quarter were driven by lower headcount and lower performance-based compensation. For the full year 2009, with continued vigilance around expense management, our goal is to achieve operating margins in the range of 10% to 13%, versus our previously stated goal of 8% to 13%. Q4 license revenue certainly is the key to delivering on our 2009 operating margin goes. That covers the operating results. Now, for a few below the line items and GAAP EPS summary. We reported other income of $255,000 for Q3 compared to $927,000 of income in Q3 2008. The year-over-year change was driven by lower interest income and FX gains. Year-to-date, the spring from an FX gain to an FX loss is $3.1 million. Apples-to-apples, this represents a $0.09 negative impact year over year to our year-to-date EPS. For your references, part of our supplemental disclosure we have added to break out detailing the other income components on your item number six. On the income tax front, our Q3 adjusted effective income tax rate was 28.2% versus 27.5% for Q3 2008. The lower end quarter rate was driven by provision to tax return adjustments, with the following of our 2008 federal income tax return in September. Primarily associated with benefits realized from additional R&D tax credits. The lower tax rate contributed $0.03 to our Q3 2009 EPS performance. Our Q4 2009 effective tax rate will return to our 32.5% estimate, with the full-year effective rate coming in around 31%. Item number nine to our supplemental schedule included in today's earnings release provides a reconciliation of our effective rate for adjusted and GAAP results. Transitioning to diluted shares, for the quarter, diluted shares were 22.175 million shares, down 10% over Q3 2008 and down 1% sequentially. We did not repurchase any shares in Q3, which leaves us with $50 million under our current share repurchase authority. For 2009, we are estimating Q4 and full-year diluted shares to be approximately 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. So on a GAAP basis, we reported GAAP earnings per share of $0.50 in Q3, compared to $0.18 in Q3 of 2008. Included in Q3 2009 EPS is a $2.8 million benefit totaling $0.12 of EPS, from releasing tax reserves associated with expiring tax audit statutes in the quarter. Excluding the unusual items in both periods, apples-to-apples GAAP EPS for Q3 2009 was $0.37 versus $0.28 for 2008, representing a 32% increase. Year-to-date GAAP reported EPS for 2009 is $0.47 compared to $0.84 in 2008. A detailed description of GAAP to non-GAAP adjustments can be found in the supplemental schedule included in our earnings release today. Now that covers the income statement. Let us move on to cash flow and balance sheet. For the quarter, we delivered Q3 cash flow from operations of $15.4 million, bringing our year-to-date total to $38.9 million. Our DSOs for the quarter were 59 days. Our year-to-date capital expenditures totaled to $1.7 million, which is down 75% over our comparable period spend of $6.8 million in 2008. We estimate 2009 capital expenditures to comment around $3 million. Our cash and investments at September 30, 2009 increased 17% to $106 million compared to $91 million at June 30, 2009 and $89 million at December 31, 2008. Cash and investments have increased 20% over the 2008 year-end, after self-funding $20 million in share repurchases in the first half of 2009. Deferred revenue, which consists mainly of maintenance revenue built in advance of performing the maintenance services, was approximately $34.5 million at September 30, 2009 compared to $33 million at December 31, 2008. So that covers the key three financial results. Before I turn the call back to Pete, as you know, we suspended guidance in Q2 due to global economic uncertainty and lack of clear visibility in pipeline opportunity close rates. So I would like to provide a fuel Q4 2009 and 2010 comments for modeling adjusted results. In general, Q3 2009 results represent a good starting point for modeling Q4 2009, adjusted primarily for the two items I mentioned earlier. One, services revenue, including maintenance, being down 10% to 12% sequentially from Q3, due to seasonal holidays and the trailing 12-month of lower license revenues. This will place services margins in the range of 51% to 53% for Q4. And two, the higher effective tax rate of 32.5% in Q4 compared to the 28.2% in Q3 2009. So that covers Q4. For 2010, clearly, with every million dollars of license revenue generating $0.03 of earnings per share, our 2010 license performance will be the key driver in adjusted earnings per share performance. Notwithstanding the license revenue outlook, we are in the early stages of our 2010 budgeting cycle and there are three clear elements whose impact on EPS should be considered. After factoring in each of these, our current goal for 2010 is to achieve services margins in the range of 53% to 55%, and 2010 operating margin expansion of about 100 basis points. The elements are, first, 2009 compensation reduction initiatives put in place to preserve short-term capacity. These initiatives included reducing executive and board compensation, unpaid furlough vacation days, and suspension of the 401K match. We planned these reductions to terminate on December 31 of this year. While we will not extend compensation reductions nor furlough days for 2010, we will continue to suspend our 401K match for 2010. The incremental expense to 2010 will be approximately $4.5 million. Second, 2009 merit increases, as you know, in 2009, Manhattan employees globally received 0% for merit increases. For 2010, we plan to restore merit increases. Our current expense estimate is approximately $5 million. And third, performance-based compensation. This includes our annual bonus plan and sales commissions. Our forecast 2009 performance comp expense is down about $11 million from 2008. We would expect tomorrow and the permanent expense increase for 2010, just as the term performance implies, we have to deliver results to earn it. These three operating elements will increase our full-year 2010 expense base approximately $20 million in total. Using our Q3 2009 run rate expense as a decent starting point, excluding license and hardware expenses, a reasonable estimate would be adding about $5 million of incremental expense per quarter. Finally, we expect our effective tax rate to rise to 34.5% in 2010, Andrea modeling diluted shares at 22.5 million shares. Now, I want to emphasize these are very early estimates, which are certainly subject to change based on our Q4 outcome and the global macro economic environment. We will true up our goals on the Q4 call. To reiterate though from my previous note as we view 2010, all in, including these items, our 2010 goal is to deliver services margins in the range of 53% to 55%, and 100 basis points of operating margin expansion. That covers my report. Now, I will turn the call back to Pete for a closing business update.

[Pete Sinisgalli:]

Thanks. We have said for the past couple of quarters that our activity with customers and prospects has been good, but that matter conditions have been slowing capital approvals and deals just haven't been closing at our historic rates. Well, our close rate improved this quarter. We added new customers around the world, including in Yarrows Family Bakers in New Zealand, Farmacias de Similares in Mexico, Nalsani in Columbia, PT Multitrend in Indonesia, Freight Mark in Malaysia, Daqing Chain Commerce & Trade and Lerentang Medicine Group in China. US wins included specialty retailers Hayneedle and Half Price Books, logistics provider Propak Development, and custom trade show company Mirror Show Management. We also expanded our sales and services with existing customers across all regions, including American Clubs, American Textile Company, BUT, Express Scripts, Famous Footwear, Fruit of the Loom, Genco Distribution Systems, Guess?, HoMedics, J. Knipper and Company, Jefferson Smurfit, LeSaint Logistics, New Balance Athletic Shoe, O'Reilly Automotive, Perfect 10 Satellite, Performance Team Freight Systems, SamsonOpt, Shanghai TingTong Logistics, Southern Wine & Spirits, SpeedFC, Sturm Foods, Sulyn Industries, Thermwell Products, United Natural Foods, Vie Cosmetics Groups. As I mentioned in my opening comments, we closed three million plus dollar deals in the quarter. All three are in the Americas, with two in the United States and one in another region of the Americas. Two of the three are retailers, and the other is in the food category of consumer goods. To our existing customers and one is a new customer. One of the existing customers had installed our warehouse management solution in one site very successfully, and has now expanded our relationship to cover the remainder of the US sites. We won the new customer against SAP and RedPrairie, and will deploy several components of our Manhattan Scope solution suite for this customer. The other win and an existing customer was quite encouraging. Technically, they are an existing customer, but they're only Manhattan purchase was our slotting products many years ago. So in many ways, this was a new prospect. We competed against SAP and RedPrairie for this customer's supply chain transformation business. And this competition I believe demonstrates the value of our scope strategy. This food client was looking to transform their supply chain to better manage inventory, reduce transportation cost, better manage the assets in their supply chain, and reduce labor expense. SAP's supply-chain software could not provide the necessary depth of functionality to meet this client's needs and RedPrairie could not provide the breadth of solutions this client requires. I expect, as the economy stabilizes and ultimately rebounds, we will continue to have strong success winning important supply-chain transformation initiatives like this one. The retail, consumer goods, and logistics service provider verticals once again strong contributors to our license fees, and together these sectors represented more than half of the license revenue in the quarter. About 70% of the quarter's license revenue was from existing customers, and about 30% from new customers. About 60% of the quarter's license was from warehouse management solutions and about 40% from our other supply-chain solutions. Our competitive run rate continued to be strong in the quarter, with Manhattan winning two out of every three deals we competed in. We continue to drive customer satisfaction across the globe, and in Q3, our professional services teams appliance take more than 75 sites live with our solutions. Also, as the market has begun to stabilize, we are starting to see some of the software projects that regulate in the height of the financial storm begin to get funding. While the last year for us has been scarred by global economic challenges, I am particularly pleased that we have been able to continue to invest meaningfully in research and development. As we cut costs in all areas to offset the reduced revenue, we were very careful not to harm investments in our future. And I believe those investments are positioning us for significant market share gains as the economy stabilizes and recovers. Of particular note, we will release our warehouse management solution on our supply-chain process platform in the first quarter of 2010, essentially completing our full suite of solutions on the platform. While I don't expect offering warehouse management on the platform to chain the growth rate of the sector, I do expect it to further improve our already strong WMS win rate and increase the value we receive for our warehouse management solution. In addition, by offering the world's best warehouse management solution on our common supply-chain process platform, we further enhance the value of all the other solutions residing on the platform. We have given a sneak preview of our next release to a few select customers to read reviews. We expected the solution to be favorably received, but the very positive feedback is encouraging nonetheless. At the end of September, we had about 1850 employees around the world. That is similar to the June statistic and down about 450 from the year ago. Today, we have 64 people in sales and sales management, with 54 of those sales reps. That is one less in both categories from a quarter ago. Looking to Q4, we continue to view the overall market as quite difficult to forecast and therefore are not offering official financial guidance. But I will say our Q4 pipelines are quite attractive. So the summarize, I believe Manhattan Associates has weathered the worst part of the financial storm in good shape. While we had four consecutive quarters of disappointing license revenue, the reduced expenses across the board to partially offset that. We continue to invest in R&D to extend our competitive advantage and stay focused on our strategy in improving customer satisfaction. I believe our Q3 results are a step in the right direction. Of course, we realize this is only one quarter and license revenue for the quarter was still down versus the prior year. But we believe our target market are beginning to thaw. Over the near to intermediate term, there is likely to be continued turbulence in the markets, but I believe that as long as the capital markets do not get more difficult than they are today, we are well-positioned to perform in that turbulence. We remain very confident in our long-term future. Operator, we will now take questions.

[Operator:]

(Operator instructions) Your first question comes from the line of Michael Huang with ThinkEquity.

[Michael Huang:]

Hi, just a couple of questions for you guys. The first one, with respect to the next release of the WMS product, I know it is a little bit early to call, but based on his conversations with clients, do you think this release of the products, is there any pent up demand around this one and could this coincide with an increased willingness to spend as we get into 2010?

[Pete Sinisgalli:]

Yes, Michael, that is a great question. We do believe this is an important release of our warehouse management system. It is the next release, builds on all of the great attributes of our covert release of the solution, which is already perceived by most as the most advanced solution in the marketplace, but we are quite excited about this next release. But we don't have any specific data that would suggest that it will change materially the dynamics in the marketplace. As I said in my prepared remarks, we don't expect customers to change their upgrade plans, their supply chain transformation plans just because Manhattan has a great new release out, what we do expect though as those opportunities come to market, our win rate will increase and we expect the value we receive for those wins to improve as well.

[Michael Huang:]

Okay. And do you think this impacted all the end customer segment that you are selling into? Does it change at all the vertical composition or the size of the customer that you're going after?

[Pete Sinisgalli:]

That is very likely to be quite consistent with the vertical markets we go after and the larger tier-1, tier-2 target market that we go after, we think the solutions should be very attractive participants in those target markets. As I said earlier in my comments, we do believe one of the true benefits of moving warehouse management onto the platform is the clear benefit our other solutions get by having WM, our market-leading solution on the platform as well. So you're quite upbeat and optimistic about the long-term potential and hopefully we will see some of that begin to materialize in the early part of 2010.

[Michael Huang:]

Great. So is it fair to say then that assuming a better spending environment that the attached rates around from the additional products, back at the picking up as a result of this release?

[Pete Sinisgalli:]

We certainly expect so. Not sure that will happen in the early part of 2010, but over the next several years, we certainly expect that the investments we have made over the last several years to move each of our solutions onto a common supply-chain platform should benefit each of the solutions.

[Michael Huang:]

And then just switching gears a little bit, so as you look into 2010, and you look at the replenishment, planning and replenishment area, now is that an area that you would expect to see kind of rebound faster than warehouse in 2010 or could you help us understand your views on product areas and which one benefits from a slightly improved spending environment?

[Pete Sinisgalli:]

Yes, you know we would love to be able to have a more complete perspective on that, Michael, but we are just numbers about the overall market turbulence and what happens next in the global economy. Overall, over the next several years, we believe there will be a very attractive replacement cycle for all of the solutions that we offer to the marketplace, whether it is distribution management, transportation management, inventory optimization, replacement, lifecycle management, planning and forecasting, we take each of those, our target areas will be ripe opportunities for a meaningful replacement cycle, but just don't have a very good crystal ball to be able to forecast that in the near term.

[Michael Huang:]

Okay. And last question for you, just what you'd expect, going into Q4, when you look at the pipeline, could you give us a sense for how much bigger is this pipeline going into Q4 versus what you saw last year in Q4 and assuming it is consistent close rates with what you saw in Q3 would actually help you drive sequential growth in license performance in Q4? Thanks.

[Pete Sinisgalli:]

Yes, that is a very good and fair question, Michael, but we are probably going to be hesitant to address it. One of the things that we learned in the first half of this year, it is a little hard to predict in this environment close rates. As I mentioned in my prepared remarks, our close rate was better in Q3 and so we are encouraged by that. We would expect all other things being equal to see a comparable close rate in Q4, but a lot unknown at this moment, but we are quite pleased with the overall size of the pipeline, the activity in the pipeline, and encouraged that we will win more than our fair share of that eventually, I am just not ready to commit to how much of that we will close in Q4.

[Michael Huang:]

Thanks very much.

[Pete Sinisgalli:]

Thanks, Michael.

[Operator:]

Second question comes from the line of Brad Reback with Oppenheimer.

[Brad Reback:]

Hey, guys, how are you?

[Dennis Story:]

Hey, Brad.

[Pete Sinisgalli:]

Good, Brad.

[Brad Reback:]

Dennis, on your comments around the incentive comp for next year, I think you had said $11 million, is that right?

[Dennis Story:]

Yes.

[Brad Reback:]

And that was sort of consistent with 2007 levels?

[Dennis Story:]

Down slightly over 2007 levels, because of headcount being down.

[Brad Reback:]

Okay, so would the implication there be that the expectation is somewhere for a return to license revenue similar to 2007 in 2010?

[Dennis Story:]

Can't go there.

[Brad Reback:]

I am sorry, 2008 levels?

[Dennis Story:]

That is a great question, Brad, but can't go there.

[Brad Reback:]

Okay, well, maybe you can just help us understand where that number came from then. It is clearly that is the single biggest delta, right, year-over-year, as we look forward, just as we try to build our models and make them educated guesses around what we think license revenue is going to be, clearly that has an impact on margin, right?

[Dennis Story:]

Sure, it is a – first, let me state I think we have got a pretty good track record of managing our margins, okay, and protecting our earnings, but it is a performance-based bonus accrual that is tied to our budget of revenue and EPS and it is x number of bonus participants at a bonus potential.

[Brad Reback:]

Okay, great. And as we think about 4Q and sort of the ability and where the conversion rate on the pipe might be as that relates to incentive comp, should we not think about the ability for you guys to earn any sort of bonuses for 4Q whatsoever regardless of where license comes in?

[Dennis Story:]

Sure. Well, with respect to Q3 year to date, we feel we are adequately accrued for bonus. As you know, we introduced the supplemental plan, bonus plan on earnings per share in Q2. So we are adequately accrued for Q3 and we felt on our forecast that we are adequately – have provided for in Q4. Sorry about that.

[Brad Reback:]

Got it. And the last question on the – as it relates – you know what, I'll have to come back – Pete, the last question on your comments around pricing on Scope. Is there – was the implication that you think you can actually sell the Scope for a higher price than that you are getting currently?

[Pete Sinisgalli:]

Well, we would expect over time, Brad, that will be providing substantially greater value and believe that we should be compensated for that greater value. So time will tell whether we can pull that off or not, but that is certainly my expectation.

[Brad Reback:]

Okay, thanks a lot, guys.

[Dennis Story:]

Thanks, Brad.

[Pete Sinisgalli:]

Thanks, Brad.

[Operator:]

Next question comes from the line of Mark Schappel with Benchmark.

[Mark Schappel:]

Pete, starting with you, with the Scope architecture initiative winding down, I was wondering if you could give us some insight into where your R&D efforts are going to be focused over the next year or two.

[Pete Sinisgalli:]

Sure, I would be happy to, Mark. Firstly, I wouldn't suggest that they are winding down, certainly we are completing a very important component of that and moving WMS to the platform, but I would want to be clear that there is still ample opportunities for us to continue to improve the value of the solutions we provide, so I wouldn't look for a significant reduction in R&D expense. There may be some modifications of that, but what we would hope to do is, we direct that investment to other areas that can increase incremental revenue and customer value. So certainly, there should be some opportunities for efficiencies, but would also be disappointed if we don't find other innovative ways to bring more value to the market.

[Mark Schappel:]

Okay, and Dennis, with respect to foreign exchange, what was the impact on revenue this quarter?

[Dennis Story:]

It was about 1%, Mark.

[Mark Schappel:]

Thank you.

[Operator:]

Next question comes from Terry Tillman with Raymond James.

[Andrew Shaw:]

This is actually Andrew Shaw on for Terry. First question on the cost control, sort of across the board, does any of that loosen up now given some of the stabilization in the environment or are you going to continue the tightly managed costs in order to keep the earnings stable?

[Dennis Story:]

I think we have a very good heritage of managing costs, so we will continue to be aggressive.

[Andrew Shaw:]

All right, thanks. And then, you give us an update on the sales force. Would you be looking to add ahead there, potentially given the improvement or is it still too early and would you think there is still sort of significant excess capacity there?

[Pete Sinisgalli:]

Yes, at the moment, we wouldn't plan to add the headcount and we think we have capacity, both in sales and in professional services. We would like to think though towards the lower half of 2010, things would improve and there would be higher growth rates than we are currently planning for and provide an opportunity for that, but at the moment, we think we have reasonable capacity in sales and professional services to handle the outcomes we expect for Q4 and 2010.

[Andrew Shaw:]

All right, thanks. That is it.

[Pete Sinisgalli:]

Thank you.

[Operator:]

Next question comes from the line of Yun Kim with Broadpoint AmTech.

[Yun Kim:]

First of all, congratulations on finally being back on track.

[Pete Sinisgalli:]

Thank you.

[Yun Kim:]

So Pete and Dennis, can you talk about the overall sales environment out there for large deals, especially those in seven figures range, you know, how is the pipeline for those deals, how's the pricing environment, whether the customers are still looking to find both to get a better discount or are you may be seeing some trend towards some of them splitting those large deals up into smaller ones?

[Pete Sinisgalli:]

Sure, I would be happy to take a crack at that, Yun. I think the environment beginning to show in Q3 and our expectations for Q4 is a return to a more normal environment that we have seen in the past in 2007, 2008, but probably it is just at a lower level of overall volume, but the environment is similar. Large deal activity continues to be okay, we will see what the close rate is, but we have multiple large deals in the pipeline that we are optimistic about closing in the quarter, many of those are for multiple products within our scope solution. Many clients are still looking to buy one or two products first and then add to that later as they implement those solutions. So they limit the amount of capital that needs to be invested up front, so that hasn't changed much. I would suggest to you that the price competition continues to be pretty challenging. So we would expect that to continue, particularly in a continuing difficult capital environment and we would expect some of our competitors, particularly some of the other best of breeds begin to continue to be quite aggressive on price. Can I suggest to you our pipeline for larger deals in Q4 is quite attractive? I would suggest to you the deal environment is comparable or getting comparable to what it was a couple of years ago, but with a lower level of overall activity. So we set into a lower level of activity in total, we believe our position in that marketplace, our competitive strength, should allow us to perform pretty well in that environment.

[Yun Kim:]

Okay. Is it still safe to assume that you probably have to close at least three seven-figure deals to hit $10 million to $12 million range for any given quarter?

[Pete Sinisgalli:]

Well, it is hard to say for sure. It depends on the size of those within that million plus range, but that is not a bad assumption, two to three or something like that would not be a bad assumption doing the math. You can see the difference between having none in Q1 and Q2 and having three in Q3.

[Yun Kim:]

Okay, great. And then quickly onto your consulting business, you got a 10% to 12% sequential decline for Q4 for the services revenue, which obviously I think implies that the consulting business will be down sequentially, but I believe you also did make some comment in your opening remarks that some deferred projects could be underway. So is there a possibility that your consulting business could come in much better than what you're planning at this point, if some of these projects do get underway during the quarter?

[Pete Sinisgalli:]

It is probably unlikely, Yun, because we are already into the latter part of October. The encouraging thing about that is that business begins to fold back into our activities and our backlog and the things we have visibility to over the two, three, or four quarters, that is encouraging. So unlikely to have a material impact, even though we only have eight or so weeks left in the quarter and there are many holidays within that or absence of business working days in that time period, unlikely to have material upside, but it is encouraging for us to look out over the next year or two.

[Yun Kim:]

Okay, and then just switching to another gear again, just curious, do you see Oracle out there as a competitor? You know, obviously, you've got time, but obviously Oracle is coming out with their new fusion app for next year, making, it sounds like they are in a little bit of a stronger position to supply chain with more order management type of solutions out there. And then obviously, they acquired (inaudible) a few years back. Just wondering if you guys are seeing Oracle much at all out there.

[Pete Sinisgalli:]

Oracle is a very, very strong company, powerful company. We'll know how much true energy they are focusing on supply chain. Certainly, I guess Allison's comments last week at OracleWorld on their launch of fusion applications has some potential implications, but we're kind of in a wait-and-see mode. We believe that our capability differentiates us from the component parts that Oracle have to put together in a fusion app world and I think they got a way to go to get there. But we certainly recognize they are a very formidable potential competitor and certainly have our antenna up to watch everything and anything they do.

[Yun Kim:]

Okay, and then finally, any update on your acquisition or M&A strategy with about – more than $100 million in cash on your balance sheet? I believe it has been a while since you guys have done anything sizable.

[Pete Sinisgalli:]

You know, that is a fair question, Yun. We would like to be more acquisitive, but as we have said on a couple of these calls, we are fairly disciplined about our strategy and the role acquisitions play in our strategy. And we believe the world is looking for a solution provider to provide a complete suite of supply chain solutions on a common supply chain process platform and there is real value to be gained by customers from that, so we would look primarily for acquisitions to be complementary to our footprint. We're not excluding anything, so we will certainly evaluate opportunities to improve shareholder value, but as a general kind of strategic direction, we would be looking for those things that are complementary to our product and technology direction. We continue to invest meaningful time and energy evaluating different possibilities, but as you pointed out, we haven't done anything of any size recently and we would like to change that, but we will continue to be disciplined about our approach to M&A.

[Yun Kim:]

Okay, great. Thank you so much.

[Pete Sinisgalli:]

Thank you, Yun. Operator, I think it is time for us to move on, so I would like to thank everyone for joining us for our Q3 conference call and we look forward to speaking with everyone in 90 days or so. Thanks. Good evening.

[Operator:]

Thank you for joining today's conference call. You may now disconnect.