MANHATTAN ASSOCIATES INC - Quarter Report: 2008 June (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

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

Commission File Number: 0-23999

MANHATTAN ASSOCIATES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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)

		Large accelerated filer þ		Accelerated filer o
		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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 August 4, 2008, the latest practicable date, is as follows: 24,520,142 shares of common stock, $0.01 par value per share.

 

 

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

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

				Page
Item 1.		Financial Statements.
		Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007			3
		Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 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.			14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.			29
Item 4.		Controls and Procedures.			30
		PART II
		OTHER INFORMATION
Item 1.		Legal Proceedings.			31
Item 1A.		Risk Factors.			31
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.			31
Item 3.		Defaults Upon Senior Securities.			31
Item 4.		Submission of Matters to a Vote of Security Holders.			31
Item 5.		Other Information.			32
Item 6.		Exhibits.			32
Signatures.					33
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO

PART I
FINANCIAL INFORMATION

Item 1.		Financial Statements.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2008				2007
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	76,928			$	44,675
Short term investments			—				17,904
Accounts receivable, net of allowance of $5,136 and $6,618 in 2008 and 2007, respectively			77,098				72,534
Deferred income taxes			6,642				6,602
Prepaid expenses and other current assets			8,297				8,646
Total current assets			168,965				150,361
Property and equipment, net			25,090				24,421
Long-term investments			6,532				10,193
Acquisition-related intangible assets, net			7,966				9,691
Goodwill, net			62,300				62,285
Deferred income taxes			9,845				9,846
Other assets			4,042				4,863
Total assets		$	284,740			$	271,660
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	8,974			$	9,112
Accrued compensation and benefits			16,536				19,357
Accrued and other liabilities			12,224				10,040
Deferred revenue			34,572				31,817
Income taxes payable			9,903				8,156
Total current liabilities			82,209				78,482
Other non-current liabilities			7,848				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; 24,681,791 and 24,899,919 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively			245				249
Additional paid-in capital			12,041				17,744
Retained earnings			181,700				165,189
Accumulated other comprehensive income			697				2,523
Total shareholders’ equity			194,683				185,705
Total liabilities and shareholders’ equity		$	284,740			$	271,660

See accompanying Notes to Condensed Consolidated Financial Statements.

Item 1.		Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(unaudited)								(unaudited)
Revenue:
Software license		$	19,365			$	23,398			$	37,677			$	37,151
Services			62,289				55,863				122,126				110,663
Hardware and other			8,836				10,368				19,011				20,005
Total Revenue			90,490				89,629				178,814				167,819
Costs and Expenses:
Cost of license			1,641				1,303				2,785				2,446
Cost of services			29,856				27,284				61,136				53,283
Cost of hardware and other			7,317				8,864				15,583				17,225
Research and development			11,711				12,278				24,365				23,429
Sales and marketing			14,676				14,491				28,248				27,098
General and administrative			8,867				8,383				17,938				16,529
Depreciation and amortization			3,158				3,354				6,406				6,855
Total costs and expenses			77,226				75,957				156,461				146,865
Operating income			13,264				13,672				22,353				20,954
Other income, net			650				298				2,951				1,390
Income before income taxes			13,914				13,970				25,304				22,344
Income tax provision			4,835				4,959				8,793				7,932
Net income		$	9,079			$	9,011			$	16,511			$	14,412
Basic earnings per share		$	0.37			$	0.34			$	0.68			$	0.53
Diluted earnings per share		$	0.37			$	0.32			$	0.66			$	0.51
Weighted average number of shares:
Basic			24,259				26,555				24,341				26,953
Diluted			24,826				27,761				24,833				28,149

See accompanying Notes to Condensed Consolidated Financial Statements.

Item 1.		Financial Statements (continued)

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2008				2007
		(unaudited)
Operating activities:
Net income		$	16,511			$	14,412
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,406				6,855
Stock compensation			4,337				3,155
Loss/(gain) on disposal of equipment			32				(3	)
Tax benefit of stock awards exercised/vested			119				1,188
Excess tax deficiency from stock based compensation			(76	)			(519	)
Unrealized foreign currency gains			(1,292	)			(52	)
Changes in operating assets and liabilities:
Accounts receivable, net			(3,840	)			(9,439	)
Other assets			1,126				2,321
Accounts payable, accrued and other liabilities			(193	)			(4,633	)
Income taxes			1,791				(65	)
Deferred revenue			2,196				2,988
Net cash provided by operating activities			27,117				16,208
Investing activities:
Purchase of property and equipment			(5,560	)			(6,467	)
Net maturities of investments			21,533				45,239
Net cash provided by investing activities			15,973				38,772
Financing activities:
Purchase of common stock			(12,351	)			(52,768	)
Excess tax benefits from stock based compensation			76				519
Proceeds from issuance of common stock from options exercised			2,187				6,100
Net cash used in financing activities			(10,088	)			(46,149	)
Foreign currency impact on cash			(749	)			923
Net change in cash and cash equivalents			32,253				9,754
Cash and cash equivalents at beginning of period			44,675				18,449
Cash and cash equivalents at end of period		$	76,928			$	28,203
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

June 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 June 30, 2008, the results of operations for the three and six months ended June 30, 2008 and 2007 and cash flows for the six months ended June 30, 2008 and 2007. The results for the three and six months ended June 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 financial condition of our customers deteriorates, the Company may be unable to determine that

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

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 (“EITF No. 01-14”), “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,” 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 $3.4 million and $6.4 million for the three and six months ended June 30, 2008, respectively and $3.1 million and $6.1 million for the three and six months ended June 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 nonfinancial 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-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.

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

     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 have auctions to reset the yield every 7 to 35 days. Certain auctions failed during the second quarter of 2008 and the underlying securities were not called by the issuer. The Company classified $6.5 million of auction rate securities that failed as long-term investments as of June 30, 2008. In determining the fair values of these 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.

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

		Fair Value Measurements at June 30, 2008 Using
						Significant				Significant
		Quoted				Other Observable				Unobservable
		Prices				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Available-for-sale securities		$	55,518			$	—			$	6,506			$	62,024
Total investments		$	55,518			$	—			$	6,506			$	62,024

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

     SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of SFAS 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 June 30, 2008 and 2007, the Company granted options to purchase 32,600 shares and 20,750 shares of common stock, respectively. The Company recorded stock option expense of $1.4 million and $1.1 million during the three months ended June 30, 2008 and 2007, respectively. During the six months ended June 30, 2008 and 2007, the Company granted options to purchase 621,336 shares and 600,113 shares of common stock, respectively. The Company recorded stock option expense of $2.7 million and $2.3 million during the six months ended June 30, 2008 and 2007, respectively.

     The Company also granted 10,864 and 5,665 shares of restricted stock during the three months ended June 30, 2008 and 2007, respectively. The Company recorded restricted stock expense of $0.9 million and $0.5 million during the three months ended June 30, 2008 and 2007, respectively. The Company granted 198,571 and 195,599 shares of restricted stock during the six months ended June 30, 2008 and 2007, respectively. The Company recorded restricted stock expense of $1.7 million and $0.9 million during the six months ended June 30, 2008 and 2007, respectively.

6. Income Taxes

     The Company adopted the provisions of FASB Interpretation No 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. During the three and six months ended June 30, 2008 there have been no material changes in the amount of the Company’s unrecognized tax benefits. Further, there have been no material changes in the Company’s expectations within the next 12 months regarding significant increases or decreases to unrecognized tax benefits as a result of positions taken.

     The Company recognizes potential accrued interest and penalties to unrecognized tax benefits within its global operations as income tax expense.

     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 U.S. Federal, state and local, or non-U.S. income tax examinations for the years before 1999.

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.

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

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

		For Three Months								For Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Net income		$	9,079			$	9,011			$	16,511			$	14,412
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment			(820	)			1,121				(1,794	)			1,330
Unrealized (loss) on investments			(1	)			(26	)			(32	)			(21	)
Other comprehensive (loss) income			(821	)			1,095				(1,826	)			1,309
Comprehensive income		$	8,258			$	10,106			$	14,685			$	15,721

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 the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
						(in thousands, except per share data)
Net income		$	9,079			$	9,011			$	16,511			$	14,412
Earnings per share:
Basic		$	0.37			$	0.34			$	0.68			$	0.53
Effect of CESs			—				(0.02	)			(0.02	)			(0.02	)
Diluted		$	0.37			$	0.32			$	0.66			$	0.51
Weighted average number of shares:
Basic			24,259				26,555				24,341				26,953
Effect of CESs			567				1,206				492				1,196
Diluted			24,826				27,761				24,833				28,149

     Weighted average shares issuable upon the exercise of stock options that were not included in the calculation of diluted earnings per share were 3,515,818 shares and 1,421,516 shares for the three months ended June 30, 2008 and 2007, respectively, and 3,816,752 shares and 1,462,266 shares for the six months ended June 30, 2008 and 2007, respectively. Such shares were not included because they were anti-dilutive.

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

9. Contingencies

     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 $1.0 million and $1.1 million for the three months ended June 30, 2008 and 2007, respectively, and $2.2 million and $1.2 million for the six months ended June 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.

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

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

		For the Three Months ended June 30, 2008																For the Three Months ended June 30, 2007
		Americas				EMEA				APAC				Total				Americas				EMEA				APAC				Total
Revenue:
License		$	15,252			$	2,448			$	1,665			$	19,365			$	18,946			$	3,967			$	485			$	23,398
Services			50,166				9,120				3,003				62,289				46,791				5,475				3,597				55,863
Hardware and other			8,133				393				310				8,836				9,862				367				139				10,368
Total revenue			73,551				11,961				4,978				90,490				75,599				9,809				4,221				89,629
Costs and Expenses:
Cost of revenue			29,585				6,250				2,979				38,814				29,301				5,265				2,885				37,451
Operating expenses			30,380				3,340				1,534				35,254				30,922				3,142				1,088				35,152
Depreciation and amortization			2,943				156				59				3,158				3,038				257				59				3,354
Total costs and expenses			62,908				9,746				4,572				77,226				63,261				8,664				4,032				75,957
Operating income		$	10,643			$	2,215			$	406			$	13,264			$	12,338			$	1,145			$	189			$	13,672

		For the Six Months ended June 30, 2008																For the Six Months ended June 30, 2007
		Americas				EMEA				APAC				Total				Americas				EMEA				APAC				Total
Revenue:
License		$	28,679			$	6,019			$	2,979			$	37,677			$	32,346			$	4,266			$	539			$	37,151
Services			99,317				17,152				5,657				122,126				92,639				10,703				7,321				110,663
Hardware and other			17,684				818				509				19,011				19,060				684				261				20,005
Total revenue			145,680				23,989				9,145				178,814				144,045				15,653				8,121				167,819
Costs and Expenses:
Cost of revenue			60,862				12,850				5,792				79,504				57,928				9,287				5,739				72,954
Operating expenses			61,147				6,542				2,862				70,551				58,862				5,994				2,200				67,056
Depreciation and amortization			5,963				327				116				6,406				6,183				548				124				6,855
Total costs and expenses			127,972				19,719				8,770				156,461				122,973				15,829				8,063				146,865
Operating income (loss)		$	17,708			$	4,270			$	375			$	22,353			$	21,072			$	(176	)		$	58			$	20,954

     Our services revenue consists of fees generated from professional services and customer support and software enhancements related to our software products for the three and six months ended in June 30, 2008 and 2007 are as follows (in thousands):

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

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Professional services		$	42,866			$	39,865			$	84,584			$	78,696
Customer support and software enhancements			19,423				15,998				37,542				31,967
Total services revenue		$	62,289			$	55,863			$	122,126			$	110,663

     License revenues related to our warehouse and non-warehouse product groups for the three and six months ended in June 30, 2008 and 2007 are as follows (in thousands):

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Warehouse		$	10,515			$	10,527			$	19,678			$	18,318
Non-Warehouse			8,850				12,871				17,999				18,833
Total license revenue		$	19,365			$	23,398			$	37,677			$	37,151

11. New Accounting Pronouncements

     In September 2006, FASB issued 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 nonfinancial 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 nonfinancial assets and liabilities recognized or disclosed at fair value on a non-recurring basis. See Note 4, Investments, for further discussion of the adoption.

     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”). 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.

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

     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.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51,” (“SFAS No. 160”) which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company does not expect that the implementation of SFAS No. 160 will have a material impact on its consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161,”) an amendment of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the implementation of SFAS No. 161 will have a material impact on its consolidated financial statements.

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 six months ended June 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.

     For all of our solutions, we offer services such as design, configuration, implementation, product assessment and training plus customer support and software enhancement subscriptions.

Highlights of Second Quarter 2008 Condensed Consolidated Financial Results

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

•

Consolidated revenue increased 1% to $90.5 million.

	•		License revenue decreased 17% to $19.4 million.
	•		Services revenue totaled $62.3 million, increasing 12%;

	•		Operating income decreased 3% to $13.3 million;
	•		Diluted earnings per share increased 16% to $0.37 per share;
	•		Cash Flow from Operations increased 58% to $21.0 million;
	•		Cash and Investments on hand was $83.5 million and $72.8 million at June 30, 2008 and December 31, 2007, respectively;
	•		The Company did not execute any share repurchases in the second quarter of 2008. The Company has $12.6 million of remaining share repurchase authority.

Results of Operations

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(in thousands, except per share data)
Revenue		$	90,490			$	89,629			$	178,814			$	167,819
Costs and expenses			77,226				75,957				156,461				146,865
Operating income			13,264				13,672				22,353				20,954
Other income, net			650				298				2,951				1,390
Income before taxes			13,914				13,970				25,304				22,344
Net income		$	9,079			$	9,011			$	16,511			$	14,412
Diluted net income per share		$	0.37			$	0.32			$	0.66			$	0.51
Diluted weighted average number of shares			24,826				27,761				24,833				28,149

     We manage our business based on three geographic regions: the Americas, EMEA, and APAC. Geographic revenue information is based on the location of sale. During the three and six months ended June 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 June 30,												Six Months Ended June 30,
										% Change												% Change
		2008				2007				2008 to 2007				2008				2007				2008 to 2007
		(in thousands)												(in thousands)
Revenue:
License
Americas		$	15,252			$	18,946				-19	%		$	28,679			$	32,346				-11	%
EMEA			2,448				3,967				-38	%			6,019				4,266				41	%
APAC			1,665				485				243	%			2,979				539				453	%
Total license		$	19,365			$	23,398				-17	%		$	37,677			$	37,151				1	%
Services
Americas		$	50,166			$	46,791				7	%		$	99,317			$	92,639				7	%
EMEA			9,120				5,475				67	%			17,152				10,703				60	%
APAC			3,003				3,597				-17	%			5,657				7,321				-23	%
Total services		$	62,289			$	55,863				12	%		$	122,126			$	110,663				10	%
Hardware and other
Americas		$	8,133			$	9,862				-18	%		$	17,684			$	19,060				-7	%
EMEA			393				367				7	%			818				684				20	%
APAC			310				139				123	%			509				261				95	%
Total hardware and other		$	8,836			$	10,368				-15	%		$	19,011			$	20,005				-5	%
Total Revenue
Americas		$	73,551			$	75,599				-3	%		$	145,680			$	144,045				1	%
EMEA			11,961				9,809				22	%			23,989				15,653				53	%
APAC			4,978				4,221				18	%			9,145				8,121				13	%
Total revenue		$	90,490			$	89,629				1	%		$	178,814			$	167,819				7	%
Operating income (loss):
Americas		$	10,643			$	12,338				-14	%		$	17,708			$	21,072				-16	%
EMEA			2,215				1,145				93	%			4,270				(176	)			2526	%
APAC			406				189				115	%			375				58				547	%
Total operating income		$	13,264			$	13,672				-3	%		$	22,353			$	20,954				7	%

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

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

Revenue

		Three Months Ended June 30,
										% Change				% of Total Revenue
		2008				2007				2008 to 2007				2008				2007
		(in thousands)
License		$	19,365			$	23,398				-17	%			21	%			26	%
Services			62,289				55,863				12	%			69	%			62	%
Hardware and other			8,836				10,368				-15	%			10	%			12	%
Total revenue		$	90,490			$	89,629				1	%			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. We believe our revenue growth in the last year is attributable to several factors, including, among others, our market leadership position as to the breadth of our product offerings, financial stability, a compelling return on investment proposition for our customers, and increased services associated with implementations of our expanded product suite.

     License revenue. License revenue decreased $4.0 million or 17% in the quarter ended June 30, 2008 over the prior year primarily driven by record license revenue in our Americas and EMEA in the second quarter 2007 as well as the impact of the current macro economic environment which somewhat lengthened the sales cycles in the Americas market in 2008. The Americas and EMEA license revenues decreased $3.7 million and $1.5 million, respectively compared to the prior year. This decrease was partially offset by an increase in APAC license revenue of $1.2 million in the second quarter of 2008.

     License sales mix across our product suite remained well-balanced in the quarter with 54% of sales in our warehouse management solutions and 46% in non-warehouse management solutions. Our core warehouse management solutions were flat in the second quarter of 2008 compared to the same quarter in the prior year and non-warehouse management solutions decreased 31% compared to the same quarter in the prior year.

     Services revenue. Services revenue increased $6.4 million or 12% in the second quarter of 2008 compared to the same quarter in the prior year principally due to $3.0 million or 8% increase in professional services revenue from larger implementation projects, increased license sales and $3.4 million or 21% increase in revenue from customer support and software enhancements. The Americas and EMEA segments had record services revenue for the quarter with an increase of $3.4 million or 7% and $3.6 million or 67%, respectively, from the second quarter of 2008 compared to the second quarter of 2007 largely due to implementation services for license deals signed during 2007. These increases were partially offset by a decrease in APAC services revenue of $0.6 million, or 17%, from the second quarter of 2008 compared to the second quarter of 2007 largely because license sales, which drive services revenues, were lower from mid 2006 to mid 2007.

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

     Hardware and other. Hardware sales decreased by 25% to $5.4 million in the second quarter of 2008 compared to $7.3 million in the second 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. For the quarters ended June 30, 2008 and 2007, reimbursements by customers for out-of-pocket expenses were approximately $3.4 million and $3.1 million, respectively.

Cost of Revenue

		Three Months Ended June 30,
										% Change
		2008				2007				2008 to 2007
		(in thousands)
Cost of license		$	1,641			$	1,303				26	%
Cost of services			29,856				27,284				9	%
Cost of hardware and other			7,317				8,864				-17	%
Total cost of revenue		$	38,814			$	37,451				4	%

     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 increased $0.3 million or 26% in the second quarter of 2008 compared to second quarter of 2007, due to license product mix driving higher third party software costs associated with embedded software sold as part of our solutions.

     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 $2.6 million increase in cost of services in the quarter ended June 30, 2008 was principally due to (i) a $2.2 million increase in salary-related costs resulting from a 17% increase in the average number of personnel dedicated to the delivery of professional services and annual compensation increases for 2008 and (ii) a $0.5 million increase in travel expense.

     Services gross margin increased 90 basis points to 52.1% in the second quarter of 2008 from 51.2% in the second quarter of 2007. The increase in margin is primarily contributed by record service revenue in the quarter.

     Cost of hardware and other. Cost of hardware decreased $1.6 million to approximately $3.9 million in the second quarter of 2008 from approximately $5.6 million in the second quarter of 2007. Cost of hardware and other includes out-of-pocket expenses to be reimbursed by customers of approximately $3.4 million and $3.3 million for the quarters ended June 30, 2008 and 2007, respectively.

Operating Expenses

		Three Months Ended June 30,
										% Change
		2008				2007				2008 to 2007
		(in thousands)
Research and development		$	11,711			$	12,278				-5	%
Sales and marketing			14,676				14,491				1	%
General and administrative			8,867				8,383				6	%
Depreciation and amortization			3,158				3,354				-6	%
Operating expenses		$	38,412			$	38,506				0	%

     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 June 30, 2008 decreased $0.6 million compared to the same quarter of the prior year. This decrease was mainly attributable to a $0.3 million decrease in salary-related costs and a $0.2 million decrease in professional fees related to translation services and visa permits.

     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 June 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 increased slightly by $0.2 million or 1% in the second quarter of 2008 compared to the same quarter of the prior year.

     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 $0.5 million increase in general and administrative expenses during the quarter ended June 30, 2008 was primarily attributable to a $0.7 million reduction in recoveries of previously expensed sales tax.

     Depreciation and amortization. Depreciation expense amounted to $2.3 million and $2.2 million for the quarters ended June 30 2008 and 2007, respectively. Amortization of intangibles associated with various acquisitions totaled $0.9 million and $1.2 million for the quarters ended June 30, 2008 and 2007, respectively.

Operating Income

     Income from Operations. Operating income for the second quarter of 2008 decreased by $0.4 million or 3% while consolidated revenue grew 1%. Operating margins decreased to 14.7% for the second quarter of 2008 from 15.3% for the second quarter of 2007. Operating income and margins declined $0.4 million due to lower license revenues and a decrease of $0.7 million in sales tax accrual recoveries.

Other Income and Taxes

		Three Months Ended June 30,
										% Change
		2008				2007				2008 to 2007
Other income, net		$	650			$	298				118	%
Income tax provision			4,835				4,959				-3	%

     Other income, net. Other income, net principally includes interest income and foreign currency gains and losses. Other income, net increased $0.4 million in the second quarter of 2008 compared to the second quarter of 2007 primarily due to the fluctuation of the U.S. dollar relative to foreign currencies partially offset by the decrease in interest income. We recorded a net foreign currency gain of $0.3 million during the three months ended June 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 Australian Dollar, and the Japanese Yen. Interest income decreased to $0.4 million for the second quarter of 2008 from $0.8 million for the second quarter of 2007 due to lower average investment balances in the second quarter of 2008. The weighted-average interest rate earned on investment securities during the three month periods ended June 30, 2008 and 2007 was approximately 2.7% and 3.7%, respectively.

     Income tax provision. Our effective income tax rates were 34.75% and 35.5% in the quarters ended June 30, 2008 and 2007, respectively. The reduction in the effective income tax rate is due to continued tax planning and implementation of various international tax planning strategies.

Highlights of the first half of 2008 Condensed Consolidated Financial Results

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

•

Consolidated revenue increased 7% to $178.8 million;

	•		License revenue was $37.7 million, an increase of 1%;
	•		Services revenue totaled $122.1 million, a 10% increase;

	•		Operating income increased 7% to $22.4 million;
	•		Diluted earnings per share increased 29% to $0.66;
	•		Cash Flow from Operations increased 67% to $27.1 million;

•

The Company repurchased 542,596 common shares during the first six months of 2008 totaling $12.4 million at an average share price of $22.76. All of these shares were repurchased in the first quarter of 2008.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

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

Revenue

		Six Months Ended June 30,
										% Change				% of Total Revenue
		2008				2007				2008 to 2007				2008				2007
		(in thousands)
License		$	37,677			$	37,151				1	%			21	%			22	%
Services			122,126				110,663				10	%			68	%			66	%
Hardware and other			19,011				20,005				-5	%			11	%			12	%
Total revenue		$	178,814			$	167,819				7	%			100	%			100	%

     License revenue. License revenue increased 1% in the six months ended June 30, 2008 over the prior year. EMEA and APAC license revenue increased $1.8 million or 41% and $2.4 million or 453%, respectively, which resulted in record first half license revenue from both segments. The increases were partially offset by a $3.7 million decrease in Americas license revenue for the six months ended June 30, 2008 compared to the same period in the prior year.

     License sales mix across our product suite remained well-balanced in the first half of 2008 with 52% of sales in our warehouse management solutions and 48% in non-warehouse management solutions. With our expanded suite of supply chain solutions we continue to see strong growth in our core warehouse management solutions with 7% growth in the first half of 2008 compared to the same period in the prior year. Non-warehouse management solutions declined 4% compared to the same period in the prior year.

     Services revenue. Services revenue increased 10% or $11.5 million in the first half of 2008 compared to the same period in the prior year principally due to: (i) a 7% or $5.9 million increase in professional services revenue from larger implementation projects and increased license sales and (ii) a 17% or $5.6 million increase in revenue from customer support and software enhancements. The Americas segment led the growth in revenue with an increase in services revenue of $6.7 million or 7%, from the first half of 2007 compared to the first half of 2008. Services revenue in EMEA also increased by $6.4 million or 60%, from the first half of 2007 to the first half of 2008 on strong license growth. These increases were partially offset by a decrease in APAC services revenue of $1.7 million or 23%, from the first half of 2007 compared to the first half of 2008 largely because license sales, which drive services revenue, were lower from mid 2006 to mid 2007, and we completed the implementation of a large client in the region.

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

     Hardware and other. Hardware sales decreased by 10% or $1.4 million to $12.6 million in the first half of 2008 compared to $13.9 million in the first half 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 six months ended June 30, 2008 and 2007, reimbursements by customers for out-of-pocket expenses were approximately $6.4 million and $6.1 million, respectively.

Cost of Revenue

		Six Months Ended June 30,
										% Change
		2008				2007				2008 to 2007
		(in thousands)
Cost of license		$	2,785			$	2,446				14	%
Cost of services			61,136				53,283				15	%
Cost of hardware and other			15,583				17,225				-10	%
Total cost of revenue		$	79,504			$	72,954				9	%

     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 increased 14%, or $0.3 million, in the first half of 2008 compared to the first half of 2007 on a 1% increase in license revenue due to license product mix driving higher third party software costs associated with embedded software sold as part of our solutions.

     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. Cost of services increased $7.9 million, or 15%, in the six months ended June 30, 2008 principally due to a $7.1 million increase in salary-related costs and $1.2 million in travel expenses resulting from a 20% increase in our average professional services headcount.

     Services gross margin decreased to 49.9% in the first half of 2008 from 51.9% in the first half of 2007. The decline in margin is due to a 20% increased investment in Services headcount to support growing demand for our services engagements and to enhance our ability to satisfy customer needs combined with a shift in product mix from our heritage System i platforms to Open Systems platforms.

     Cost of hardware and other. Cost of hardware decreased $1.6 million or 14% to approximately $9.3 million in the first half of 2008 from approximately $10.9 million in the first half of 2007. Cost of hardware and other includes out-of-pocket expenses to be reimbursed by customers of approximately $6.3 million for each of the six months ended June 30, 2008 and 2007.

Operating Expenses

		Six Months Ended June 30,
										% Change
		2008				2007				2008 to 2007
		(in thousands)
Research and development		$	24,365			$	23,429				4	%
Sales and marketing			28,248				27,098				4	%
General and administrative			17,938				16,529				9	%
Depreciation and amortization			6,406				6,855				-7	%
Operating expenses		$	76,957			$	73,911				4	%

     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. The increase of $0.9 million or 4% in research and development expenses for the first half of 2008 compared to the same period of the prior year was mainly attributable to an increase in compensation costs of $0.7 million resulting from headcount growth and annual compensation increases.

     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. The $1.2 million or 4% increase in sales and marketing expenses in the six months ended June 30, 2008 was attributable to: (i) a $0.5 million increase in marketing programs, (ii) $0.3 million increase in stock compensation expense, and (iii) a $0.3 million increase in travel expenses.

     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 net increase of $1.4 million or 9% in general and administrative expenses during the six months ended June 30, 2008 was primarily attributable to a $0.6 million increase in stock compensation expense and a $0.8 million reduction in recoveries of previously expensed sales tax.

     Depreciation and amortization. Depreciation expense amounted to $4.7 million and $4.5 million for the six months ended June 30, 2008 and 2007. Amortization of intangibles associated with various acquisitions totaled $1.7 million and $2.4 million for the six months ended June 30, 2008 and 2007, respectively.

Operating Income

     Income from Operations. Operating income for the six months ended June 30, 2008 increased by $1.4 million, or 7%, based on consolidated revenue growth of 7%. Operating margins were 12.5% for the first half of 2008 and 2007. Operating income in the EMEA segment increased by $4.4 million due to record revenue growth in the first half of 2008. Operating income in APAC increased slightly by $0.3 million. The increases in EMEA and APAC were partially offset by the decrease in the Americas segment of $3.4 million.

Other Income and Taxes

		Six Months Ended June 30,
										% Change
		2008				2007				2008 to 2007
Other income, net		$	2,951			$	1,390				112	%
Income tax provision			8,793				7,932				11	%