MANHATTAN ASSOCIATES INC - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 0-23999

MANHATTAN ASSOCIATES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Georgia		58-2373424
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
2300 Windy Ridge Parkway, Suite 1000
Atlanta, Georgia		30339
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (770) 955-7070

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

The number of shares of the Registrant’s class of capital stock outstanding as of November 4, 2008, the latest practicable date, is as follows: 24,035,527 shares of common stock, $0.01 par value per share.

 

 

MANHATTAN ASSOCIATES, INC.
FORM 10-Q
Quarter Ended September 30, 2008

TABLE OF CONTENTS

				Page
PART I FINANCIAL INFORMATION
Item 1.		Financial Statements.
		Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007			3
		Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)			5
		Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.			15
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.			31
Item 4.		Controls and Procedures.			32
PART II OTHER INFORMATION
Item 1.		Legal Proceedings.			32
Item 1A.		Risk Factors.			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.			33
Item 3.		Defaults Upon Senior Securities.			34
Item 4.		Submission of Matters to a Vote of Security Holders.			34
Item 5.		Other Information.			34
Item 6.		Exhibits.			34
Signatures.					35
EX-31.1
EX-31.2
EX-32

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

		September 30,				December 31,
		2008				2007
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	79,802			$	44,675
Short term investments			—				17,904
Accounts receivable, net of allowance of $4,832 and $6,618 in 2008 and 2007, respectively			71,078				72,534
Deferred income taxes			6,577				6,602
Prepaid expenses and other current assets			8,325				8,646
Total current assets			165,782				150,361
Property and equipment, net			23,606				24,421
Long-term investments			3,033				10,193
Acquisition-related intangible assets, net			7,197				9,691
Goodwill, net			62,281				62,285
Deferred income taxes			9,797				9,846
Other assets			2,865				4,863
Total assets		$	274,561			$	271,660
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	8,998			$	9,112
Accrued compensation and benefits			16,436				19,357
Accrued and other liabilities			11,868				10,040
Deferred revenue			33,978				31,817
Income taxes payable			7,399				8,156
Total current liabilities			78,679				78,482
Other non-current liabilities			8,650				7,473
Shareholders’ equity:
Preferred stock, no par value; 20,000,000 shares authorized, no shares issued or outstanding in 2008 or 2007			—				—
Common stock, $.01 par value; 100,000,000 shares authorized; 24,222,343 and 24,899,919 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively			240				249
Additional paid-in capital			2,515				17,744
Retained earnings			186,009				165,189
Accumulated other comprehensive (loss) income			(1,532	)			2,523
Total shareholders’ equity			187,232				185,705
Total liabilities and shareholders’ equity		$	274,561			$	271,660

See accompanying Notes to Condensed Consolidated Financial Statements.

Item 1. Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(unaudited)								(unaudited)
Revenue:
Software license		$	13,802			$	17,303			$	51,479			$	54,454
Services			60,023				58,437				182,149				169,100
Hardware and other			8,911				8,849				27,922				28,854
Total Revenue			82,736				84,589				261,550				252,408
Costs and Expenses:
Cost of license			1,528				1,599				4,313				4,045
Cost of services			29,376				28,348				90,512				81,631
Cost of hardware and other			7,036				7,286				22,619				24,511
Research and development			12,546				11,887				36,911				35,316
Sales and marketing			11,579				13,079				39,827				40,177
General and administrative			9,099				8,397				27,037				24,926
Depreciation and amortization			3,125				3,406				9,531				10,261
Asset impairment charges			5,205				—				5,205				—
Total costs and expenses			79,494				74,002				235,955				220,867
Operating income			3,242				10,587				25,595				31,541
Other income, net			927				1,619				3,878				3,009
Income before income taxes			4,169				12,206				29,473				34,550
Income tax (benefit) provision			(140	)			4,321				8,653				12,253
Net income		$	4,309			$	7,885			$	20,820			$	22,297
Basic earnings per share		$	0.18			$	0.31			$	0.86			$	0.84
Diluted earnings per share		$	0.18			$	0.29			$	0.84			$	0.80
Weighted average number of shares:
Basic			24,069				25,739				24,246				26,536
Diluted			24,568				26,879				24,736				27,723

See accompanying Notes to Condensed Consolidated Financial Statements.

Item 1. Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Nine Months Ended
		September 30,
		2008				2007
		(unaudited)
Operating activities:
Net income		$	20,820			$	22,297
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			9,531				10,261
Asset impairment charge			5,205				—
Stock compensation			6,616				4,939
Loss on disposal of equipment			41				26
Tax benefit of stock awards exercised/vested			181				1,596
Excess tax benefits from stock based compensation			(81	)			(607	)
Deferred income taxes			—				(742	)
Unrealized foreign currency gain			(743	)			(880	)
Changes in operating assets and liabilities:
Accounts receivable, net			1,131				(11,341	)
Other assets			266				2,228
Accounts payable, accrued and other liabilities			1,249				(7,173	)
Income taxes			(752	)			(1,304	)
Deferred revenue			2,059				3,261
Net cash provided by operating activities			45,523				22,561
Investing activities:
Purchase of property and equipment			(6,818	)			(7,934	)
Net maturities of investments			21,558				63,185
Net cash provided by investing activities			14,740				55,251
Financing activities:
Purchase of common stock			(25,053	)			(74,932	)
Excess tax benefits from stock based compensation			81				607
Proceeds from issuance of common stock from options exercised			3,018				9,356
Net cash used in financing activities			(21,954	)			(64,969	)
Foreign currency impact on cash			(3,182	)			1,239
Net change in cash and cash equivalents			35,127				14,082
Cash and cash equivalents at beginning of period			44,675				18,449
Cash and cash equivalents at end of period		$	79,802			$	32,531
Supplemental disclosures of cash flow information- noncash investing activity:
Tenant improvements funded by landlord		$	—			$	7,918

See accompanying Notes to Condensed Consolidated Financial Statements.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2008
(unaudited)

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements of Manhattan Associates, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these condensed consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of our financial position at September 30, 2008, the results of operations for the three and nine months ended September 30, 2008 and 2007 and cash flows for the nine months ended September 30, 2008 and 2007. The results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with our audited consolidated financial statements and management’s discussion and analysis included in our annual report on Form 10-K for the year ended December 31, 2007.

2. Principles of Consolidation

     The accompanying condensed consolidated financial statements include the Company’s accounts and the accounts of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

3. Revenue Recognition

     The Company’s revenue consists of revenues from the licensing and hosting of software, fees from implementation and training services (collectively, “professional services”), plus customer support and software enhancements, and sales of hardware and other revenues (other revenues consists of reimbursements of out-of-pocket expenses incurred in connection with its professional services). All revenue is recognized net of any related sales taxes.

     The Company recognizes license revenue under Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”), promulgated by the American Institute of Certified Public Accountants, specifically when the following criteria are met: (1) a signed contract is obtained; (2) delivery of the product has occurred; (3) the license fee is fixed or determinable; and (4) collection is probable. SOP 98-9 requires recognition of revenue using the “residual method” when (a) there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting; (b) vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement; and (c) all revenue-recognition criteria in SOP 97-2, other than the requirement for vendor-specific objective evidence of the fair value of each delivered element of the arrangement, are satisfied. For those contracts that contain significant customization or modifications, license revenue is recognized using contract accounting.

     The accounting related to license revenue recognition in the software industry is complex and affected by interpretations of the rules which are subject to change. Judgment is required in assessing the probability of collection, which is generally based on evaluation of customer-specific information, historical collection experience and economic market conditions. If market conditions decline, or if the

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

financial condition of our customers deteriorates, the Company may be unable to determine that collectibility is probable, and the Company could be required to defer the recognition of revenue until the Company receives customer payments.

     The Company’s services revenue consists of fees generated from professional services and customer support and software enhancements related to the Company’s software products. Fees from professional services performed by the Company are generally billed on an hourly basis, and revenue is recognized as the services are performed. Professional services are sometimes rendered under agreements in which billings are limited to contractual maximums or based upon a fixed-fee for portions of or all of the engagement. Revenue related to fixed-fee based contracts is recognized on a proportional performance basis based on the hours incurred on discrete projects within an overall services arrangement. Project losses are provided for in their entirety in the period in which they become known. Revenue related to customer support services and software enhancement is generally paid in advance and recognized ratably over the term of the agreement, typically 12 months.

     Hardware and other revenue is generated from the resale of a variety of hardware products, developed and manufactured by third parties, that are integrated with and complementary to the Company’s software solutions. As part of a complete solution, the Company’s customers periodically purchase hardware from the Company in conjunction with the licensing of software. These products include computer hardware, radio frequency terminal networks, radio frequency identification (“RFID”) chip readers, bar code printers and scanners and other peripherals. Hardware revenue is recognized upon shipment to the customer when title passes. The Company generally purchases hardware from the Company’s vendors only after receiving an order from a customer. As a result, the Company does not maintain significant hardware inventory.

     In accordance with the Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues Task Force (“EITF”) Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF No. 01-14”), the Company recognizes amounts associated with reimbursements from customers for out-of-pocket expenses as revenue. Such amounts have been classified to hardware and other revenue. The total amount of expense reimbursement recorded to revenue was $3.2 million and $9.6 million for the three and nine months ended September 30, 2008, respectively, and $3.2 million and $9.3 million for the three and nine months ended September 30, 2007, respectively.

4. Investments

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for reporting fair value and expands disclosures required for fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. However, in February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”, which delayed for one year the applicability of SFAS No. 157’s fair-value measurements to non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis without material impact to the financial statements. On January 1, 2008, the Company partially adopted SFAS No. 157 related to all financial assets and liabilities and non-

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

financial assets and liabilities recognized or disclosed at fair value on a recurring basis. The Company is currently assessing the potential impact this statement will have on the Consolidated Financial Statements once it is adopted for nonfinancial assets and liabilities recognized or disclosed at fair value on a non-recurring basis.

     SFAS No. 157 establishes a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of asset or liability and their characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:

	•		Level 1—Quoted prices in active markets for identical instruments.
	•		Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
	•		Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

     The Company’s investments in marketable securities consist principally of debt instruments of state and local government agencies and U.S. corporate commercial paper. These investments are categorized as available-for-sale securities and recorded at fair market value, as defined by SFAS No. 157. Investments with maturities of 90 days or less from the date of purchase are classified as cash equivalents; investments with maturities of greater than 90 days from the date of purchase but less than one year are generally classified as short-term investments; and investments with maturities of greater than one year from the date of purchase are generally classified as long-term investments. The Company’s long-term investments consist of corporate or U.S. government debt instruments with maturities between one year and five years. The Company holds investments in auction rate securities, which have original maturities greater than one year, but which previously had auctions that reset the yield every 7 to 35 days. In determining the fair values of auction rate securities, the Company considered the credit worthiness of the counterparty, estimates of interest rates, expected holding periods, and the timing and value of expected future cash flows. The Company uses quoted prices from active markets which are classified at level 1 as a highest level observable input in the disclosure hierarchy framework as defined by SFAS No. 157 for all other available-for-sale securities. Unrealized holding gains and losses are reflected as a net amount in a separate component of shareholders’ equity until realized. For the purposes of computing realized gains and losses, cost is determined on a specific identification basis. Certain auctions failed during 2008 and the underlying securities were not called by the issuer. During the quarter ended September 30, 2008, the Company recorded an other-than-temporary impairment charge of $3.5 million on one of these investments. The Company reduced the carrying value to zero due to a combination of credit downgrades of the underlying issuer and the bond insurer as well as increased publicly reported exposure to bankruptcy risk by the issuer and continued significant deterioration in the credit markets limiting the issuer’s ability to re-finance the underlying bond. The $3.5 million charge is included in asset impairment charges in the condensed consolidated statements of income. The Company classified its remaining $3.0 million of auction rate securities that failed as long-term investments as of September 30, 2008. These remaining securities were issued by state or regional educational loan authorities and are collateralized by federally insured student loans. These investments have high credit ratings, and the Company intends and has the ability to hold these securities until maturity or until called. However, these investments may require an impaired valuation at some point in the future as new information develops.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

     The following table provides the assets and liabilities carried at fair value measured on a recurring basis at September 30, 2008 (in thousands):

		Fair Value Measurements at
		September 30, 2008 Using
						Significant Other				Significant
		Quoted Prices				Observable Inputs				Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Available-for-sale securities		$	44,167			$	—			$	3,033			$	47,200
Total investments		$	44,167			$	—			$	3,033			$	47,200

     In July 2003, the Company invested $2.0 million in an RFID technology company. The investment has been accounted for under the cost method and is included in “Other Assets” on the condensed consolidated balance sheets. In the third quarter of 2006, the Company wrote down its investment by $0.3 million due to uncertainties associated with the fair value of the investment following an unsuccessful public offering. During the third quarter of 2008, the Company wrote down the remaining balance of this investment recording an other-than-temporary impairment charge of $1.7 million. The Company recorded the additional impairment due to a combination of continued negative financial results reported by this company in a very competitive sector and a down round of financing in which the Company’s preferred share ownership was converted into common stock, eliminating the Company’s preference rights associated with liquidation, thereby substantially impairing its ability to recoup its investment. The $1.7 million charge is included in asset impairment charges in the condensed consolidated statements of income.

     SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), permits but does not require the Company to measure financial instruments and certain other items at fair value. The Company did not elect to measure at fair value any of its financial instruments under the provisions of SFAS No. 159, thus the Company’s adoption of this statement effective January 1, 2008 did not have an impact on the Company’s consolidated financial statements.

5. Stock-Based Compensation

     During the three months ended September 30, 2008 and 2007, the Company granted options to purchase 22,600 shares and 227,000 shares of common stock, respectively. The Company recorded stock option expense of $1.4 million and $1.2 million during the three months ended September 30, 2008 and 2007, respectively. During the nine months ended September 30, 2008 and 2007, the Company granted options to purchase 643,936 shares and 827,113 shares of common stock, respectively. The Company recorded stock option expense of $4.1 million and $3.5 million during the nine months ended September 30, 2008 and 2007, respectively.

     The Company also granted 7,531 and 75,665 shares of restricted stock during the three months ended September 30, 2008 and 2007, respectively. The Company recorded restricted stock expense of $0.8 million and $0.6 million during the three months ended September 30, 2008 and 2007, respectively. The Company granted 206,102 and 271,264 shares of restricted stock during the nine months ended

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

September 30, 2008 and 2007, respectively. The Company recorded restricted stock expense of $2.5 million and $1.5 million during the nine months ended September 30, 2008 and 2007, respectively.

6. Income Taxes

     The Company’s effective tax rate was 29.36 % and 35.5% for the nine months ended September 30, 2008 and 2007, respectively. The reduction in the effective income tax rate was primarily related to a release of income tax reserves resulting from expiring tax audit statutes for U.S. federal income tax returns filed for 2004 and prior partially offset by $0.6 million tax expense on the repatriation of cash from a foreign subsidiary.

     The Company adopted the provisions of FASB Interpretation No 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. As of September 30, 2008, the Company’s unrecognized tax benefits totaled $2.9 million, of which $1.1 million, if recognized, would lower the effective tax rate.

     The Company recognizes potential accrued interest and penalties to unrecognized tax benefits within its global operations in income tax expense. The Company’s liability for the potential payment of interest and penalties totaled $2.7 million at September 30, 2008.

     The Company conducts business globally and, as a result, files income tax returns in the United States’ Federal jurisdiction and in many state and foreign jurisdictions. The Company is no longer subject to income tax examinations for the years before 2005 in U.S. Federal, substantially all state and local, or substantially all non-U.S. jurisdictions. Due to the expiration of statutes of limitations in multiple jurisdictions globally during the quarter ended September 30, 2008, the Company experienced a decrease in unrecognized tax benefits of $2.2 million. Further, the Company anticipates it is reasonably possible that unrecognized tax benefits may decrease within twelve months by $2.2 million related primarily to previous acquisitions and jurisdictional taxable income amounts due to the expiration of statutes of limitation.

     In the third quarter of 2008, the Internal Revenue Service (“IRS”) concluded an examination of the Company’s U.S. Federal income tax return for 2005. The examination resulted in a net refund to the Company of $0.1 million.

7. Comprehensive Income

     Comprehensive income includes net income, foreign currency translation adjustments and unrealized gains and losses on investments that are excluded from net income and reflected in shareholders’ equity.

     The following table sets forth the calculation of comprehensive income (in thousands):

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

		For Three Months Ended								For Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income		$	4,309			$	7,885			$	20,820			$	22,297
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment			(2,229	)			(170	)			(4,023	)			1,160
Unrealized (loss) gain on investments			—				51				(32	)			30
Other comprehensive (loss) income			(2,229	)			(119	)			(4,055	)			1,190
Comprehensive income		$	2,080			$	7,766			$	16,765			$	23,487

8. Net Income Per Share

     Basic net income per share is computed using net income divided by the weighted average number of shares of common stock outstanding (“Weighted Shares”) for the period presented. Diluted net income per share is computed using net income divided by Weighted Shares plus common equivalent shares (“CESs”) outstanding for each period presented using the treasury stock method.

     The following is a reconciliation of the income and share amounts used in the computation of basic and diluted net income per common share:

		For Three Months Ended								For Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(in thousands, except per share data)
Net income		$	4,309			$	7,885			$	20,820			$	22,297
Earnings per share:
Basic		$	0.18			$	0.31			$	0.86			$	0.84
Effect of CESs			—				(0.02	)			(0.02	)			(0.04	)
Diluted		$	0.18			$	0.29			$	0.84			$	0.80
Weighted average number of shares:
Basic			24,069				25,739				24,246				26,536
Effect of CESs			499				1,140				490				1,187
Diluted			24,568				26,879				24,736				27,723

     Weighted average shares issuable upon the exercise of stock options that were not included in the calculation of diluted earnings per share were 3,814,462 shares and 1,359,931 shares for the three months ended September 30, 2008 and 2007, respectively, and 3,804,462 shares and 1,359,931 shares for the nine months ended September 30, 2008 and 2007, respectively. Such shares were not included because they were anti-dilutive.

9. Contingencies

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

     From time to time, the Company may be involved in litigation relating to claims arising out of its ordinary course of business. Many of the Company’s installations involve products that are critical to the operations of its clients’ businesses. Any failure in a product could result in a claim for substantial damages against the Company, regardless of its responsibility for such failure. Although the Company attempts to limit contractually its liability for damages arising from product failures or negligent acts or omissions, there can be no assurance that the limitations of liability set forth in the Company’s contracts will be enforceable in all instances. The Company is not presently involved in any material litigation. However, it is involved in various legal proceedings. The Company believes that any liability that may arise as a result of these proceedings will not have a material adverse effect on its financial condition, results of operations or cash flows. The Company expenses legal costs associated with loss contingencies as such legal costs are incurred.

10. Operating Segments

     The Company operates its business in three geographical segments: the Americas (North America and Latin America), Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). The information for the periods presented below reflects these segments. All segments derive revenue from the sale and implementation of the Company’s supply chain execution and planning solutions. The individual products sold by the segments are similar in nature and are all designed to help companies manage the effectiveness and efficiency of their supply chain. The Company uses the same accounting policies for each operating segment. The Chief Executive Officer and Chief Financial Officer evaluate performance based on revenue and operating results for each region.

     The Americas segment charges royalty fees to the EMEA and APAC segments based on software licenses sold by those operating segments. The royalties, which totaled approximately $0.8 million and $0.7 million for the three months ended September 30, 2008 and 2007, respectively, and $3.0 million and $1.9 million for the nine months ended September 30, 2008 and 2007, respectively, are included in cost of revenue in EMEA and APAC with a corresponding reduction in the Americas cost of revenue. The revenues represented below are from external customers only. The geographical-based costs consist of costs of personnel, direct sales and marketing expenses, and general and administrative costs to support the business. There are certain corporate expenses included in the Americas region that are not charged to the other segments including research and development, certain marketing and general and administrative costs that support the global organization and the amortization of acquired developed technology. Included in the Americas costs are all research and development costs including the costs associated with the Company’s India operations.

     The following table presents the revenues, expenses and operating income by reporting segment for the three and nine months ended September 30, 2008 and 2007 (in thousands):

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

		For the Three Months ended																For the Three Months ended
		September 30, 2008																September 30, 2007
		Americas				EMEA				APAC				Total				Americas				EMEA				APAC				Total
Revenue:
License		$	10,782			$	1,389			$	1,631			$	13,802			$	14,348			$	2,308			$	647			$	17,303
Services			48,834				8,255				2,934				60,023				47,723				7,417				3,297				58,437
Hardware and other			8,341				439				131				8,911				7,779				738				332				8,849
Total revenue			67,957				10,083				4,696				82,736				69,850				10,463				4,276				84,589
Costs and Expenses:
Cost of revenue			29,484				5,668				2,788				37,940				28,654				5,729				2,850				37,233
Operating expenses			28,719				2,973				1,532				33,224				29,160				3,094				1,109				33,363
Depreciation and amortization			2,931				150				44				3,125				3,142				208				56				3,406
Asset impairment charges			5,205				—				—				5,205				—				—				—				—
Total costs and expenses			66,339				8,791				4,364				79,494				60,956				9,031				4,015				74,002
Operating income		$	1,618			$	1,292			$	332			$	3,242			$	8,894			$	1,432			$	261			$	10,587

		For the Nine Months ended																For the Nine Months ended
		September 30, 2008																September 30, 2007
		Americas				EMEA				APAC				Total				Americas				EMEA				APAC				Total
Revenue:
License		$	39,461			$	7,408			$	4,610			$	51,479			$	46,694			$	6,574			$	1,186			$	54,454
Services			148,151				25,407				8,591				182,149				140,362				18,120				10,618				169,100
Hardware and other			26,025				1,257				640				27,922				26,839				1,422				593				28,854
Total revenue			213,637				34,072				13,841				261,550				213,895				26,116				12,397				252,408
Costs and Expenses:
Cost of revenue			90,346				18,518				8,580				117,444				86,582				15,016				8,589				110,187
Operating expenses			89,866				9,515				4,394				103,775				88,022				9,088				3,309				100,419
Depreciation and amortization			8,894				477				160				9,531				9,325				756				180				10,261
Asset impairment charges			5,205				—				—				5,205				—				—				—				—
Total costs and expenses			194,311				28,510				13,134				235,955				183,929				24,860				12,078				220,867
Operating income		$	19,326			$	5,562			$	707			$	25,595			$	29,966			$	1,256			$	319			$	31,541

     The Company’s services revenues, which consist of fees generated from professional services and customer support and software enhancements related to its software products, for the three and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Professional services		$	40,693			$	41,488			$	125,277			$	120,184
Customer support and software enhancements			19,330				16,949				56,872				48,916
Total services revenue		$	60,023			$	58,437			$	182,149			$	169,100

     License revenues related to the Company’s warehouse and non-warehouse product groups for the three and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Warehouse		$	7,656			$	10,290			$	27,334			$	28,771
Non-Warehouse			6,146				7,013				24,145				25,683
Total license revenue		$	13,802			$	17,303			$	51,479			$	54,454

11. Subsequent Events

     On October 16, 2008, the Board authorized the repurchase of an additional $25.0 million of the Company’s common stock under the Company’s stock repurchase program.

     On October 21, 2008, the Company announced that, based on its view of the intermediate-term market demand, the Company has identified over-staffed areas and eliminated approximately 150 positions worldwide to realign capacity with demand forecasts. The Company will record the related restructuring charge in the fourth quarter of 2008.

12. New Accounting Pronouncements

     In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for reporting fair value and expands disclosures required for fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. However, in February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” which delayed for one year the applicability of SFAS No. 157’s fair-value measurements to non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis. The Company partially adopted SFAS No. 157 on January 1, 2008 related to all financial assets and liabilities and non-financial assets and liabilities recognized or disclosed at fair value on a recurring basis. The Company is currently assessing the potential impact this statement will have on the Consolidated Financial Statements once it is adopted for non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis. See Note 4, Investments, for further discussion of the adoption.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2008
(unaudited)

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, “Fair Value Measurements,” and FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments.” SFAS 159 is effective for the entity’s fiscal year that begins after November 15, 2007. The Company did not elect to measure at fair value any of its financial instruments under the provisions of SFAS No. 159, thus the adoption of this statement effective January 1, 2008 did not have an impact on the Company’s consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS No. 141(R)”) which amends SFAS No. 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively. The Company will adopt SFAS No. 141(R) effective January 1, 2009 and apply it to any business combinations on or after that date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Certain statements contained in this filing are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to plans for future business development activities, anticipated costs of revenues, product mix and service revenues, research and development and selling, general and administrative activities, and liquidity and capital needs and resources. When used in this report, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this quarterly report. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2007. Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. The following discussion should be read in conjunction with the condensed consolidated financial statements for the three and nine months ended September 30, 2008 and 2007, including the notes to those statements, included elsewhere in this quarterly report (the “Condensed Consolidated Financial Statements”). We also recommend the following discussion be read in conjunction with management’s

discussion and analysis and consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.

References in this filing to the “Company,” “Manhattan,” “Manhattan Associates,” “we,” “our,” and “us” refer to Manhattan Associates, Inc., our predecessors, and our wholly-owned and consolidated subsidiaries.

Business

We are a leading developer and provider of supply chain solutions that help organizations optimize the effectiveness, efficiency, and strategic advantages of their supply chains. Our business is organized into three geographical reporting segments: Americas, EMEA, and APAC. Our solutions consist of software, services and hardware, which coordinate people, workflows, assets, events and tasks holistically across the functions linked in a supply chain from planning through execution. These solutions also help coordinate the actions, data exchange and communication of participants in supply chain ecosystems, such as manufacturers, suppliers, distributors, trading partners, transportation providers, channels (such as catalogers, store retailers and Web outlets) and consumers.

     Our solutions are designed to help organizations optimize their supply chain operations holistically, from planning through execution. We call our portfolio of supply chain software solutions Manhattan SCOPE^TM (Supply Chain Optimization from Planning through Execution). SCOPE includes our five supply chain solution suites: Planning and Forecasting, Inventory Optimization, Order Lifecycle Management, Transportation Lifecycle Management and Distribution Management. For all of our solution suites, we offer services such as design, configuration, implementation, product assessment and training plus customer support and software enhancement subscriptions.

     For additional information regarding our supply chain software solutions, please refer to the Software Solutions section under Item 1, Business of our annual report on Form 10-K for the year ended December 31, 2007.

Recent Developments

     Asset impairment charges. During the quarter ended September 30, 2008, we recorded an other-than-temporary impairment charge of $1.7 million, writing down the remaining balance of a $2.0 million investment in an RFID technology company we made in July 2003. We recorded the additional impairment due to a combination of continued negative financial results reported by this company in a very competitive sector and a down round of financing in which our preferred share ownership was converted into common stock, eliminating our preference rights associated with liquidation, thereby substantially impairing our ability to recoup our investment. In addition, we recorded an other-than-temporary impairment charge of $3.5 million on an investment in an auction rate security. We reduced the carrying value to zero due to a combination of credit downgrades of the underlying issuer and the bond insurer as well as increased publicly reported exposure to bankruptcy risk by the issuer and continued significant deterioration in the credit markets limiting the issuer’s ability to re-finance the underlying bond.

     Subsequent event. On October 21, 2008, we announced that, based on our view of the intermediate-term market demand, we identified over-staffed areas and eliminated approximately 150 positions worldwide to realign capacity with demand forecasts. We will record the related restructuring charge in the fourth quarter of 2008.

Highlights of Third Quarter 2008 Condensed Consolidated Financial Results

     Summarized highlights of the 2008 third quarter results, as compared to the 2007 third quarter, follow:

•

Consolidated revenue decreased 2% to $82.7 million;

	•		License revenue decreased 20% to $13.8 million;
	•		Services revenue totaled $60.0 million, increasing 3%;

	•		Operating income decreased 69% to $3.2 million, which includes $5.2 million in asset impairment charges for a RFID technology investment and an auction-rate security investment;
	•		Diluted earnings per share decreased 38% to $0.18 per share;
	•		Cash Flow from Operations was a record $18.4 million, increasing 190%;
	•		Cash and Investments on hand was $82.8 million and $72.8 million at September 30, 2008 and December 31, 2007, respectively;
	•		The Company repurchased 511,404 common shares totaling $12.6 million at an average share price of $24.73 in the third quarter of 2008, thereby completing its $50 million buyback program approved in October 2007.

Results of Operations

     The following table summarizes our consolidated results for the three and nine months ended September 30, 2008 and 2007.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(in thousands, except per share data)
Revenue		$	82,736			$	84,589			$	261,550			$	252,408
Costs and expenses			79,494				74,002				235,955				220,867
Operating income			3,242				10,587				25,595				31,541
Other income, net			927				1,619				3,878				3,009
Income before taxes			4,169				12,206				29,473				34,550
Net income		$	4,309			$	7,885			$	20,820			$	22,297
Diluted net income per share		$	0.18			$	0.29			$	0.84			$	0.80
Diluted weighted average number of shares			24,568				26,879				24,736				27,723

     We manage our business based on three geographic regions: the Americas, EMEA, and APAC. Geographic revenue information is based on the location of sale. The revenues represented below are from external customers only. The geographical-based costs consist of costs of personnel, direct sales and marketing expenses, and general and administrative costs to support the business. There are certain corporate expenses included in the Americas region that are not charged to the other segments including research and development, certain marketing and general and administrative costs that support the global organization and the amortization of acquired developed technology. Included in the Americas costs are all research and development costs including the costs associated with the Company’s India operations.

During the three and nine months ended September 30, 2008 and 2007, we derived the majority of our revenues from sales to customers within our Americas region. The following table summarizes revenue and operating profit by region:

		Three Months Ended September 30,												Nine Months Ended September 30,
										% Change												% Change
		2008				2007				2008 to 2007				2008				2007				2008 to 2007
		(in thousands)												(in thousands)
Revenue:
License
Americas		$	10,782			$	14,348				-25	%		$	39,461			$	46,694				-15	%
EMEA			1,389				2,308				-40	%			7,408				6,574				13	%
APAC			1,631				647				152	%			4,610				1,186				289	%
Total license		$	13,802			$	17,303				-20	%		$	51,479			$	54,454				-5	%
Services
Americas		$	48,834			$	47,723				2	%		$	148,151			$	140,362				6	%
EMEA			8,255				7,417				11	%			25,407				18,120				40	%
APAC			2,934				3,297				-11	%			8,591				10,618				-19	%
Total services		$	60,023			$	58,437				3	%		$	182,149			$	169,100				8	%
Hardware and Other
Americas		$	8,341			$	7,779				7	%		$	26,025			$	26,839				-3	%
EMEA			439				738				-41	%			1,257				1,422				-12	%
APAC			131				332				-61	%			640				593				8	%
Total hardware and other		$	8,911			$	8,849				1	%		$	27,922			$	28,854				-3	%
Total Revenue
Americas		$	67,957			$	69,850				-3	%		$	213,637			$	213,895				0	%
EMEA			10,083				10,463				-4	%			34,072				26,116				30	%
APAC			4,696				4,276				10	%			13,841				12,397				12	%
Total revenue		$	82,736			$	84,589				-2	%		$	261,550			$	252,408				4	%
Operating income:
Americas		$	1,618			$	8,894				-82	%		$	19,326			$	29,966				-36	%
EMEA			1,292				1,432				-10	%			5,562				1,256				343	%
APAC			332				261				27	%			707				319				122	%
Total operating income		$	3,242			$	10,587				-69	%		$	25,595			$	31,541				-19	%

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

     The results of our operations for third quarter 2008 and 2007 are discussed below.

Revenue

		Three Months Ended September 30,
										% Change				% of Total Revenue
		2008				2007				2008 to 2007				2008				2007
		(in thousands)
License		$	13,802			$	17,303				-20	%			17	%			20	%
Services			60,023				58,437				3	%			72	%			69	%
Hardware and other			8,911				8,849				1	%			11	%			11	%
Total revenue		$	82,736			$	84,589				-2	%			100	%			100	%

     Our revenue consists of fees generated from the licensing and hosting of software; fees from professional services and customer support and software enhancements; and sales of complementary radio frequency and computer equipment.

     License revenue. License revenue decreased $3.5 million or 20% in the quarter ended September 30, 2008 over the same period in the prior year primarily driven by the current macroeconomic environment which has lengthened the sales cycles in the Americas market in 2008. The Americas and EMEA license revenues decreased $3.6 million and $0.9 million, respectively compared to the same period in the prior year. This decrease was partially offset by an increase in APAC license revenue of $1.0 million in the third quarter of 2008.

     License sales mix across our product suite remained well-balanced in the quarter with 55% of sales in our warehouse management solutions and 45% in non-warehouse management solutions. Our core warehouse management solutions decreased $2.6 million or 26% in the third quarter of 2008 compared to the same quarter in the prior year and non-warehouse management solutions decreased $0.9 million or 12% compared to the same quarter in the prior year.

     Services revenue. Services revenue increased $1.6 million or 3% in the third quarter of 2008 compared to the same quarter in the prior year principally due to a $2.4 million or 14% increase in revenue from customer support and software enhancements partially offset by a $0.8 million or 2% decrease in professional services revenue from decreased license sales. The Americas and EMEA segments increased $1.1 million or 2% and $0.8 million or 11%, respectively, in the third quarter of 2008 compared to the third quarter of 2007. These increases were partially offset by a decrease in APAC services revenue of $0.3 million, or 11%, in the third quarter of 2008 compared to the third quarter of 2007.

     Over the past several years, our services revenue growth and margins have been affected by some pricing pressures. We believe that the pricing pressures are attributable to global macro-economic conditions and competition. In addition, our services revenue growth will be affected by timing of license revenue growth and the mix of products sold. For instance, individual engagements involving our non-warehouse management solutions typically require fewer implementation services.

     Hardware and other. Hardware sales increased slightly to $5.8 million in the third quarter of 2008 compared to $5.6 million in the third quarter of 2007. Sales of hardware are largely dependent upon customer-specific desires, which fluctuate from quarter to quarter. Reimbursements for out-of-pocket expenses are required to be classified as revenue and are included in hardware and other revenue.

Reimbursements by customers for out-of-pocket expenses were approximately $3.2 million for the quarters ended September 30, 2008 and 2007.

Cost of Revenue

		Three Months Ended September 30,
										% Change
		2008				2007				2008 to 2007
		(in thousands)
Cost of license		$	1,528			$	1,599				-4	%
Cost of services			29,376				28,348				4	%
Cost of hardware and other			7,036				7,286				-3	%
Total cost of revenue		$	37,940			$	37,233				2	%

     Cost of license. Cost of license consists of the costs associated with software reproduction; hosting services; funded development; media, packaging and delivery, documentation and other related costs; and royalties on third-party software sold with or as part of our products. Cost of license decreased slightly by $0.1 million, or 4%, in the third quarter of 2008 compared to third quarter of 2007.

     Cost of services. Cost of services consists primarily of salaries and other personnel-related expenses of employees dedicated to professional and technical services and customer support services. The $1.0 million increase in cost of services in the quarter ended September 30, 2008 was principally due to (i) a $0.9 million increase in employee-related costs such as salary, benefits and payroll taxes resulting from an 11% increase in the average number of personnel dedicated to the delivery of professional services and annual compensation increases for third quarter of 2008 and (ii) a $0.2 million increase in travel expenses.

     Services gross margin declined 40 basis points to 51.1% in the third quarter of 2008 from 51.5% in the third quarter of 2007. The decrease in margin is primarily attributable to the decrease in professional services revenue in the quarter.

     Cost of hardware and other. Cost of hardware decreased $0.1 million to approximately $4.0 million in the third quarter of 2008 from approximately $4.1 million in the third quarter of 2007. Cost of hardware and other includes out-of-pocket expenses to be reimbursed by customers of approximately $3.1 million and $3.2 million for the quarters ended September 30, 2008 and 2007, respectively.

Operating Expenses

		Three Months Ended September 30,
										% Change
		2008				2007				2008 to 2007
		(in thousands)
Research and development		$	12,546			$	11,887				6	%
Sales and marketing			11,579				13,079				-11	%
General and administrative			9,099				8,397				8	%
Depreciation and amortization			3,125				3,406				-8	%
Asset impairment charges			5,205				—				100	%
Operating expenses		$	41,554			$	36,769				13	%

     Research and development. Research and development expenses primarily consist of salaries and other personnel-related costs for personnel involved in our research and development activities. Research and development expenses for the quarter ended September 30, 2008 increased $0.7 million or 6% compared to the same quarter of the prior year. This increase was mainly attributable to the increase in employee-related costs such as salary, benefits and payroll taxes resulting from additional research and development personnel combined with annual compensation increases.

     Our principal research and development activities have focused on the expansion and integration of new products acquired and new product releases and expanding the product footprint of our supply chain optimization solutions called Supply Chain Optimization from Planning through Execution. The Manhattan SCOPE Platform provides not only a sophisticated service-oriented architecture-based application framework, but a platform that facilitates the integration with Enterprise Resource Planning (ERP) and other supply chain solutions. For the quarters ended September 30, 2008 and 2007, we did not capitalize any research and development costs.

     Sales and marketing. Sales and marketing expenses include salaries, commissions, travel and other personnel-related costs and the costs of our marketing and alliance programs and related activities. Sales and marketing expenses decreased by $1.5 million or 11% in the third quarter of 2008 compared to the same quarter of the prior year. This decrease was mainly attributable to a $1.3 million decrease in employee-related costs, primarily commission and bonus, due to the decrease in revenue.

     General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related costs of executive, financial, human resources, information technology and administrative personnel, as well as facilities, legal, insurance, accounting and other administrative expenses. The $0.7 million increase in general and administrative expenses during the quarter ended September 30, 2008 was primarily attributable to $0.7 million of employee-related expenses such as compensation, bonus, benefits, and payroll taxes and a $0.3 million reduction in recoveries of previously expensed sales tax partially offset by a $0.3 million decrease in travel expenses.

     Depreciation and amortization. Depreciation expense amounted to $2.4 million and $2.2 million for the quarters ended September 30, 2008 and 2007, respectively. Amortization of intangibles associated with various acquisitions totaled $0.8 million and $1.2 million for the quarters ended September 30, 2008 and 2007, respectively.

     Asset impairment charges. Asset impairment charges of $5.2 million during the quarter ended September 30, 2008 consist of a $3.5 million impairment on an investment in an auction-rate security and a $1.7 million impairment on an investment in an RFID technology company. We reduced the carrying value of the auction-rate security investment to zero due to a combination of credit downgrades of the

underlying issuer and the bond insurer as well as increased publicly reported exposure to bankruptcy risk by the issuer and continued significant deterioration in the credit markets limiting the issuer’s ability to re-finance the underlying bond. We wrote down the remaining balance of our $2.0 million investment in an RFID technology company due to a combination of continued negative financial results reported by this company in a very competitive sector and a down round of financing in which our preferred share ownership was converted into common stock, eliminating our preference rights associated with liquidation, thereby substantially impairing our ability to recoup our investment.

Operating Income

     Income from Operations. Operating income for the third quarter of 2008 decreased by $7.3 million or 69%. Operating margins decreased to 3.9% for the third quarter of 2008 from 12.5% for the third quarter of 2007. Operating income and margins declined primarily attributable to lower license revenues and $5.2 million asset write-downs during third quarter of 2008.

Other Income and Taxes

		Three Months Ended September 30,
										% Change
		2008				2007				2008 to 2007
Other income, net		$	927			$	1,619				-43	%
Income tax (benefit) provision			(140	)			4,321				-103	%

     Other income, net. Other income, net principally includes interest income and foreign currency gains and losses. Other income, net decreased $0.7 million in the third quarter of 2008 compared to the third quarter of 2007 due to the fluctuation of the U.S. dollar relative to foreign currencies and the decrease in interest income. We recorded a net foreign currency gain of $0.5 million during the three months ended September 30, 2008. The foreign currency gains and losses resulted from gains or losses on intercompany balances with subsidiaries due to the fluctuation of the U.S. dollar relative to other foreign currencies, principally the Indian Rupee, the British Pound, the Euro and the Chinese Yuan Renminbi. Interest income decreased to $0.4 million for the third quarter of 2008 from $0.8 million for the third quarter of 2007 due to lower average investment balances in the third quarter of 2008. The weighted-average interest rate earned on investment securities during the three month periods ended September 30, 2008 and 2007 was approximately 3.3% and 4.1%, respectively.

     Income tax (benefit) provision. Our effective income tax rate was a benefit of 3.4% and a provision of 35.5% in the quarters ended September 30, 2008 and 2007, respectively. The tax benefit in the third quarter of 2008 primarily related to a release of income tax reserves resulting from expiring tax audit statutes for U.S. federal income tax returns filed for 2004 and prior partially offset by the asset impairment charges for which no tax benefit was recorded.

Highlights of the first nine months of 2008 Condensed Consolidated Financial Results

     Summarized highlights of the first nine months of 2008, as compared to the first nine months of 2007, are as follows:

•

Consolidated revenue increased 4% to $261.6 million;

	•		License revenue decreased 5% to $51.5 million;
	•		Services revenue totaled $182.1 million, an 8% increase;

	•		Operating income decreased 19% to $25.6 million, which includes a $5.2 million asset impairment charge for a RFID technology investment and an auction-rate security investment;
	•		Diluted earnings per share increased 5% to $0.84;
	•		Cash Flow from Operations increased 102% to $45.5 million;
	•		The Company repurchased 1,054,000 common shares during the first nine months of 2008 totaling $25.0 million at an average share price of $23.72.

Nine months Ended September 30, 2008 Compared to Nine months Ended September 30, 2007

     The results of our operations for the first nine months of 2008 and 2007 are discussed below.

Revenue

		Nine Months Ended September 30,
										% Change				% of Total Revenue
		2008				2007				2008 to 2007				2008				2007
		(in thousands)
License		$	51,479			$	54,454				-5	%			20	%			22	%
Services			182,149				169,100				8	%			69	%			67	%
Hardware and other			27,922				28,854				-3	%			11	%			11	%
Total revenue		$	261,550			$	252,408				4	%			100	%			100	%

     License revenue. License revenue decreased 5% in the nine months ended September 30, 2008 compared to the same period in the prior year. EMEA and APAC license revenue increased $0.8 million or 13% and $3.4 million or 289%, respectively, which resulted in record first half license revenue from both segments. The increases were offset by a $7.2 million decrease or 15% in Americas license revenue for the nine months ended September 30, 2008 compared to the same period in the prior year driven by the current macro-economic environment, which has lengthened the sales cycles in the Americas market in 2008.

     License sales mix across our product suite remained well-balanced in the first nine months of 2008 with 53% of sales in our warehouse management solutions and 47% in non-warehouse management solutions. Core warehouse management solutions and non-warehouse management solutions declined 5% and 6%, respectively, in the first nine months of 2008 compared to the same period in the prior year.

     Services revenue. Services revenue increased 8% or $13.0 million in the first nine months of 2008 compared to the same period in the prior year principally due to a 4% or $5.1 million increase in professional services revenue and a 16% or $7.9 million increase in revenue from customer support and software enhancements. The Americas segment services revenue increased $7.8 million or 6%, from the first nine months of 2007 compared to the first nine months of 2008. Services revenue in EMEA also increased by $7.2 million or 40%, from the first nine months of 2007 on strong license growth in the first

half of 2008. These increases were partially offset by a decrease in APAC services revenue of $2.0 million or 19%, from the first nine months of 2007 compared to the first nine months of 2008 largely because license sales, which drive services revenue, were lower in 2007, and we completed the implementation of a large client in the region in 2007.

     Over the past several years, our services revenue growth and margins has been affected by some pricing pressures. We believe that the pricing pressures are attributable to global macroeconomic conditions and competition. In addition, our services revenue growth will be affected by timing of license revenue growth and the mix of products sold. For instance, individual engagements involving our non-warehouse management solutions typically require fewer implementation services.

     Hardware and other. Hardware sales decreased by 6% or $1.2 million to $18.3 million in the first nine months of 2008 compared to $19.5 million in the same period of 2007. Sales of hardware are largely dependent upon customer-specific desires, which fluctuate from year to year. Reimbursements for out-of-pocket expenses are required to be classified as revenue and are included in hardware and other revenue. For the nine months ended September 30, 2008 and 2007, reimbursements by customers for out-of-pocket expenses were approximately $9.6 million and $9.3 million, respectively.

Cost of Revenue

		Nine Months Ended September 30,
										% Change
		2008				2007				2008 to 2007
		(in thousands)
Cost of license		$	4,313			$	4,045				7	%
Cost of services			90,512				81,631				11	%
Cost of hardware and other			22,619				24,511				-8	%
Total cost of revenue		$	117,444			$	110,187				7	%