Yun Kim - Wedbush Morgan Mark Schappel - Benchmark Company

Good afternoon. My name is Jennifer and will be your conference facilitator for today. At this time, I’d like to welcome everyone to the Manhattan Associates quarter four and year-end 2008 earnings conference call. All lines have been placed on mute to prevent background noise. After the speaker’s remarks, there will be a question and answer period (Operator Instructions). I’d now like to introduce Mr. Dennis Story, Chief Financial Officer of Manhattan Associates. Sir, you may begin your conference.

Good afternoon everyone, and welcome to Manhattan Associates 2008 fourth quarter earnings call, also greetings from Bangalore India. Pete and I both are visiting our Bangalore operations and so in the off chance that we experience technical difficulties please bear with us as we believe we’ve covered all scenarios with backup alternatives for completing this call. Before we launch into the results discussion, I will review our cautionary language and then turn the call over to Pete Sinisgalli, 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 2007 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 the companies. We believe that this presentation of certain non-GAAP measures facilitates investor’s understanding of our historical operating trend 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 and 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’ll turn the call over to Pete.

Thanks Dennis and welcome to our fourth quarter earnings call. I’ll start by taking you through some of the highlights from the quarter and Dennis will provide details of our financial results. I’ll follow with additional observations about our business and provide an overview of our outlook for 2009. Dennis will conclude our prepared remarks with our financial guidance for the full year and first quarter of 2009 and then we’ll be happy to answer your questions. In a very difficult selling environment, we posted a decent fourth quarter and full year 2008. Total revenue for the quarter was $75.7 million, a decrease of 11% versus the prior year. For the quarter, we achieved adjusted EPS of $0.26, within our guidance range and a decline of 30% compared to Q4 last year. For the year, we finished with total revenue of $337.2 million, essentially flat to 2007 and adjusted EPS of $1.38, up 6% from last year. Despite a difficult global economy, particularly in the second half of the year, we delivered some very important, non financial successes. We improved customer satisfaction across all products and geographies and we extended awareness of our suite of solutions beyond our core strength in warehouse management. Our competitive win/loss rate in 2008 was strong and most importantly, we made very good progress on our product roadmap. I’ll talk more about these shortly. Now I’ll turn the call back over to Dennis to provide details of our financial results.

Thanks Pete. I will cover adjusted financial results first and then provide a summary of our GAAP earnings. As Pete mentioned in the difficult economic environment continues to put pressure on revenues and consequently earnings, as a number of licensed deals pushed out at the quarter. We delivered $0.26 of adjusted EPS in the fourth quarter, which was within our guidance range and represented a 30% decrease over the prior year quarter, driven by lower revenues and $3 million equating to $0.08 impact of additional reserves associated primarily with revenues and collection risk tied to the economy. Adjusted net income of $6 million in the quarter decreased 37% over Q4, 2007. There is no question that our business is feeling the impact of this unprecedented economic downturn. However we encourage investors to consider key takeaways from our 2008 performance that clearly indicates the strength of our business. One, we have a strong track record of managing expenses wisely and in 2008 we proactively executed meaningful expense reductions that should contribute to operating earnings expansion in 2009. Two, we delivered record Q4 and full year maintenance revenues with 90 plus % retention rates. Three, our services margins continue to be world class. We delivered 50.7% services margins for the year after absorbing Q1 margins with 47.9%. Four, our cash flow is very strong. We generated record Q4 and full year operating cash flows of $18 million and $64 million respectively. Five, our balance sheet, exiting 2008 was stronger than it was when we entered the year and it was very solid then. Of our $89 million in total cash, $86 million is highly liquid. Six, our capital structure is efficient and well managed. We have no debt, and our operating cash flow enabled us to sell fund $35 million in share…

Thanks, Dennis. In Q4 we signed four deals of $1 million or more in recognized license revenue. Three of the four were with existing customers and three of the four were also led by warehouse management solutions, while the fourth was the transportation win. In the quarter, about 60% of license fees were for warehouse management and about 40% came from other solutions. For the year, this ratio was 55% WMS and 45% for the rest of the solutions in our portfolio. The retail, consumer goods and logistic service provider verticals were once again strong 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 clients. Software license wins with new customers included A.N. Deringer, BUT International, Carolina Logistics, Fasteners for Retail, J.J. Taylor, Loglibris, Optimal LTD, Pfizer, QVC and Wakefern Foods. Projects with existing customers included Al-Shiwari, American Eagle Outfitters, Bed Bath & Beyond, Benjamin Moore, Genuine Parts, LeSaint Logistics, Maersk, McKesson, Sara Lee, Staples and Whirlpool. Our win/loss rates for Q4 and the full year continued to be quite strong. In both, we won better than two out of every three deals we competed in. Customers have never been more satisfied with our solutions, services and people. Their support has manifested as an increasing number of references, customer white papers, written customer testimonials and overall customer enthusiasm for Manhattan. Just one example is Adidas, naming its global IT Manhattan team as the most successful project team of 2008. Our relationship with Adidas involves collaborative team work from individuals in the Americas, EMEA and APAC across a global rollout. So it’s an excellent example of the holistic supply chain improvement organizations can drive with…

Thanks, Steve. For full year 2009, we anticipate adjusted earnings per share of $1.23 to $1.48, ranging from a decline of 11% to a gain of 7%. The mid point represents about a 2% decline over the $1.38 we achieved in 2008. Due to the uncertain global macro-economic environment, we've expanded our guidance range from our traditional $0.04 to $0.6 to $0.25 cents for 2009. For 2009, our goal is to improve operating margins by about 50 basis points over 2008. Also, as I noted earlier, we expect interest and other income to decline by $3.9 million, as we do not budget for FX gains or losses. The 2008 FX gains are disclosed by quarter in the supplemental schedule to our earnings release. Finally, for 2009 we are targeting an effective tax rate of 33.5% for GAAP, and adjusted results. The increase is primarily driven by 2008 one-time R&D, and job training tax credits, that are not expected to recur in 2009. Our adjusted EPS for the first quarter 2009, our adjusted EPS guidance for Q1 is $0.20 to $0.30, with the $0.25 mid point representing about a 29% decrease compared to the $0.35 we posted in Q1 of 2008. As a reminder, in Q1 of 2008, we incurred $1.6 million in FX gains or $0.04 that we have not budgeted to recur in 2009. Apples-to-apples adjusted EPS would be down about 19%, at the guidance midpoint, as does our annual guidance. Our Q1 guidance reflects the impact of global macro-economic conditions. For operating margins, we expect an increase over Q4 2008 due to expense reduction initiatives, but lower than our Q1 2008 margin on lower year-over-year revenue comp. As you may well know, historically our Q1 EPS and operating margins decline on a sequential basis from Q4 to Q1 due to lower license revenues combined with renewed FICA and merits expense increases. As Pete mentioned, 2009 merit increases are 0% across the board, for all non-promoted employees in the Company. However, we will have incremental FICA, bonus expense and restricted stock expense on a sequential basis totaling approximately $3 million pretax, which equates to about $0.08 of adjusted EPS. In Q4 2008, we accrued zero bonus expense to employees with revenue and EPS bonus targets. Now I will quickly cover GAAP EPS guidance. For the full year 2009, GAAP diluted earnings per share we anticipate a $1.03 to $1.28 which represents growth ranging from 10% to 36%, and mid point growth of 25% over the $0.94 we delivered in 2008. We expect full year GAAP diluted earnings per share to be approximately $0.20 per share lower than adjusted earnings per share, which principally excludes purchase amortization from acquisitions, and stock option expense under FAS 123R. That covers our guidance, now I will turn the call back over to Pete.

Thanks, Dennis. To summarize, we believe our 2008 performance continued to outpace others in our market, and we're confident we will continue to extend our market leadership in 2009 and beyond. We believe we've made considerable progress in establishing ourselves as the best in class supply chain solutions leader. We also believe the investments we've made in our products, technologies, customers and employee’s position us well for substantial growth when the market returns to a more normal activity level, and that our shareholders will be rewarded for our success. Operator, we will now take questions.

(Operator Instructions) Our first question comes from Yun Kim - Wedbush Morgan.

Thank you. Just want to talk about your exposure to seven-figure deals. Last two quarters, license revenue having lackluster, yet you guys still managed to sign four $1 million-plus deals each quarter. And I think you pointed out in your prepared remarks that you guys actually have done a good job, including large deals, but the under-performance is coming from those mid sized deals. How do you explain this and how do you try to remedy that situation? And then also are you somewhat worried that now you are becoming more exposed to those seven figure deals than ever before?

It's a great question, Yun. I think I could explain that overall with a pretty general perspective. In general, we have seen the larger companies, with, budgeted for, planned for supply chain transformation programs continue to invest in those programs. We have seen larger deal activity continue to close at an okay rate. Where we've seen the most slowdowns for a [deferral] of projects have been in the mid market, those deals, as Dennis described was between $250,000 and $1 million in license fees. Our view is that that part of the market has been most impacted in the short run by the difficulty in raising capital, borrowing funds and the difficulty in seeing where the next couple of quarters will lead them from a capital perspective. So, we are doing what we can to encourage our partners, to be able to make those decisions to invest in improvements in their supply chain. But we expect, probably for the next two quarters at least, that that pattern will be similar, that market strong companies that have made commitments for supply chain transformation will continue to make those investments, and some of the mid market folks that are very concerned about short-term funding will probably find it difficult to pull the trigger on initiatives. Now, I think the good news there is, as we looked at those deals that did not close, both the larger ones that closed and the mid sized deals that are going to close, we believe those deals have been delayed not lost. We keep very close track on our win/loss rate. As we mentioned in our prepared remarks, our win/loss rate for the quarter and for the year was very strong, winning more than two out of every three deals we competed in. So we believe when the market returns to a more stable level that there is a lot of additional business for us to capture.

Great. So you believe that under performance is really more of a market segment, coming through the SMB whether again just simply that certain modules are not doing well like you would expect, a significant customer trying to upgrade with new modules or adding on more modules incrementally?

I think, Yun, as we said in the prepared remarks, about 70% of the quarter's license revenue came from existing customers and about 30% new. That's down from our normal 50% new rate. And we believe what we are seeing, and certainly other companies similar to Manhattan are seeing, are people leveraging existing programs, expanding existing programs, some hesitancy to investing in new initiatives. So, we do think that this clearly macro-economic in nature, and that once the macro economy regains some level of balance, these deals will get back on track.

Great, and then in terms of your services business, specifically consulting, we saw a fairly good size drop in services revenue sequentially in the quarter. I can pull it out with the weak license revenue last quarter. Are we expecting this consulting business to continue to show sequential declines this year if license revenue remains where it is? And not improve much from the current run rate?

We don't provide specific revenue guidance. But I can tell you, generally speaking, we would expect overall revenue for the Company to be about at 2008 levels, and we probably expect in that mix slight improvement in license revenue and maybe a little bit of an offset in services. As I think you will know, the services business generally follows the license business, and since license was down a bit in 2008, that will have some impact on us in 2009. We're also experiencing a little bit of hesitancy on some clients' parts for upgrades of their existing solutions and also through those issues, trying to work with our clients to come up with economic solutions that work for them. And we expect that we will have some benefit in 2009. But we do expect the macro issue is going to significantly up in here, and expect overall 2009 revenue to be about flat with 2008.

Last question, can you give us an update on your acquisition strategy for the year? It's been a while since you guys had a major one. You have a good balance sheet, strong cash flow. I am assuming valuation for a lot of interesting assets both big and small are probably reasonable right now. Do you anticipate being a little bit more aggressive on that front this year?

We'd like to be more aggressive if we can find attractive acquisition candidates. The challenge has been, I think we've been in a strong financial position for many years, and been aggressive looking at different opportunities to expand our state of supply chain solutions. And it needs to be in the context of two qualifiers. We are very focused on supply chain optimization, so anything of interest needs to be a market leader in supply chain. Secondly we need to make sure that any acquisition fits with the technology road map. As I mentioned in my prepared remarks, we believe we are making very good progress on our full year product plan, a rolling three year product plan, with now 22 of our solutions on a supply chain process platform. So our acquisition strategy needs to be integratable with both our technology strategy and our product strategy. Having said that, I certainly agree with you. I think that over the balance of 2009 there will be more opportunities for acquisitions at a more favorable price. And we do have a very strong balance sheet, so we will continue to be quite aggressive and opportunistic for those that match up to our strategy.

Your next question comes from Mark Schappel - The Benchmark Company.

Pete, on your deals that were delayed, do you believe they are just being delayed or are you actually seeing deals that are actually being canceled?

That's a great question, Mark. We really can't tell for sure. Most of our conversations with folks appear to be deals that have been delayed. At the end of the day, there will probably be a bankruptcy or two that will force companies not to progress with things that they might have in better economic times. For the deals that we're working with, I would say, if not all, the vast majority have been delayed. But time will tell if some of these customers are no longer standalone businesses in 2010 or so. So we certainly believe some deals pushed out of Q4 into 2009, not sure if they will close the first quarter for the past or when they might close, but I believe that we're well positioned in those opportunities and hopefully many of those will feel more confident in the market positions in the near-term.

Okay, thanks, and on maintenance revenue, Dennis, could you just review what the maintenance renewal rates were in the quarter, and whether you saw any kind of a market shift in those rates over prior quarters?

They were consistent with our traditional trends of 90-plus %, Mark. We are seeing, because of the economy, customers, some customers requesting some concessions around the maintenance. Generally, we deal with those on a case-by-case basis.

Thanks. And could you just review the foreign exchange impact to both the top and bottom lines?

Yes, it was about 3 percentage points in the quarter. For the year, it was basically, which was about $2.2 million for the year, was $2.2 million negative impact, or 3 percentage points in Q4. For the year, it was $243,000 positive impact on the top line. So basically it was a push. A lot of currency volatility, obviously, in Q4. And then on the operating income line, for the quarter we had a negative impact of $1.7 million , I'm sorry, we had a positive impact of $900,000 for the quarter. That was mainly driven by our India, Bangalore operations. And for the year, we had a positive $1.2 million impact on operating income, most all of that obviously coming in the fourth quarter. And all of that is detailed in the supplemental schedules that go out with the earnings release.

Okay, thanks. Then finally Pete, have you seen any fallout in the marketplace yet with respect to the failed JDA i2 merger, or is it too early to tell, in your view?

Yes, Mark, it's probably too early to tell. I think that deal wasn't able to conclude within the last quarter. I think there is still some priority that needs to be brought to that transaction. We have not seen anything in particular change because the JDA i2 deal did not close.

So no frozen deals then?

No.

Thank you.

Not because of that.

This concludes today's question and answer session. Mr. Sinisgalli, any closing remarks?

Jennifer, thank you very much for everyone for joining the call. We look forward to speaking with you in three months. Have a good day.

This concludes today's conference call, you may now disconnect.