Manhattan Associates, Inc.
Q2 2010 Earnings Call Transcript

Published: 21 Jul 2010

[Operator:]

Good afternoon. My name is Neyson [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates second quarter 2010 earnings 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) As a reminder, ladies and gentlemen, this call is being recorded, today, Tuesday, July 20th, 2010. I will now like to introduce Dennis Story, Chief Financial Officer of Manhattan Associates. Mr. Story, you may begin your conference.

[Dennis Story:]

Thank you, Neyson, and good afternoon, everyone. Welcome to Manhattan Associates 2010 second quarter earnings call. I will review our cautionary language and then turn the call over to Pete Sinisgalli, our CEO. During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risk and uncertainties, are not guarantees of future performance, and that actual results may differ materially from those in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our Annual Report on Form 10-K for fiscal 2009 and the Risk Factor discussion in that report. We are under no obligation to update these statements. In addition, our comments will cover certain non-GAAP financial measures. These measures are not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. We believe that this presentation of certain non-GAAP measures facilitates investors’ understanding of our historical operating trends with useful insight into our profitability, exclusive of unusual adjustments. Our Form 8-K filed today with the SEC and available from our website 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 2010 earnings call. I will start the call by taking you through an overview of the quarter and the first half. Dennis will then get into the details of our financial results. And then we’ll be happy to answer your questions. We are quite pleased with our second quarter and first half financial results and continue to be encouraged about our near term and long term prospects. License revenue for the quarter at $15.5 million was more than three times last year’s results and includes two deals of one million or more in recognized revenue. Total revenue was $77.6 million, up 33% versus Q2 of last year. Adjusted EPS was $0.38, almost three times Q2 2009’s outcome. Our win-loss rate continues to favor us in two out of every three competitive deals as the market is quite receptive to our broad suite of supply chain solutions on a common supply chain process platform. This quarter’s million plus license deals illustrate our strong, strategic position in one our customer is looking for a distribution solution to complement a supply chain transformation program. Although our discussions initially focused on the customers’ request for distribution management, we soon were able to expand the evaluation to include transportation management as we demonstrated the meaningful advantage of integrating warehouse management and transportation management for better performance. The second million plus deal was with an existing warehouse management customer who wanted to build on their WMS efficiency gains by enhancing their order management and inventory allocation processes. We were able to demonstrate the additive value of combining our order life cycle management solution suite with their existing WMS system. While questions certainly remain regarding the health and direction of the global economy, we believe we are well-positioned for continued success. Since the global economy began to stabilize in the third quarter of last year, we’ve posted four straight quarters of strong financial results. In addition, we continue to make important investments in innovation that clearly differentiate us from all others in our market. I believe our ability to execute and our commitment to innovation will be well-regarded and well-rewarded in the future. And I will speak more about this following Dennis’ comments. Dennis?

[Dennis Story:]

Thanks, Pete. The second quarter of 2010 mirrored the first a strong license and services revenue performance paved the way for Manhattan to deliver Q2 adjusted EPS of $0.38, representing growth of 171% over a weak Q2 2009 comp of $0.14. No question, we have had an exceptional first half in 2010 against significantly disparate comps in 2009. Business momentum is very positive on a trailing 12-month basis and heading in the right direction. As we look to the second half of 2010 and into 2011, our visibility is positively firming up on license pipeline and services demand. At this point we believe our business will begin to return to more historically typical seasonality starting in the second half of this year. I will provide some directional financial parameters for the second half throughout my review of Q2 and recap at the end before I turn the call back to Pete for the business update. Now, for some highlight in the second quarter. One, license revenue of $15.5 million nearly tripled the $4.1 million we delivered in Q2 of 2009 leading the way to a total revenue growth of 33%. Two, services revenue increased 11% year-over-year as positive license performance over the past four quarters is driving current growth in both professional services and maintenance revenue. Three, services revenue demand is exceeding capacity. We are actively hiring and added 55 net new associates during the second quarter almost entirely within professional services to cover services demand. The full quarterly expense impact of these hires will not appear until Q3. Four, we continue to maintain our meaningful strategic investments in R&D, investing about $0.14 of every revenue dollar to deliver competitive superior solutions. Five, we had an unexpected FX gain in Q2 resulting in a positive impact to other income, which generated $0.02 sequential quarterly improvement and EPS. Six, operating cash flow of $10 million brings our year-to-date total to $24 million sustaining very healthy performance for this metric. And finally, seven, our balance sheet continues to support long term strategy flexibility and stability with a cash position of $120 million and consistently efficient and well-managed capital structure. Having no need to (inaudible) service and backed by strong operating cash flow, we repurchased 25 million in common stock during Q2. That covers the key highlights. From an operating results perspective, Q2 total revenue performance of $77.6 million increased 33% over the prior year quarter on the strength of license and services revenue growth. While this year-over-year growth comparison reflects a weak quarter comp, we are encouraged by our license pipeline activity and the strength of services demand. Our Americas segment continued its momentum posting its fourth consecutive quarter of solid license revenue performance and delivered total revenue growth of 37%. Internationally, both EMEA and APAC again had solid license revenue quarters driving double digit total revenue gain. EMEA total revenue of $8.6 million for the quarter increased 10% quarter-over-quarter and APAC revenue of $4.2 million was up 30% over Q2 2009. While all theaters posted solid top line results, Europe’s economic recovery continues to lag the U.S. particularly in the U.K. However, we are seeing some modest signs of improvement in our license pipeline activity in the U.K. Considering our strong total revenue performance in the first half of 2010 and acknowledging 20009 as a macroeconomic anomaly, here is our view toward total revenue in the second half of 2010. Historically, we’ve experienced seasonality in certain of our revenue streams and traditionally we plan for a seasonally low Q3 license quarter and a seasonally low Q4 professional services quarter. Taking economic, historic, and current performance factors into consideration, we believe average total revenue per quarter of about $74 million represents a reasonable quarterly total revenue proxy for the remainder of the year. Achieving this level of performance would result in 2010 full year total revenue of nearly $300 million or 22% growth over 2009 total revenue of $247 million. With respect to license revenue, Q2’s $15.5 million represents 275% growth over Q2 2009 revenue of $4.1 million as we recognized another two one plus million dollar license deals in the quarter compared to none in the second quarter of 2009. License revenue of $29.7 million for the first half of 2010 represent 228% growth over the first half of 2009. In the quarter, Americas generated $12.8 million in Q2 license revenue, up from $2.4 million in Q2 2009. The Americas team recognized one Q2 deal with software license value exceeding a million dollars. EMEA’s Q2 license revenue totaled about $1.4 million, which was up from $1.1 million delivered in Q2 2009 and included one software license deal with the value exceeding $1 million. And finally, our APAC team delivered license revenue totaling $1.3 million, nicely outperforming the $700,000 they posted in Q2 2009. For the balance of the year we are forecast license revenue to be slightly below our first half results as we plan for a seasonally low Q3 and for a Q4 similar to our Q2 2010 result this year. Now, onto services. We posted total services revenue of $54.8 million, an increase of 11% compared to Q2 2009 and a sequential increase of 2% over Q1 2010. During our Q1 call we shared our view that Q2 services revenue would range from down slightly to even with Q1 revenue of $53.5 million. As expected, our professional services increased only slightly on a sequential basis and leverage the strength of underlying growth in the Americas to overcome the effect of $2 million in deferred services revenue we recognized in Q1.Maintenance revenue also performed solidly, increasing 5% sequentially, driving better-than-expected services revenue in Q2 based primarily on timing of cash collections. Looking at our services revenue components, our Q2 professional services revenue totaled $34.3 million increasing 12% compared to Q2 2009 and up 1% sequentially. Sequential growth was somewhat masked by the $2 million in deferred revenue recognized in Q1 that I just mentioned. Net of that deferred revenue underlying sequential growth in professional services revenue was 7%. EMEA continues to experience some downward pressure on services revenue, stemming from the combination of lower license revenues on a trailing 12-month basis in a less active upgrade climate given the persistent sluggish economy particularly in the U.K. Maintenance revenue of $20.4 million increased 10% over Q2 2009 and is up 5% sequentially on solid license revenue activity and timing of cash collections on maintenance renewals. As stated on previous calls, we recognize maintenance renewal revenue on a cash basis, so the timing of cash collection can cause some inter-period lumpiness. Most importantly, our customer retention rates continue to track at a healthy 90 plus percent. For the second half of 2010, we expect Q3 services revenue to range from flat to up modestly on a sequential basis from Q2 and for Q4 services revenue to be down sequentially from Q3 by about 5% to 8% due the seasonal holiday period. You may recall, our sequential decline from Q3 to Q4 in 2009 was 9% and in 2008 it was 10%. Consolidated services margins for the quarter were 54.8% compared to 57.2% in Q2 2009 and 55.2% in Q1 of 2010. Excluding the Q1 deferred revenue, underlying services margins in Q1 2010 were 54%. We expect second half services margins to average about 52.5%, higher in Q3 and lower in Q4 and full year services margins to be in the 53% to 54% range. We are actively hiring services personnel, so we’ll see some margins fluctuation from quarter to quarter as we onboard new hires and factor in our traditional second half seasonality based on Q3 summer vacations and Q4 year-end holidays. Now, I will move on to adjusted operating income. Q2 adjusted operating income of $12.8 million increased nearly 3X over Q2 2009. Our operating margin for the quarter was 16.4% versus 8.8% in Q2 2009, driven by strong revenue performance combined with lower than forecast headcount expense. As expected, our adjusted operating expenses, which include sales and marketing, R&D, G&A, and depreciation were $32.3 million for Q2 2010, increasing 20% over Q2 2009 due to an abnormal comp. As discussed in our previous calls, this increase was planned to absorb performance based compensation, which includes commission and bonuses tied to improved results, restoration of normalize base compensation following short term reduction initiatives executed in 2009, and higher restricted stock expense associated with the change in our equity incentive program as discussed in our Q4 2009 earnings call. As you know, starting in 2010, we eliminated stock option awards in favor of 100% restricted stock grants, of which 50% are service based and 50% are performance based. We issued our 2010 annual stock grants at the end of January consistent with our historical grant practices. One million of the 1.8 million sequential increase from Q1 2010 is attributed to our annual momentum customer conference with the balance being additions to restricted stock awards and headcount. So, we expect quarterly operating expenses of approximately $32 million for the remainder for the year per quarter as we expect strategic headcount additions mainly in R&D to roughly equivalent to our Q2 momentum conference expense. So from our operating perspective based on expected seasonality and license revenue in Q3 and in services revenue in Q4 our Q3 operating margin goal is to deliver 13.5% to 14.5% margins and our full year goal is to deliver operating margins in the 14.5% to 15% range representing 110 to 150 basis point improvement over 2009. This also raises the top end of our operating margin range by about 50 basis points above the range discussed in our Q1 earnings call, reflecting our healthy first half performance. So, that covers the operating results. Now for a few below-the-line items. Given the current FX environment, we expected currency losses in Q2. However, we reported a Q2 gain in other income of $304,000 compared to a Q2 2009 loss of $404,000, and Q2 2010 loss of $498,0000. The sequential improvement from Q1 2010 resulted in $0.02 of incremental EPS benefit. For your reference, as part of our supplemental disclosure, we’ve added a break-out detailing the other income-expense components under item number 6. Regarding income tax expense, our adjusted effective tax rate for the second quarter was 35.5% consistent with Q1. Our Q2 GAAP effective rate dropped to 33.5% due to tax benefits associated with employee option exercises of incentive stock options. We continue to expect the second half adjusted and GAAP effective tax rates to approximately 34.5% based on our mix U.S. to international taxable income. Now, transitioning to diluted shares, for the quarter diluted shares totaled 22.8 million, up slightly over Q1 diluted shares of 22.5 million as our Q2 stock price appreciated 15% over Q1, driving increased option exercise activity and higher common stock equivalents. In Q2 options exercised totaled 649,000 shares, which in turn generated $14.4 million in cash proceeds to Manhattan. We also experienced share dilution from our common stock equivalents due to higher in the money value associated with remaining stock options outstanding. During the quarter, we repurchased 869,000 shares of Manhattan common stock at an average share price of $28.77 totaling $25 million fully utilizing our repurchase authority in the quarter. The timing of the share repurchases did not quite offset the dilutive impact of option exercises and the increase in common stock equivalents for the quarter. As noted in today’s earnings release, this month our board approved $25 million of new share repurchase authority. For the balance of 2010, based on current stock price appreciation, we expect diluted shares to average about 23 million shares per quarter, which does not assume any common stock repurchases. These estimated depend on a number of variables such as stock price, option exercises, forfeitures and share repurchases, which can significantly impact our estimates. On a GAAP basis, we recorded – we reported GAAP diluted earnings per share of $0.36 for Q2 compared to a loss of $0.02 in Q2 2009, driven on the strength of operating results. A detailed description of GAAP to non-GAAP adjustments can be found in the supplemental schedule reconciling selected GAAP to non-GAAP measures in our earnings release today. So that covers the income statement. Now, I will move on to cash flow and the balance sheet. For the quarter we delivered cash flow from operations of $10 million, bringing our year-to-date total to $24 million, slightly ahead of last year. Q2 operating cash flows are down sequentially, primarily on working capital build and trade receivables. Our accounts receivable balance increased 10% or $4 million sequentially on license and services revenue growth. Our DSO’s continue to be solid at 55 days compared to Q1 DSO of 53 days. And capital expenditures were $1.5 million in the quarter. For 2010, we continue to estimate capital expenditures to be in the range of $6 million to $8 million. Our Cash and investments at June 30, 2010, were $120 million and up 33% compared to June 30 of last year’s balance of $91 million and down fro $123 million at March 31, 2010. Cash is down about $3 million year-to-date as we’ve invested about that amount in capital expenditures and cash flow from ops essentially self-funded share buyback net of option proceeds on a breakeven basis. That covers the 2010 financial results. In summary, our first half 2010 performance was very solid. However, as I mentioned in my opening remarks, our view is that our second half forecast should follow the typical seasonality trends we have experienced historically. Additionally, we expect a load balance staffing levels to meet demand requirements exiting 2010 into 2011. With these two considerations in mind, rather than provide an expected EPS range for the remainder of the year we are enumerating directional parameters for the second half and the rationale underlying them for five variables affecting EPS as follows. First, total revenue. First half total revenue of $151.6 million was very strong. Traditional seasonality in Q3 license revenue and Q4 services revenue makes it difficult to use Q2 results as a proxy for the second half of the year. Adjusting for Q3 and Q4 license and services seasonal mix, and factoring in the possibility of continued global macroeconomic shifts, we expect second half total revenue of approximately $148 million. This will lower adjusted EPS about $0.08 to $0.10 in the second half versus our first half performance. Two, services margins. Our goal remains to achieve average services margins of 52.5% for the second half adjusting for Q3 and Q4 seasonality and full year services margins of 53% to 54%. Three, operating expense. As I mentioned, we expect Q3 and Q4 operating expenses to track at about $32 million per quarter for the balance of the year. Four, operating margins. Our full year goal is to achieve 14.5% to 15% operating margins, which is 50 basis points higher than the goal we shared on our Q1 earnings call and 110 to 150 basis points improvement over 2009. Our second half margins for services and operating margins reflect additional headcount hires to balance capacity with demand, which will lower EPS by about $0.05 compared to our first half. And last, other income and diluted share. Given the current FX environment, we do not sufficient insight to expect a repeat of the FX gain reflected in other income this quarter and are therefore forecasting an FX loss in Q3 and Q4 consistent with our past estimate of approximately $400,000 per quarter based on four out of the six quarters we’ve experienced FX losses. Diluted share for the second half we are forecasting at 23 million shares each quarter. The combined EPS impact of these below line items is a reduction of about $0.05 over the first half results. So, overall, our forecast 2010 full year adjusted results project a solid year versus 2009 with total revenue of about $300 million versus $247 million in 2009, an increase of about 22%, which should drive earnings per share growth of about 33% over the $0.96 per share we delivered in 2009. Now that completes my report. I will turn the call back to Pete for the business update.

[Pete Sinisgalli:]

Thanks, Dennis. As Dennis mentioned, we posted a solid license revenue result of $15.5 million in the quarter. About 55% of this quarter’s license revenue came from warehouse management sales and about 45% from our other solutions. The retail, consumer goods, and third party logistics verticals were once again strong contributors to license revenue in the quarter. In addition, one of our large deals was in the life sciences vertical this quarter. Both large deals were with existing customers making our license revenue mix this quarter 75% from existing customers and 25% from new customers. During the quarter, we completed software license wins with new customers such as Associated Hygienic Products, HPHC, Pickwick, Hire Logistics, CD Hartnett, and The Chamberlain Group. Three of the new customer wins this quarter were to customers who wanted the advantage of warehouse management on our supply chain process platform. Two of the three were wins over RedPrairie and one against Oracle. We also expanded partnership with existing customers such as Twatswiss [ph], AN Darenter [ph], Avon [ph], Benjamin Moore, Challenger Motor Freight, Converse, Dick's Sporting Goods, XL [ph], McKesson, Panalpina, Phillips-Van Heusen, Southern Wine and Spirits, Speed Transportation, and Harvard Drug. Our professional services organizations around the globe continue to platform well. In addition to posting solid financial results, the teams continue to drive improvements in customer satisfaction. In the second quarter of 2010, our global services teams helped customers go live with our solutions in more than 85 sites. Importantly, two of the go live sites were for one client who was deploying warehouse management on our supply chain process platform. Given this product has been available for just six months, bringing it two sites live so far this year is a real accomplishment. In addition, we are currently implementing many of the customer sites with this solution. I am quite pleased with our overall professional services business and in particular with our success so far implementing our latest platform based warehouse management solution. Headcounts at the end of the quarter was about 1850, up about 50 from March and about the same as Q2 of last year. Today, we have 70 people in sales and sales management with 59 of those serving as sales representative. That’s down one head in both categories from March. Over the balance of 2010, we’d like to add about 100 people to our staff. The additional staff will largely be in our professional services team where our current customer demand is straining our ability to meet customer needs. In May, we held our annual customer conference Momentum in Hollywood, Florida for about 850 attendees, about 30% more than last year. This year’s theme, ‘Platform Thinking’ highlighted the expanded possibilities of broad reaching value our customers can derive from deploying a complete suite of solutions on a common supply chain process platform. Our platform message was very well received by the audience and the energy level was high throughout the event. Let me now wrap up our prepared remarks to summarize for you. We are very pleased with our first half 2010 financial results and our progress in nonfinancial areas. I believe our relative competitive position continues to improve and that our ability to deliver innovative supply chain solutions is second to none. We are looking forward to a solid second half of 2010 and continued success in expanding our strategy supply chain solutions through our Platform Thinking approach. Operator, we’ll now take questions.

[Operator:]

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

[Mark Schappel:]

Hi, good evening. Nice job on the quarter, number one. Number two, Pete, starting with you, with respect to the Momentum user conference May, which appear to be a pretty good success, how did the event impact the current quarter or Q2 and how do you think it’s going to impact Q3 coming up here?

[Pete Sinisgalli:]

Yes. Well, thanks for the complement, Mark. It is great question. We were very pleased with the atmosphere, attitudes and I believe the lingering success that carried over from the Momentum conference at the conference largely attended by existing customers. This year we did have a fairly large group of prospects that attended. And I believe their exposure to very satisfied existing Manhattan customers and the broad platform messaging that was apparent throughout all of the sessions was a big positive in continuing to expand our pipeline. I think it had limited on Q2 closes, obviously with the conference being in May. But I do believe the very positive responses we’ve gotten from the conference will have a positive influence on pipeline expansion and closure in Q3, Q4 and looking out to 2011.

[Mark Schappel:]

Okay. And, in May I believe the company released, which you call the FieldSCOUT, which is basically your mobile solution and I believe that is giving you some access to move into the stores. I am just wondering if there is any other solutions at least in your mind or the company is working on to help you guys move a little bit further into the retail store area.

[Pete Sinisgalli:]

It’s a great question, Mark. Yes, FieldSCOUT has the potential for future implementations in stores to help with inventory management and best allocation of inventory. We also have other solutions that can help in that regards as well. In some cases, we have clients that are using warehouse management capability to help better manage parts of their store inventory management, store operations, and we are optimistic that between our order lifecycle management solutions and some of our inventory optimization solutions, we can have a greater impact on store effectiveness. Now, those solutions won't be used specifically in the store for just the store operations, but can be used as a complement to other solutions they have in place. But in particular, we were quite excited about our order lifecycle solutions ability to make stores more effective for our clients. I think you probably, Mark, were exposed to our solution discussion at the conference in Hollywood where we talked about buy online, pickup in store, ship from the store, some of the more advanced capabilities that our element [ph] solution can allow some our retail clients to leverage in their multi-channel operations. So we certainly think order lifecycle management and its advanced functionality and capability will be a big opportunity for Manhattan to assist our retail customers with improved efficiency at the store level.

[Mark Schappel:]

Okay. And then finally, for Dennis, a question for you. With respect to the financial guidance, now you’ve given a lot of guidelines but again you haven’t reinstated your formal financial guidance and given two good quarters really you’ve had are you still seeing some things out there that kind of unnerve you a little bit as far as giving formal financial guidance to the Street?

[Dennis Story:]

You know, I am not seeing a lot that’s unnerving me. I mean we are still concerned about the economy and you hear quite a bit of negative pessimism and we took pretty dramatic turn going into the first half of 2009, so we are pretty cautious and frankly just with the quality or the parameters that we are providing, Mark, for now we are going to stand down on providing EPS guidance.

[Mark Schappel:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Terry Tillman from Raymond James. Your line is now open.

[Terry Tillman:]

Yes, thanks guys, nice job, and thanks for the detail. I guess this is the first question related to – you know because you had a lot of highs and lows here, peaks and valleys in terms of demand, what is it going to take to get back to like what you are doing in the late ’07 or first half of ’08 where kind of $18 million to $22 million per quarter license numbers. Is it you just frankly need more opportunities to work with or you need larger scope of deals or you just need better close rates? Can you help us with what will cause the next step, another step up if you will into even greater license revenue?

[Pete Sinisgalli:]

Yes, Terry, we are pretty confident in our market position and the overall market’s need for advances solutions like ours. And we believe in time we’ll see the kind of license revenue success quarterly that we did experience in ’07 and first part of ’08. I think the thing that ties back to the comment Dennis just made on Mark’s question about guidance, I think one of the things we are – we’d still like to see happen is a little bit more stability in the global economy and a little more enthusiasm and confidence in the global economy and I think that will be an important catalyst to getting some of the clients and prospects to make the decision to sign and move a little bit more quickly. What we are seeing right now, my opinion is that customers that are very strong in their marketplaces are confident to go ahead and make decisions that advance their supply chain capabilities. Those that are doing very well also have the confidence to move forward. But there still are a lot of companies that would really benefit by advances in their supply chain capability that I think are still hesitant. The velocity or the pipeline close rates hasn’t improved dramatically in the last year. I think it’s certainly better clearly by our results. But we think a more stable, more confident marketplace would allow us to accelerate our license revenue results.

[Terry Tillman:]

Okay. Okay, thanks, Pete. And then I guess, Pete this followup relates to – and I know this (inaudible) quite a bit looking at metrics, 75% of business from existing customers and there is two deals over a million dollars versus four last quarter. I mean is this just a prime example we shouldn’t read into this and the rest of the year we could see more of a balance of new versus existing or do you see something different making the back half of the year on that front?

[Pete Sinisgalli:]

You know, Terry, I think it’s more timing than anything else. I think we were quite pleased to be able to convince two existing customers to sign up for large deals in the quarter. So, we think that’s a great long term advantage for us. And I would suspect over the next several years as we continue to penetrate the market, the shift will gradually go to a higher percentage of (inaudible) quarter installed base – of installed base wins versus net new wins, but certainly in the next couple of quarters, next couple of years we think that 50

[Terry Tillman:]

Okay. And just my last one relates to – for Pete or Dennis, just on a philosophical basis in going forward, I mean it’s one thing for us to ask you for guidance for the second half not even talk about next year, but are you guys committed to on an ongoing basis driving margin expansion? So as we look into ’11, could we see a scenarios where the margins can expand, because the reason I am asking is if we are adding a 100 more heads towards the back half of this year, is that something that could get in the way of you all continuing to improve on the margin side? Thank you.

[Dennis Story:]

So, I will take it and let Pete add some color, yes, we are absolutely committed to margin expansion. We are in the early stages of planning 2011, so I am not going to give you any parameters, Terry, but we are committed to margin expansion.

[Pete Sinisgalli:]

Yes, if you think – one thing we are quite bullish about – we have good visibility into our services pipelines and so forth and good pipelines for license sales and we believe the second half of this year will be a good opportunity for us to continue to strengthen ourselves to take market share and be able to – Terry, as you were saying earlier, get to those higher levels of quarterly license revenue fees and strong services business as well. And I think it’s a very attractive time for us to be investing for the next couple of years as well as delivering very strong current period financial results.

[Terry Tillman:]

Okay. Thank you.

[Pete Sinisgalli:]

Thanks, Terry.

[Operator:]

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

[Yun Kim:]

Thank you. So I noticed that there were only two seven-figure deals in the quarter, but you guys still did almost $15 million or actually above $15 million in license revenue. Typically you do about three to four to get there. Was one of the two million dollar plus deals unusually large or did you have just much higher ASP in the quarter?

[Pete Sinisgalli:]

Yes. Yun, as you know, we don’t give out the specifics of the million dollar deals, so I won't speak specifically to that. But I will tell you one of the things that we were quite pleased about in the quarter was the mix of the mid-sized deals that we had in the quarter. We saw and I think this is encouraging for the back half of the year and 2011, we saw some of the Tier 2 type companies getting more confident that was trying to just get of the sidelines and upgrade their supply chains. So, very nice mix, very nice growth in the mid-market size or the mid-tier, less than a million, but frankly bigger than the $0.25 million, $0.5 million range. It was a good quarter for that level of activity.

[Yun Kim:]

Okay, good to hear. Then also, obviously good to see the positive trends in your consulting business. in terms of second half plan, your plan to add 100 additional headcount mostly in consulting organization, how much of that plan increase is driven by service backlog that you already have and how much of that is driven by executive deal signings?

[Pete Sinisgalli:]

You know, I would suggest you the majority, probably vast majority of that is visibility we have into work we need to perform over the next 12 months. I wouldn’t call it backlog, necessarily because we are not behind, but it is work that through deals we signed in Q1, Q2, upgrades we are starting to see in additional rollouts. We are confident with the stable global economy that the work we see in front of us will be there for us to deliver for customers. And one of the things we are quite focused on is making sure we continue to maintain a very high level of customer satisfaction. Over the last couple of years I think we’ve made some real good progress in further extending the satisfaction of our customer base. We want to make sure we maintain that as our market opportunities continue to improve.

[Yun Kim:]

Okay, great. And then lastly, Pete, you guys signed a one large deal in the life sciences vertical. Are there any other opportunity of a large deal of that size outside of just retail CPG [ph] vertical in second half pipeline and may be you can just talk about your plan to expand outside of the core retail CPG verticals, whether you want to accelerate that plan or you want to keep focusing on your core verticals at least in the near term? Thanks.

[Pete Sinisgalli:]

Sure, sure. In the second half of the year we have a couple of deals in the pipeline that would be outside of our core retail – ship to retail vertical markets, so we are cautiously optimistic the investments we’ve made to play in other verticals will continue to pay off. Obviously we’ll continue to focus a lot of energy in the core verticals where we had success because we have a very meaningful, I believe, competitive advantage in those areas. We certainly don’t want to do anything to neglect those areas. But we’ll look for opportunities over the next couple of quarter, next couple of years to continue advance our success and verticals outside of those that we’ve traditionally had very good success. So, we are thrilled with the success we had in the second quarter, particularly that one large deal and believe we can leverage that and other going forward.

[Yun Kim:]

Okay, great. Thank you so much.

[Pete Sinisgalli:]

Thank you.

[Operator:]

(Operator instructions) And there are no further questions at this time. I will turn the call back over to management for any closing remarks.

[Pete Sinisgalli:]

Very good. Well, thank you all for joining us for the second quarter update. As always, we look forward to speaking with you in about 90 days. Good night.

[Operator:]

And this concludes today’s conference call. You may now disconnect.