Manhattan Associates, Inc.
Q4 2009 Earnings Call Transcript

Published: 3 Feb 2010

[Operator:]

Good afternoon, my name is Courtney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates fourth quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Dennis Story, you may begin your conference.

[Dennis Story:]

Thank you Courtney and welcome everyone to Manhattan Associates 2009 fourth quarter earnings call. I will review our cautionary language and then turn the call over to Pete Sinisgalli, our CEO. During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve 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 Web site 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 call. I speak for the entire Manhattan Associates team and I am sure echo sentiments from other companies as well when I say we are glad to have 2009 behind us. There is no question 2009 was a tough year; however, it was also a year of two distinctly different halves with encouraging market signals beginning to emerge in the third quarter and continuing through the fourth quarter. In fact, the fourth quarter was the first time in more than a year that we posted license revenue growth. A stabilizing economy is the primary reason for this improved outcome. As the press release we issued today outlines and Dennis will cover in his comments, we posted decent results in the fourth quarter and for the full year, and looking forward we are cautiously optimistic. Our optimism comes from contrasting the first half of 2009 with the second half. Our total license revenue in the first half of 2009 can be fairly characterized as abysmal, a total of $9 million, down 76% versus the first half of 2008 with no deals worth more than $1 million in the mix. In contrast, we delivered $25.6 million in total license revenue in the second half of the year. While the second half result remains down in a year-over-year comparison it’s down only 7%. While most organizations will continue to be slower and more cautious when considering strategic capital investments than they were in years prior to the global economic meltdown, we did close three deals worth $1 million or more in Q3 and another two in the fourth quarter. The return of large deals helped us improve from delivering adjusted EPS of $0.21 in the first half of this year to $0.74 in the second half. The second half result is up 23% over the adjusted EPS we delivered in the second half of 2008. It’s important to note that our competitive run rate was strong all year, but even stronger in Q4. In head-to-head sale cycles against our major competitors for the year, we won six out of ten on average and performed even better in Q4, winning two out of every three. We were also able to deliver results without sacrificing our investments in building competitive advantage. During the year, we delivered important advances across the full breadth of our supply chain solutions. This culminated with the release of our warehouse management system on our supply chain process platform in December. There is an old truism that advices never waste a good recession. I believe we took that advice to heart in 2009. While it was a very challenging year, I believe the actions we took and the investments we made, made a significant difference in customer satisfaction and our relative market position, and that improvement will pay off handsomely over the long run. I will provide more color on that shortly. But first, I will turn the call back over to Dennis for our financial results.

[Dennis Story:]

Thanks, Pete. Before I jump into Q4 results, it’s worth putting our full-year 2009 results in context. We certainly were not immune to the impact of the worst global economic recession post-World War II. Total revenue for 2009 was $246.7 million, down $91 million or 27% over 2008, marking our lowest revenue year since 2004. License revenues of $34.7 million decreased 47%, our lowest license revenue year since 2001. While as Pete noted, the second half of 2009 saw the welcome return of customers willing to commit to deals worth $1 million or more in license revenue we still closed only five deals of this magnitude for the year. As a result, adjusted earnings per share were $0.73, compared to $0.96, declining 30% compared with 2008. In the face of a negative $91 million revenue delta from 2008, we took decisive actions to protect earnings without sacrificing investment in innovation and service to our customers. Of the $91 million top line GAAP, we were able to recoup about $80 million or $0.88 of every revenue dollar decline, delivering adjusted operating profit of $33 million down just $11 million from 2008. In some respects, 2009 marks one of the finest performances in Manhattan’s history despite unprecedented challenges, our more than 800 associates banded together with a common focus and a common willingness to make short-term sacrifices to advance our competitive market position. We believe we are starting 2010 as an even stronger company for having weathered the trials of 2009, which Pete will highlight further in his closing remarks. Against that backdrop for the full year I will now cover our Q4 performance. Q4 adjusted EPS of 0.31 increased 19% compared to $0.26 in the fourth quarter of 2008. Q4 adjusted net income of $7 million increased 16% over Q4 2008. Here are other Q4 highlights. One, license revenue of $14.3 million increased 3% over 2008, snapping a string of six consecutive quarters of negative year-over-year growth. Two, our services margins continue to be world-class. We delivered services margins of 53.1% this quarter, compared to 51.5% in Q4 2008. Three, operating cash flow continues to be very strong. We generated $19.4 million in Q4, bringing our year-to-date total to $58.3 million. In a year with total revenues down $91 million, 2009 was our second best year on record for operating cash flow performance, not too shabby. Four, our balance sheet continues to support long-term strategic flexibility and stability, with a cash position of $123 million, up nearly 40% from our Q4 2008 position of $88.7 million. Five, our capital structure is efficient and well managed. We have no debt and our operating cash flow enabled us to self-fund $23 million in accretive share repurchases in 2009. And finally, six, we continue to maintain strategic investments in R&D and innovation that deliver competitively superior solutions. Now, I will cover the operating results. Q4 total revenue performance of $62.1 million was down 18% over the prior quarter as overall growth continued to be constraint due to global macroeconomic challenges. Americas posted its second consecutive quarter of solid license revenue performance; however, total revenue was down 17% over Q4 2008 on lower services revenue. With respect to international performance, EMEA totaled revenue of $6.7 million for the quarter, declined 24% year over year and APAC revenue of $2.8 million was down 17% over Q4 2008, driven by lower license and services revenue. As I mentioned earlier, license revenue for Q4 totaled $14.3 million, increasing 3% over Q4 2008 license revenue of $13.8 million. Americas generated $13.1 million in Q4 license revenue, up 10% over Q4, 2008. The Americas team closed two Q4 deals with software license values exceeding $1 million plus. EMEA’s Q4 license revenue totaled $636,000, which was down from the $1.5 million posted in Q4 2008. And finally, our APAC team delivered license revenue totaling $533,000 for the quarter, slightly ahead of the $426,000 they delivered in Q4 2008. Shifting to services; total Q4 services revenue was $42.7 million, declining 21% compared to Q4 2008 and down 9% sequentially from Q3 2009. This is a slightly better result than the 10% to 12% estimated sequential decline we covered in our Q3 earnings call. Sequentially for Q4, in addition to our normal seasonal decline due to holidays, we continued to experience 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 global economic conditions. Looking at our services revenue components; our Q4 professional services revenue totaled $22.5 million, declining 33% compared to Q4 2008. For the year, professional services revenue declined 29% compared to 2008. Maintenance revenue of $20.2 million was flat with respect to Q4 2008 and up 2% sequentially. Year-to-date maintenance revenue of $77.1 million also was flat with the prior year and up 2% excluding currency impact. As we have noted throughout the year, in this economic environment, overall maintenance for the year has been challenged due to lower license revenue, pressure from customers wanting to reduce maintenance fees, and the impact of some customer bankruptcies. Collections timing also is 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 have aggressively managed our capacity to protect earnings and margins. For the quarter, adjusted consolidated services margins were 53.1%, up 160 basis points compared to 51.5% in Q4 of 2008. Our full-year services margins were 55.9% compared to 2008 year-to-date margin of 50.7%. Our margin performance in 2009 reflects the expense actions we executed to align capacity with demand combined with lower performance-based compensation. Moving on to adjusted operating income; Q4 adjusted operating income of $12 million increased 67% over Q4 2008. Our operating margin for the quarter was 19.3% versus 9.5% in Q4 2008 driven by license revenue performance and strong expense leverage. Our adjusted operating expenses which include sales and marketing, R&D, G&A and depreciation were $24.8 million for Q4 2009, down 27% over Q4 2008. Lower operating expenses in the quarter were driven by lower headcount and lower performance-based compensations. Now that covers the operating results. Now a few below the line items on our GAAP EPS summary; we reported a loss in other income of $375,000 for Q4 compared to $1.7 million of income in Q4 of 2008. The year-over-year change was driven by lower interest income and FX losses. Year-over-year, the FX gain or loss in other income swung from a $3.9 million gain in 2008 to an FX loss of $1 million in 2009. Apples-to-apples that represents a negative $0.14 impact year over year to EPS. Bank forecasts for 2010 FX rates are projecting the US dollar to further weaken against international currencies. As a result, for 2010, we are forecasting a net quarterly expense of $300,000 on the other income expense line, totaling $1.2 million of expense for the full year. For your reference as part of our supplemental disclosure, we have added a breakout detailing the other income expense components under item number 6. Regarding income tax expense, we ended the full year with an effective tax rate of 33.2%, which was higher than our original 32.5% estimate principally due to a shift in taxable income mix, whereby the US accounted for a higher proportion of taxable income at a higher statutory tax rate than our international entities. This shift in mix stems from the strong second half operating income performance in the Americas combined with weak operating income performance in EMEA and APAC. The true up for the full-year impact resulted in a Q4 effective rate of 39.5%. We expect our 2010 effective tax rate to rise to about 35% for both adjusted and GAAP earnings as R&D tax credit legislation remains open for 2010 and tax benefits associated with international cash repatriation realized in 2009 will not recur. Item number 9 to our supplemental schedule included as part of today’s earnings release provides a reconciliation of our effective rate for adjusted and GAAP results. Now transitioning to diluted shares; for the quarter, diluted shares totaled 22.7 million shares down 4% over Q4 2008 and up 2% sequentially on option dilution driven by a 28% stock price appreciation in Q4. We repurchased 115,000 shares of Manhattan Associates common stock in Q4 2009 at an average share price of $24.28, which totaled $2.8 million. As noted in today’s earnings release, in January of this year our board raised our remaining repurchase authority of $12.2 million to a total of $25 million. For 2010, we are estimating that the number of diluted shares will average 22.8 million shares which does not assume any common stock repurchases. These estimates depend on a number of variables such as stock price, option exercises, forfeitures, and share repurchases that can significantly impact our estimates. On a GAAP basis, we reported GAAP diluted earnings per share of $0.26 in Q4 compared to $0.08 in Q4 2008. As you may recall, our Q4 2008 GAAP EPS of $0.08 also included a $4.7 million pre-tax restructuring charge equating to a $0.13 EPS impact. Apples-to-apples GAAP EPS for Q4 2009 increased 24% over Q4 2008. Full-year reported GAAP EPS for 2009 was $0.73 compared to $0.94 in 2008, which is down 22%. And on an apples-to-apples basis year-to-date, 2009 GAAP EPS decreased 38% on lower revenues. Of course, a detailed description of GAAP to non-GAAP adjustments can be found in the supplemental schedule reconciling selected GAAP to non-GAAP measures in our earnings release today. Now that covers the income statement. I will cover cash flow and the balance sheet now. For the quarter, we delivered Q4 cash flow from operations of $19.4 million bringing our year-to-date total cash flow from operations to $58.3 million. This marks our second best year on record with respect to cash flow from operations and our DSOs for the quarter were 56 days. Our year-to-date capital expenditures totaled $2.4 million, which is down nearly 70% over our 2008 spend of $7.7 million. For 2010, we are estimating capital expenditures to be in the $6 million to $8 million range. Our cash and investments at December 31, 2009 increased 39% to a $123 million compared to December 2008 cash of $88.7 million, and is up 16% sequentially over September 2009 cash of $106 million. Deferred revenue, which consists mainly of maintenance revenue billed in advance of performing a maintenance services, was $37.4 million at December 31, 2009 compared to $33 million at December 31, 2008. That covers the Q4 financial results and closes the book on a very long 2009. Before I turn the call back to Pete, though, I would like to address 2010. As Pete noted in his opening remarks, too much uncertainty lingers across the global macroeconomic landscape to forecast with confidence and accuracy when customers and prospects currently in our pipeline will return to predictable patterns of strategic capital investment. We therefore will remain with our suspended guidance policy. In general, we expect the following three basic financial tenets to hold in 2010. One, revenue and earnings will more balanced given the weak comp in the first half of 2009. Two, total expenses will increase based on the following four actions; a, restoring short-term comp initiatives and performance-based comp that we discussed in the Q3 earnings call; b, adding headcount to align capacity with demand; c, introducing a new equity comp program that eliminates stock options; d, accommodating currency risk to our operating profit. And three, all in, we are targeting operating margin improvement of about 50 basis points over 2009. So, here is some more details on each of these tenets. One, more balanced revenue and earnings growth; in general, we have consistently shared our goal of growing total revenue at about two times the market growth rates estimated in industry analyst’ reports. With respect to license revenue, until better forecast visibility returns, for now we believe our second-half 2009 performance represents a good proxy for considering 2010 performance. At this time, we are assuming a persistently difficult selling environment to blend with steady demand throughout the year versus a repeat of 2009’s back half upswing. Historical sequential trends for services revenue suggests Q1 2010 services revenue will be up over Q4 2009 somewhere in the 10% to 15% range, but also down compared to Q1 2009, as the trailing 12 months of lower license revenues continues to impact growth with respect to this metric. Moderate services revenue growth is possible in 2010 with positive year-over-year growth weighted to the second half of the year. We are targeting full-year services margins in the 52% to 54% range. Now I will talk about increased total expense. On our Q3 call, we covered the restoration of short-term expense cuts we made in 2009, and that this action would drive about $20 million per annum, or $5 million per quarter increase to our expense run rates. As a reminder, these initiatives comprise restoring short-term compensation cuts enacted to preserve short-term capacity, restoring merit increases in 2010 as Manhattan global employees received no merit increases in 2009, and the performance-based bonus and commissions reset to the 2010 budget. Just as the term performance implies, we have to deliver results, darn it. Incremental to our Q3 forecast, we are increasing our 2010 expense outlook by an additional $15 million to address three core elements. First, adding additional headcount to align capacity with demand. Second, the adoption of a new long-term equity incentive program which replaces our prior plan. And third, currency risk to operating income. With respect to additional headcount capacity, we are estimating about $6 million of incremental expense to keep capacity and forecasted demand aligned. We are actively hiring now based on two factors, our services headcount is down about 40 heads through natural attrition in the back half of 2009, and we are forecasting sequential growth of 10% to 15% in Q1 services revenue. The $6 million of incremental expense contemplates the addition of about 75 heads in 2010. Regarding Manhattan’s equity program; in 2009, Manhattan’s compensation committee launched a thorough evaluation of various equity comp plan alternatives working in concert with an independent third-party compensation consulting firm. Based on this evaluation, in January of 2010, our comp committee approved a redesign of Manhattan’s long-term equity incentive plan with the objective to optimize its performance and retention strength while managing program share usage to improve long-term equity overhang. The new program eliminates stock optional awards in favor of 100% restricted stock grants; of which, 50% are service-based and 50% are performance-based for plan participants. Both awards have a four-year vesting period with the performance portion of the award tied to our annual revenue and EPS incentive compensation targets. The change in grant complexion from a mix of options and restricted stock to 100% restricted stock means the cost of our equity program for grant years prospectively is fully loaded into adjusted earnings. Overall, restrictive stock expenses increasing an incremental $4 million over 2009 and about half of this increase relates to the new program design. And finally, currency appreciation risk to the operating income line. With current bank forecast of the US dollar further weakening in 2010, we are forecasting a $5 million increase to expenses with a 50% split between cost of revenue and operating expenses. Now, this is partially offset by a $3 million favorable impact to revenue; however, operating income is forecast to be $2 million lower primarily due to rupee appreciation against the US dollar. As you all know, with our large development center in Bangalore, India, we are exposed to currency fluctuations without our natural revenue hedge. That covers our additional operating expense. As for the final tenet of expecting operating margin improvement of about 50 basis points, here are the details. Factoring in the parameters discussed above, all in, for the full year, our 2010 goal is to deliver services margins in the range of 52% to 54%, and operating margin expansion of about 50 basis points. For Q1 2010, we are targeting an operating margin range of 10% to 12%. Now that covers my report. I will turn the call back to Pete for our closing business update.

[Pete Sinisgalli:]

Thanks, Dennis. I know that was a lot of detail to cover, but we certainly appreciate your covering it with everyone on the call as part of our full disclosure program. Now I will jump into a little bit of color on our quarter and the 2009 results. First a little bit about the deals we closed in Q4, with respect to the two large deals, one with an existing customer and one was with a new customer. And both were wins that included multiple Manhattan solutions. One win was to assist in a major supply chain transformation, as the client moves from a decentralized to a centralized strategy to gain greater efficiencies and effectiveness across labor, assets, and inventory. The other deal will help restructuring existing supply chain to realize greater labor and transportation efficiencies. In both cases, the clients are striving to improve operational efficiencies while at the same time enhancing customer service levels. About half of license revenue fees in the quarter were tied to warehouse management and about half to all other solutions. And for the year, this ratio was about 60% warehouse management and 40% our other solutions. The retail, consumer goods, and logistic service provider verticals were once again solid contributors to our license fees and made up more than half of license revenue for both the quarter and the year. We had a successful quarter adding new clients and expanding our relationships with existing ones. Software license wins with new customers, included Goya Foods, Groveport, J&P Cycles, Kwik Trip, Radiant Group, ResMed, Tractor Supply, Richline Group, Sigma-Aldrich and Vasanta Group. Projects with existing customer included ACH Food, Amerisource Bergen, Archbrook Laguna, Avon, Carolina Logistics, CEVA Logistics, Fitness Quest, Genuine Parts, Guru Denim, Jasco, O'Reilly Auto, PepsiCo, Performance, Tally Weijl and Wirtz. As I mentioned in my opening remarks, I believe we made good use of the recession of 2009. We focused tremendous energy on advancing an already strong level of customer satisfaction across all of our solutions. I believe customer confidence and approval of our solutions, services and people have never been stronger. Their support has manifested as an increasing number of references, customer white papers, written customer testimonials and overall customer enthusiasm for Manhattan. Also in the spirit of making the most of a tough economy, I am particularly pleased with the progress we achieved through our 2009 investments in research and development. While we aggressively cut cost during the year to offset the recession’s impact on our revenue, we were careful to avoid hurting our R&D plans, and our R&D teams performed. As we do each December, we delivered update releases for many of our solutions across our supply chain portfolio. While I am proud of each of these solution releases, the most notable was the release of our Warehouse Management solution on our Supply Chain Process Platform. This means essentially all of our solutions can leverage the advantages of our platform-based approach which is unmatched by any competitor. For the first time, businesses can build supply chain business advantage through the deep rich functionality delivered by best-in-class solutions, while also receiving the TCO, or total cost of ownership benefits, inherent in a platform approach. Both delivered through one strategic supply chain partner. Now, this achievement certainly further improves our warehouse management offering. Moreover, with our market-leading WMS now on the same platform as our other solutions, I believe we significantly enhanced the value of each of those solutions as well. In mid January, we held our annual kick-off meeting. This year’s theme tied directly to our superior competitive position which is the power of our platform. We encapsulated that power in our 2010 theme; Platform Thinking, the Common Approach to Uncommon Supply Chain Advantage. During the weeklong event, we stressed with our sales teams and others the exceptional value we can deliver through a common platform that unifies all supply chain functions to deliver uncommon value. The excitement, as our teams explored ways we can reshape the way customers and prospects think about supply chain optimization, was invigorating. I believe that despite the market malaise, we are prepared to work through in 2010, we are ready to aggressively attack the market and we are on to deliver for organizations prepared to act. Turning our sights to 2010, as Dennis mentioned, we expect to continue to live with a difficult selling environment. We can’t predict when the global economy will return to more normal levels of buying activity; however, we are quite confident that as it does we will continue to capture market share and drive improvements in our financial results. As we did in 2009, in 2010 we will refuse to waste the good recession. We will remain focused on delighting our customers, delivering market leading-innovation in our software and extending our sustainable and uncommon competitive advantage through our common platform-based approach to supply chain excellence. With that operator, we will now take questions.

[Operator:]

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

[Michael Huang:]

Thanks very much. Couple questions for you. First of all, as you look at 2010, I know that uncertainty persists, but what could you believe – what do you believe could represent the biggest driver to license growth? Would it be a market recovery or is it re-platform WMS, is it strengthening partner leverage or is it something else?

[Pete Sinisgalli:]

I think, Michael, that it will likely be all of the above. As Dennis mentioned in his comments, we are believing the 2010 economic environment will be similar to the second half of 2009, not as weary as the first half but similar to the second half. We believe it could be better for us as a company if the economy improves a little bit more than the economic activity in the second half of ’09. So that certainly would be a meaningful driver. We are also optimistic that we’ve materially improved the value of the solutions we bring to market. As I mentioned in our prepared remarks, we believe our – delivering of WMS on the platform is a major achievement for our company. We're equally delighted with the advancements we've made in our other solutions as well. We believe the combination of WMS on the platform as well as our other 20 plus solutions also on the platform is a very compelling value proposition for supply chain and IT executives. Both the functional advancements and the rich cross-application optimization are now available on our solutions as well as a very attractive total cost of ownership benefits, I believe will make a material difference on our selling success hopefully in 2010, but certainly over the long run.

[Michael Huang:]

Could you talk about – are there any secular trends that are driving re-platforming, so for example as organizations are looking to drive some multi-channel commerce program or trying to drive some sophisticated online presences, could you talk about whether or not you think that that could help you offset a really tough spending environment and drive some urgency with respect to re-platforming their WMS or Order Management or Transportation?

[Pete Sinisgalli:]

Sure, I’d be happy to. Certainly just from a macro perspective, vertical market perspective, a number of us attended the National Retail Federation conference couple of weeks ago in New York, and we were encouraged by the enthusiasm of retailers. So while – and they have a pretty steep slope decline to come back from ’08 and ’09 we are encouraged by the level of activity and the need they saw to move a little bit more quickly to re-platform in your words. Part of that, I think one of the strongest areas that most retailers saw in their business in 2009 was their e-commerce initiatives. Sales across the board in e-commerce were impressive, even in the tough economic environment. And I believe what many retailers are recognizing is the value of the importance of integrating each of their channels to better delight their customers, but also to improve the efficiency of their supply chains of their businesses. So better allocate inventory to the right customer sets, getting the right product to the right place at the right time and doing all of that, limiting the amount of capital invested in their inventory and also maintaining efficient transportation networks. So I certainly think from a secure perspective the move to integrate multi-channel offerings is meaningful opportunity for Manhattan. And just one other quick one there, I don’t want to delay with this point too long, but we launched a major campaign in the latter part of 2009 that we were calling Zero Disappointment Retailing. And our point of view there is by leveraging advancements in information technology retailers and consumer goods companies can improve the effectiveness of their go-to market strategies and make sure that they are delighting their customers. So how do they get to the point of having zero disappointments in their customer base, and we believe with applications like ours, particularly those that are integrated across our platform are material opportunities for companies to improve their value proposition.

[Michael Huang:]

Okay. In terms of just the license performance in Q4, obviously you saw some sequential growth despite fewer larger deals. Could you just talk about whether or not there are things that you guys are doing differently from a sales execution standpoint? Was this more of an end of your seasonal flush, like what was helping drive the volume of deals that you got done? How does that trend at least through Q1, Q2 based on pipelines that you see?

[Pete Sinisgalli:]

Yes, Michael, I’d be happy to answer that. I think I would like to be able to tell you we did something very different in the second half of the year than the first half of the year and that was responsible for the better license revenue performance. Certainly, over the back half of the year we tried to be as aggressive as we reasonably could, as creative as we reasonably could win business. But I would tell you it has more to do with the economy stabilizing than anything we did. I certainly believe our marketplace greatly values the solution set that we bring to market as our target markets are more comfortable releasing capital for supply chain improvement. We will win more than our fair share of that business. But we are trying to be a little bit more creative, a little bit more aggressive in our approach in the marketplace to make sure that we win all the business that’s available to us. So as I said, all year along, we were pretty pleased with our win rate, it could always be better but pretty pleased with our win rate, particularly in Q4, in particular against our major competitors. I believe that continued focus of our sales teams and solutions teams and so forth will position us well for the long run. But there wasn’t anything dramatically different that we did in the second half of the year than we did in the first half.

[Michael Huang:]

Okay. And last question, just with respect to pipeline, how is that looking entering Q1 versus what you had going into Q4. I would imagine that continues to build pretty nicely.

[Pete Sinisgalli:]

Yes, we are pretty pleased with where the pipeline is at the moment. We entered Q4 with a solid pipeline and we are entering Q1 with an attractive pipeline. We are encouraged, as I mentioned, with the energy level at the National Retail Federation conference, and in conservations we are having with other vertical markets that we do business in. At the same time, as Dennis mentioned in his comments, we still find it difficult to determine what the last two weeks of March might bring. So we are hesitant to get too bullish in the intermediate term, but we certainly like where we are positioned. I believe we are valued by our customers, and believe as customers get more and more comfortable freeing up capital for supply chain improvement programs we will be at or near the top of the list.

[Michael Huang:]

Great. Thanks very much.

[Pete Sinisgalli:]

Thanks, Michael.

[Operator:]

Your next question comes from the line of Eric Lemus from Raymond James. Your line is open.

[Eric Lemus:]

Hello, gentlemen. Thank you for taking my call today. Several questions here; my first one, how should we think with the potential mix of business of WMS or supply chain execution, and then your planning business over the next couple of years on a percentage of license revenue basis as well as the respective growth rates?

[Pete Sinisgalli:]

Yes, it’s a great question. I would think – at least for our planning purposes, we are planning for those to be similar going forward. For 2009 in the fourth quarter about half of our license revenue was WMS, half was non-WMS. The majority of the non-WMS revenue is Transportation, Inventory Optimization, and Order Lifecycle Management. We have not had as much success in the planning category as we’d like. We are quite focused in trying to improve our success in the supply chain planning space. I believe we're making appropriate investments to enhance our market offering in that space and believe we have some real opportunities to do so, particularly as we continue to build out our platform go-to market strategy. But WMS is a very important market to us. We expect it will continue to be a very important market for us. But we are quite excited about some of our newer applications. The Order Lifecycle Management application is quite attractive. It’s one of the enabling technologies that allow customers to truly integrate their multiple channel offerings in a cost-efficient way, and believe some of the advances we brought to market in that solution are quite attractive. And we are quite pleased with our Inventory Optimization solution as well. So between Transportation, Order Lifecycle Management, Inventory Optimization complementing our warehouse management and distribution management suite of solutions we believe we will see solid growth in our application space. But clearly WMS is an important part and one of the reasons we are very excited about getting that on our platform.

[Eric Lemus:]

Great. And then any commentary on where points of margin leverage are more notable over the next year or so? And secondly, anything longer term on an operating margin bogey, 15%, mid-teens or something similar?

[Dennis Story:]

Yes, sure. Eric, we’ve stated long term, once the market starts to self correct or what the new normal is our objective within a three-year horizon is to get to 20% operating margins. We need to get through 2010 and see how the market recovers, and we will evaluate that time horizon. In terms of leverage within the business, we’ve always stated that license leverage is a big point for us, leverage on G&A as we get top line growth and leverage on our R&D investment.

[Eric Lemus:]

Okay, great. Anymore feedback from customers and prospects on a scope and any perspective on how or when it could possibly start benefitting business and/or win rate, more of a 2011 thing or early in 2010?

[Pete Sinisgalli:]

Yes. We are quite optimistic that will affect business beginning in Q1. We took the opportunity in the early part of this year to allow a couple of our business partners to take a look under the hood a little bit before our G&A date and feedback was very positive. In fact, a couple of sales in Q4 have started their implementations in 2010 and we are already implementing the warehouse management solution on the platform as well as with another upgrade. So we are quite encouraged by the initial start and we are optimistic that will be a competitive advantage to us beginning early in 2010.

[Eric Lemus:]

Okay, great. Thank you.

[Pete Sinisgalli:]

Thanks, Eric.

[Operator:]

(Operator instructions) Your next question comes from the line of Mark Schappel for The Benchmark Company. Your line is open.

[Mark Schappel:]

Hi, good evening. Pete, on a percentage of sale basis, R&D has been bouncing around pretty close to historical low for the company. I was wondering what we should expect going forward, whether we should expect it stay around these levels or do you have any plans to kick that back up pretty big?

[Pete Sinisgalli:]

Yes, Mark, we take a look at R&D as a percent of overall revenue and when I've looked at it we generally spend somewhere in the 14% to 15% of revenue, I think that’s been the case for about the past five years. It probably bounces a little bit quarter to quarter based on accrued incentive compensation and so forth. But for I think the last four or five years, we've been ballpark 14% to 15% of total revenue has been invested in R&D, and our view is that around that range will likely to continue. When we look across the competitive landscape, most of the successful software companies invest somewhere in that 14%, 15%, 13% range, and we believe companies investing less than that are effectively short-changing the future. So we believe there's some real opportunities for us to continue to invest at that level to extend our competitive advantage and reward shareholders in the long run, and that’s our plan at the moment.

[Mark Schappel:]

Okay, thanks. And Dennis, the operating margin expansion guidelines that you called for about 50 basis point improvement in the next year. I believe though on the prior call, in the third quarter call, you were expecting closer to 100 basis point improvement, would the difference be principally the foreign exchange comments that you made?

[Dennis Story:]

There is a couple of differences there Mark. One is the impact of FX. The other is the adoption of the equity plan program where we have increased incremental expense associated with the restricted stock. And that’s about $2 million incremental impact. So on an apples-to-apples basis, we are absorbing about 100 basis point pressure on the margin line for 2010 with the new equity program. So equity program and FX are the two drivers.

[Mark Schappel:]

Thank you.

[Pete Sinisgalli:]

I think, Mark, everyone on the call, I'm sure knows this we are just planning out stock options which in our old program have been eliminated. They did not have an impact on adjusted EPS.

[Operator:]

There are no further questions at this time.

[Pete Sinisgalli:]

Thank you, everyone for joining us. We look forward to sharing with you our Q1 update in about 90 days. Good night.

[Operator:]

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