Manhattan Associates, Inc. (MANH) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Candace, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manhattan Associates' Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, January 29, 2013. I would now like to introduce Mr. Dennis Story, CFO of Manhattan Associates. Mr. Story, you may begin.

Thank you, Candace, and good afternoon, everyone. Welcome to Manhattan Associates' 2012 Fourth Quarter Earnings Call. I will review our cautionary language and then, I'll turn the call over to Eddie Capel, our Chief Executive Officer. During this call, including the question-and-answer session, we may make forward-looking statements regarding future events or future financial performance of Manhattan Associates. You are cautioned that these forward-looking statements involve risks and uncertainties, are not guarantees of future performance and that actual results may differ materially from projections contained in our forward-looking statements. I refer you to the reports Manhattan Associates files with the SEC for important factors that could cause actual results to differ materially from those in our projections, particularly our annual report on Form 10-K for fiscal 2011 and the risk factor discussion in that report. We are under no obligation to update these statements. In addition, our comments include certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You'll find this reconciliation in the schedules in the Form 8-K we submitted to the SEC earlier today and on our website at manh.com. Now I'll turn the call over to Eddie.

Thanks Dennis. Good afternoon, everyone. 2012 was a year of exceptional success in Manhattan Associates, both in the Americas and internationally. Financial results were very good, our competitive position continues to improve and customer satisfaction continue to increase across the board. We posted solid results across essentially all financial metrics for the fourth quarter and for the full year. Q4 total revenue of $95.4 million increased 14%, and adjusted earnings per share of $0.71 increased 18% over Q4 2011. Overall, I'm pleased with our financial results in all areas. However, we did see some buying hesitation based upon the lingering global macro uncertainty. And as a result, our license revenue for the quarter fell just short of our goal. License revenue for the quarter was $14.4 million, down from $16.6 million in Q4 2011. For the full year, it was $61.5 million, up 13% over 2011. We recognized 3 $1 million-plus deals in the quarter. All 3 were in the United States, and all 3 were with existing customers who saw fit to extend their partnership with Manhattan Associates. 2 of the 3 $1 million-plus deals were in the retail vertical. These 2 large retail deals to existing customers demonstrates the strength of our WM Open Systems solutions. Both customers had implemented the solution at one or more of their warehouses and have been so pleased with the results, they purchased the right to use the solution at more of their facilities. We're thrilled with the success of rolling out our WM platform and are excited by the opportunity to continue to sell additional platform-based solutions into this happy base of WM customers. All in all, we had a very solid quarter. Our competitive win rate remains strong all year. In head-to-head sales cycles against our major competitors, we won 75% of the time in Q4 and about 70% of the time in 2012 as a whole. We also had a very successful year driving improvements in customer satisfaction and continuing to deliver innovative new solutions from our research and development investments. And I'll comment on those areas following Dennis' full financial review. And as we look forward, I believe we're very well-positioned for 2013 and beyond. We're not expecting the global economy to improve materially in 2013. Nonetheless, we're optimistic about our financial outlook for the year ahead, and I'll discuss some of our exciting market opportunities after Dennis has provided the full financial update. So, Dennis?

Thanks Eddie. I will cover our results for Q4 and full year 2012, then review our 2013 guidance and then turn the call back to Eddie for our business update. For the quarter, we delivered total -- record total revenue of $95.4 million, increasing 14% and adjusted earnings per share of $0.71, grew 18% over Q4 2011 on 19% Services revenue growth. Also Q4 2012 GAAP diluted earnings per share was $0.63, increasing 26% over Q4 2011. Our Q4 results capped off a record 2012 year in revenue, earnings per share and operating cash flow. Full year total revenue was $376.2 million, growing 14% over 2011. Total revenue growth by region was solid, with Americas up 13%; EMEA, 23%; and APAC, 19%. Adjusted earnings per share was $2.82, and GAAP earnings per share was $2.56, both increasing 22%; on license and services revenue growth of 13% and 16%, respectively. And operating cash flow increased 35% for the year, totaling $75.3 million. Excluding currency impact, full year total revenue increased 15%, and adjusted earnings per share grew 18%. Foreign exchange rate variances positively impacted Q4 adjusted earnings per share growth by $0.01 and full year, $0.08. License revenue for the quarter was $14.4 million, down 13% compared to $16.6 million in Q4 2011. And as Eddie mentioned, full year license revenue was $61.5 million, increasing 13% over 2011's revenue of $54.2 million. While Q4 license revenue of $14.4 million was a solid-base license quarter, with the strong deal activity in the quarter, we were disappointed to see a number of large deals push into 2013. Nevertheless, we continue to experience solid activity in our target markets, and the demand environment continues to be quite positive. So we remain cautious and optimistic. Turning to Services revenue. Q4 was $72.3 million, up 19% over Q4 2011's $60.6 million. For the year, 2012 services revenue totaled a record $283.9 million, increasing 16% over 2011. As a reminder, total service revenue includes both consulting and maintenance revenue. Strong demand for our Consulting Services continued in Q4, posting revenue of $46 million on 21% growth and full year revenue of $185.2 million on 18% growth. For the year, we increased our global services headcount 20% or nearly 250 heads to meet customer demand. About 25 of these heads were added in Q4, and our Q1 2013 hiring plan is to add about another 25 or so. Maintenance revenue for Q4 was $26.3 million, increasing 16% over Q4 2011, and full year maintenance revenue was a record $98.6 million, growing 13%. Solid license revenue performance throughout 2012, cash collections and retention rates of 90-plus percent contributed to year-over-year growth. As a reminder, we recognize maintenance renewal revenue on a cash basis, so the timing of cash collections can cause interperiod revenue lumpiness from quarter-to-quarter. Moving on to consolidated services margins for the quarter, they were 53.4% compared to 55.1% in Q3 2012 and 55.9% in Q4 2011. Consistent with prior years, Q4 margins declined sequentially from Q3 due to a combination of: Seasonal holiday impact on revenue, impact of new hires and higher performance-based compensation expense based on record results. Full year services margins were 55% versus 56.5% in 2011, reflecting the impact of 2012 new hires, the hire performance-based compensation expense, partially offset by favorable FX impact of about 60 basis points. As we've mentioned throughout 2011 and 2012, customer demand was outstripping capacity. So the past 2 years, we've aggressively hired to meet customer needs. Entering 2013, we've achieved a better demand capacity alignment, so we anticipate our pace of hiring should be more regulated throughout the year. For 2013, we are targeting full year services margins in the 53.75% to 54.25% range. We expect Q1 2013 Services margins to be in the 53.3% to 53.6% range, with Q2 and Q3 services margins increasing as availability and utilization ramps for the new hires and of course, in Q4, a sequential decline due to holiday seasonality. Regarding Q1, you may recall last year's Q1 Services margins were 54.8%, benefiting from the recognition of $2 million in previously deferred services revenue with no associated cost. Apples-to-apples, our Q1 2012 underlying Services margin is 53.4%, which is comparable to our Q1 2013 expectation. Our services margin profile factors in the full cost of our Q4 and Q1 hires. This investment, combined with annual salary increases and seasonally high FICA payroll tax expense, will raise our cost of services sequentially from Q4 to Q1 by about 3% or 4%. Moving on to operating expenses. These include sales and marketing, R&D, G&A and depreciation, and were $30.7 million for the quarter and $126.9 million for the year, both up about 5%. We expect 2013 operating expenses to grow about 6% over 2012 driven by investment in sales and marketing, R&D and IT and facilities infrastructure investments to support our growth. Turning to operating income. Through strong revenue growth and operating expense control, we delivered record Q4 and full year adjusted operating income of $21.7 million in the quarter and $88.4 million for the year. Operating margins for Q4 were 22.7% and 23.5% full year. 2012 full year operating income and operating margin benefited $2.7 million and 90 basis points from FX impact, primarily driven by Indian rupee depreciation. Excluding the FX impact, 2012 full year operating margin increased 120 basis points to 22.6% compared to 21.4% operating margin we achieved in 2011. As we discussed in our previous earnings call and consistent with our 2012 beginning of the year outlook for margin expansion, we continue to plan a 50-basis-point improvement in 2013 operating margin. In addition to meeting our revenue growth objectives, this improvement depends on the relative stability of forecasted FX rates for 2013. We expect Q1 2013 operating margin to be about the same as Q1 2012's 21.4%, with Q2 through Q4 operating margins ranging between 24% and 25%, adjusted for quarterly license and services revenue mix due to seasonality. Just a reminder, Q1 2012's operating margin was 19.7% if you exclude the $2 million in deferred services revenue impact. So apples-to-apples, we're looking to achieve about 170 basis point improvement in Q1 2013. Moving on to other income, which includes net interest income, net gains and losses on asset disposals and the net impact of realized and unrealized foreign exchange gains or losses, was a positive $534,000 in Q4 and a positive $965,000 for the full year. Consistent with prior years, our 2013 forecast for other income is $100,000 of income per quarter, totaling $400,000 full year. We do not attempt to budget for FX gains and losses in other income. Moving on to income taxes. Our 2012 adjusted effective income tax rate was 36%. For 2013, we are forecasting a full year effective tax rate of 35.75%. Our Q1 tax rate estimate is approximately 35%, reflecting the 2012 R&D tax credit approved by Congress this month and for quarters 2 through 4 the effective rate is 36%. Turning to cash. We generated full year operating cash flow of $75 million, up from $56 million in 2012 on strong earnings growth and low cash tax payments. Over the past couple of years, we have benefited from tax-deductible option exercise activity that will be minimal in 2013 and forward. So absent any U.S. tax reform in 2013, our cash paid taxes will definitely increase. Our 2012 free cash flow increased 33% to $67 million over $51 million in 2011. We closed the year with $103 million in cash and investments and 0 debt on our balance sheet. And our Q4 DSOs were 60 days, down from 70 days in Q3 2012. So let me say we continue to be committed to achieving steady organic revenue growth and earnings leverage through investment in technical innovation while efficiently managing our capital structure to drive shareholder returns. For the year, we reduced our common shares outstanding 3%, buying back 1.9 million shares, totaling $99.7 million, offsetting option exercises of 1.3 million shares. In Q4, we repurchased 527,000 shares of Manhattan common stock, totaling $31 million, offsetting option exercises of 247,000 shares. Just a little perspective on cap structure management. In January of 2010, our comp committee approved the redesign of Manhattan's long-term equity incentive plan, eliminating stock option awards in favor of 100% restricted stock grants of which 50% are service based and 50% are performance based for all plan participants. The objective was to optimize the plan's performance and retention strength while managing program share usage to improve long-term equity overhang. Since January of 2010, 5 million options have been exercised, which equates to about 22% overhang and about $0.60 of EPS dilution risk, with no dilution impact to shareholders. Exiting 2012, we have about 370,000 outstanding option grants remaining. Under our restricted stock program, our overhang has been reduced from about 38% to 14%, and our annual grant rate -- run rate is about 1% of common shares. So for 2013, we are estimating quarterly and full year diluted shares at 20, that's 20.1 million shares. This estimate does not assume any common stock repurchases and depends on a number of variables, including stock price, option exercises, forfeitures and share repurchases, which can significantly impact estimates. And finally, last week, our board approved raising our share repurchase authority limit to a total of $50 million. So that closes the chapter on 2012. Now I will cover our 2013 guidance and then hand off to Eddie for the business update. So for 2013, our growth thesis is about the same as what we put forth at the start of 2012. While we are cautious given the tepid global macro environment, we expect to grow top line revenue in the 9% to 10% range, with operating margin expanding about 50 basis points to 24% and adjusted EPS increasing 12% to 14%. So a few details. For 2013 revenue, we're forecasting to grow total revenue at roughly 2x the market growth rate, pegged at the low end at 5%. Our current annual guidance for total revenue is to deliver $410 million to $415 million, which represents 9% to 10% growth. Given the macro, we pegged the low end of the 5% to 7% market growth estimate and, two, from a revenue mix, we believe hardware and build travel is likely to be growth constrained to the mid to high single-digit range. Overall, we expect our full year total revenue split to be about 48% first half, 52% second half. We expect to return to a more historical seasonal pattern, with Q1 and Q3 license revenue lower than Q2 and Q4 license, and Q4 services revenue down sequentially from Q3 due to seasonal holidays. We are assuming Q1 2013 total revenue growth to be about 7% over Q1 2012. Excluding the previously mentioned $2 million in nonrecurring deferred revenue in Q1 2012, we expect underlying year-over-year total revenue growth for Q1 to be about 9%. Final comment for revenue. If all goes according to plan, we expect to surpass 2 revenue milestones in 2013: Our Consulting Services will surpass $200 million in top line growth, and maintenance will surpass the $100 million century mark. And guess what, that's all organic, too. For 2013, adjusted diluted earnings per share, our guidance range is $3.15 to $3.21, representing 12% to 14% growth over 2012 adjusted EPS of $2.82. With beginning of the year salary increases for our worldwide staff and headcount additions to support continued strong services demand, we expect Q1 EPS to decline sequentially from Q4 by about 4% to 5%, while posting low double-digit growth over Q1 2012. And similar to revenue, we expect full year EPS to have about the same first half, second half spread of 48%, 52%. With the exception of Q1 2013 being down sequentially from Q4 2012, we expect the remaining quarters for the balance of the year to average adjusted EPS of about $0.83, plus or minus, reflecting typical patterns for license and services quarterly seasonality. And for 2013 GAAP diluted earnings per share, we expect to deliver $2.85 to $2.91, representing 11% to 14% growth over 2012 GAAP EPS of $2.56. The $0.30 full year EPS difference between GAAP and non-GAAP diluted adjusted EPS represents solely the impact of equity-based compensation. We expect the EPS impact to spread evenly across the year at about $0.075 per quarter. So that wraps up my comments and covers our 2013 guidance. Now I'll turn the call back to Eddie for the business update.

Thanks, Dennis. Well, first, let me provide a little more detail on the deals we closed in Q4. As I discussed on the front end of the call, we recognized 3 large deals in the quarter, all with existing customers. Overall, about 35% of our full year license revenue was generated from new customers and 65% from existing customer partnerships. We're quite pleased to be able to capture 35% of our license fees for the year from new customers, which is higher than most participants in the application software space, an important validation of our platform-based strategy and organic investment in innovation driving our ability to win these new customers. For Q4, about 70% of our license fees were associated with Warehouse Management and about 30% with our other solutions. For the full year, about 65% of our license fees were tied to WMS. As is customary for us, the retail, consumer goods and logistics service provider verticals were our strongest license fee contributors and made up more than half of our license revenue for both Q4 and the full year. Now we saw some nice strength in the retail vertical, both in Q4 and during the full year. And as I think you're all aware, since most of us are participating in it, we're in the crucible of a retail revolution, really the first one in 25 years or so. The way in which consumers engage with retailers has changed. They, the consumers, have tremendous access to information on hand via smartphones and tablets. And they can get it anytime that they want. And the cost for their loyalty is the retailers' ability to offer flexible shopping choices and timely service. And for retailers to do this, they need a wealth of capabilities that few previously had. They include not only a single view of the customer but the ability to leverage the biggest asset retailers have over fewer e-commerce players, inventory and associates and hundreds of stores nationwide. The push retailers are making to integrate stores into their fulfillment network use the web more than ever and bring these experiences to customers on their mobile devices, plays well with both our heritage and our future. Manhattan has the world's leading solution for managing and optimizing inventory, ensuring products at the right place at the right time and to enable the fulfillment of customer demand. To this end, we're seeing our customers seek solutions to expanded these execution capabilities from the traditional distribution centers across the supply chain and ultimately, into their stores. This is obviously quite exciting for us and for them, too, of course. Now the combination of our Distributed Order Management solution, with our recently announced store at commerce activation offering, serves as a one-two punch for making network-wide inventory available for orders and executing those orders efficiently. During the most recent retail busy season, it produced some very exciting results for our customers, enabling a record e-commerce revenues and driving significant operational. Now it should be noted that this retail revolution, as we're terming it, is creating opportunities for manufacturers and wholesalers as well, allowing them to interact with their customers in new and creative ways. And again, our solutions are uniquely well-positioned to assist these companies in developing new business and go-to-market models. We had a successful quarter adding new clients and expanding our relationship with existing clients. Software license wins with new customers that have permitted us to share their names include Bison Stores, Empire Express, Essilor International, NTT Data, Pearson Educacion de Mexico, Rhee Brothers, Southern States Cooperative and Zongbao District Beijing International. Expanding partnerships with existing customers included ACCO Brands Benelux, Alliance Healthcare, Belk, Chico's Retail Services, Dean Foods, Elektra del Milenio, Exel, Foot Locker Corporate Services, HEB Grocery Company, Keystone Distribution, Leroy Merlin France, Meyer Group, Northern Tool and Equipment, PepsiCo, Primark Stores, Shoppers Drug Mart, Southern Wines & Spirits of America, The Container Store, Vera Bradley Designs and VF Services. Global implementation activity was strong during 2012 as well, with about 300 successful go-lives and approximately 60 of them happening in Q4. Our platform-based warehouse management solution continue to expand its install base. At the end of 2011, we had 12 clients live at 28 sites. We now sit with 26 clients and 56 sites live. And many, many more customers and sites in progress. Dennis mentioned our Services business posted strong financial results in Q4 and for the full year 2012. But I would suggest even more important than the strong financial results delivered by our Services teams was the continued high marks achieved for customer satisfaction. For the year 2012, we invested $45 million in research and development, with more than 650 people dedicated to R&D. At the core of our success is our strategy to grow investment through innovation, developing a Supply Chain Process Platform-based suite of solutions, distinguishes us from all other competitors. And our R&D team continues to do an excellent job of driving innovation in all product areas. And we delivered new, more robust, more efficient solutions than ever to the markets we serve in 2012. And for 2013, we plan once again to invest significantly in research and development, spending more this coming year than we did in 2012 as we strive to further distance ourselves from our other supply-chain-solution-providing competitors. At the end of the year, we had more than 2,400 employees around the globe. That's about 25 more than at the end of Q3 and just about 250 more than at the end of 2011, essentially all of the headcount growth during the quarter and the year was in our Professional Services group on strong demand to support top line growth. We finished the year with 65 people in sales and sales management, with 56 of those, quota-carrying sales reps. That's up 4 reps from Q3 and flat from Q4 2011. And we're looking to add about 10 sales professionals in 2013, with the majority of those in the Americas. Now turning our sights to 2013. We're very optimistic, yet we're somewhat cautious at the same time. We recently conducted a series of 2013 internal kickoff meetings, and the teams are certainly very proud of the 2012 accomplishments but even more excited about what lies ahead for us. Our pipelines are solid and active. Recent industry trade events provided encouraging interest in our solutions, and we expect to continue our competitive win rate. However, entering 2013, Europe and Japan are in recession, and the U.S. continues to wrestle with fiscal consolidation issues, including the debt ceiling, tax policy and so on. The reality is we're in the midst of a global multiyear recovery cycle that presents the potential for headwinds in license close cycles in our target markets. So we feel it only prudent for us to be at least somewhat cautious. On the other hand, I'm very optimistic about Manhattan's long-term growth prospects and our ability to continue to grow market share in all of our target markets. Supply chain complexity in all of the vertical industries in which we play continues to increase, driven by digitalization, e-commerce and aggressive competition. And as I discussed earlier, these market shifts are fueling multiyear supply chain investment cycles. And addressing these challenges will only happen with the aid of sophisticated software and technology, which is right at the core of our platform strategy. We're the only pure-play supply chain management company in the world that has developed a suite of supply chain solutions through organic R&D investment on a common architecture, designed to drive lower total cost of ownership and increase customer service levels. A deep intellectual property and industry experience is a key differentiator for Manhattan versus the competition. So with all that said, we expect 2013 to be another solid financial year for Manhattan Associates, driving shareholder return through steady revenue and consistent earnings growth. We remain focused on delivering for our customers, driving market-leading innovations into our solutions and seizing every opportunity to extend our sustainable competitive advantage through our platform-based approach to supply chain excellence. So with that, operator, we'd now be happy to take any questions.

[Operator Instructions] And your first question comes from Terry Tillman with Raymond James. Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division: The first question actually, Eddie, as you're talking about cautious optimism, given that there were a couple of flipped deals, larger deals in the fourth quarter, which somebody kind of always had to deal with anyways, does that actually do anything, though, to change kind of your assumptions for close rates either on just kind of more of the meat-and-potatoes business or larger deals into 2013?

Not really, Terry. Obviously, we were disappointed with a couple of deals, slipping out of the quarter in Q4. But license revenue is still decent in Q4, 3 larger deals, which meant, to use your expression, the meat-and-potatoes deals were pretty solid in Q4. You're right, there always are deals that slip from one quarter to another, for sure. But as I said, our pipeline remains solid and active. So it really doesn't change our perspective going into Q1 or for the full year 2013.

Yes, Terry, we've had -- on the mid-six-figure deals, we've had pretty good traction post 2009, good consecutive growth year-over-year 2010 forward, kind of filling in or creating an underlying foundation when we have some of these challenging quarters. Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division: Okay. And I guess, Eddie, I'd be remiss if I didn't ask for an update on Distributed Order Management. How is that coming along in terms of this quarter was 30% of total license sales were non-WMS. Has this increasingly become one of the more prominent non-WMS products? And is it something that's now starting to be more pervasive where you see business every quarter with that?

Yes, certainly, we're very encouraged by the progress that we're making with Distributed Order Management, Terry. It is becoming an active, certainly a very active product in our portfolio. We're seeing nice -- very nice growth in the business, not the largest component of our business, for sure. But certainly, the growth is impressive and so on. Now as we see this continued, revolution in the retail industry an omni-channel, if you want to phrase it that way, Order Lifecycle Management, Distributed Order Management certainly is right front and center in the middle of that phenomenon. As I mentioned in my prepared comments, retailers are seeking to get a single view of the customer across all of the sales channels that they serve to get -- trying to leverage all of the inventory across their network in every node of fulfillment. And DOM is the solution that it gives retailers the ability to have that single view and execute across the network. Combined with this new offering that we announced at NRF, we're calling Store Commerce Activation, where we're driving some of the frankly more traditional execution capabilities that look a good bit like distribution center capabilities into the stores so that you can get a combination of leveraging the inventory assets that retailers already have in their stores, leveraging the assets that they have in their people to do 2 things: Provide very timely and flexible service to their customers but also frankly, take some of the edge off of the peaks during the real busy seasons and smooth out the demand across the distribution centers. So a pretty interesting offering for sure.

Yes. And I would add to that, that's what gets me a little bit excited about that, Terry is, is that's the money side of the supply chain. We've always been great at driving cost efficiency, but the Store Commerce Activation, DOM, et cetera, that really drives at the heart of revenue and assisting customers and prospects with monetizing their supply chain networks. So the other thing that I would also point out, we've always been a large seller of WM deals. What's kind of unique in terms of catalyst in the market is, is we're in this multiyear -- the market's down, the globe continues to struggle with the macro, which is -- it creates caution. But my optimism is, is that it's driving a lot of our target markets into not just the omni-channel dynamics but also legacy replacement of old systems, very old systems. And that was kind of the earmark of some of our larger WMS deals in 2012. Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division: Got it, got it. And my last question just relates to competitive dynamics. I mean, there was definitely a notable transaction that occurred with one of your traditional merchandising planning competitors and then supply-chain execution competitor joining forces. Any commentary about what your field salesforce or just what you may have seen at all initially in the fourth quarter? And any perspective into 2013?

Yes, yes. Thanks, Terry. Well, to be honest, the transaction is pretty fresh. So we haven't really seen the impact of that transaction yet in the field from a competitive perspective. I don't think our salesforce are really having to particularly respond to it. Of course, we continue to remain very encouraged by our position. The fact that we have a very high level of research and development investment as it compares to the number of products that we offer and the number of products that we have to support, we think gives us the ability to drive significant innovation into our solutions. That's what we're about, driving innovation and differentiation for our customers to deliver value for their business.

Yes. So let me piggyback on that. I really -- I'll focus on Manhattan. I think the platform strategy that we embarked upon and our organic growth strategy is a key differentiator in the marketplace. What gives me kind of affirmative data points is our competitive win rate, and we're going to go focus on keeping that competitive win rate up, as well as continuing to drive customer satisfaction. So I think our relative competitive position based on our win rates, this multiyear cycle focus is going to continue to improve. What gets me excited is we got 2,400 associates focused on growth and customer satisfaction. To Eddie's point, we're investing in innovation. We got a lot of great market catalyst happening out there. So I think we're well-positioned.

And your next question comes from Yun Kim with Janney Capital Markets.

So Eddie, can you just talk about whether any of those 3 seven-figure deals were legacy replacement deals? And just the overall self pipeline for such large replacement deal for 2013 and whether or not you still expect large deal activity for the year to be driven by them?

Yes. So I think -- in reverse order, we still certainly are seeing significant legacy replacement cycles. And it is that time of the product life cycle for Warehouse Management, transportation management and certainly, these Order Lifecycle Management products as well, given the e-commerce business and the multichannel business, the first systems are really put in about 10 years ago at the turn of the century and as e-commerce becomes a much more mainstream part of retailers business and so forth, it's time for a refresher of those systems and frankly, a more integrated approach to multichannel retailing. So we're seeing that, that phenomenon as well. We expect it to continue during 2013. In terms of the -- without going into too much -- too many specifics around Q4 large deals, a couple of them certainly were legacy replacements. And as I pointed out, they were very -- we were very pleased with the fact that it was an expanded relationship that we developed with those particular customers. Essentially, they tried one site, it was very successful compared with their old legacy system, and they chose to expand the relationship. So very pleased with that.

If I don't mind asking, how long did it take from the initial sign of the smaller deal and the rollout of the pilot before they engaged with you guys in terms of signing up much larger deal this quarter?

Yes, yes. I'm not sure that I have those exact numbers off the top of my head. I would tell you that a typical implementation cycle for a pretty sizable distribution center, now bearing in mind when you're doing legacy replacement or any kind of replacement, there's generally not a super rush, right, to get it implemented. But it's generally about 7, 8, 9 month cycle from initial signing to go live. And then there's usually a period of making sure that the customer gets the results that they expect.

There's not a single bright line answer for that, Yun. We've seen some customers where basically, their first buy was WM for their e-commerce. And now, they've had great success and they're rolling the platform out, replacing legacy on the bricks-and-mortar side of the equation, so, and vice versa.

Okay, great. And then, Eddie, with what you call the retail evolution going on out there in your target market with a lot of the retailers and CPG companies focusing on omni marketing, mobile and whatnot, do you expect your R&D efforts to focus more on revenue-generating products like the one you just released, I forget the name, still a commerce activation product?

To some extent, Yun. Now the beauty of our platform strategy is, first of all, we have a significant part of our research and development organization that's sort of horizontally focused on the platform, the architecture, the technology to support the innovation across each of the kind of specific offerings, number one. And number two, since we are developing on a common platform and a common set of technologies, we can, first of all, from a personnel perspective, move people around from product to product quite readily. But also, we get the benefit of essentially reusing capabilities that have been developed for one solution for another particular functional capability. So the answer to your question is yes, but it's not a student body left shift of personnel from one product to another. But certainly, we're enjoying the opportunity, as Dennis pointed out, to be on the revenue generation side of the supply chain, that's newer for us. Creates the opportunity for us to have different conversations with different people in our customer organizations and create some real value for our customers.

Okay, great. And then a quick question for you, Dennis. I don't know if you actually said it or not, I'm still picking notes from your comments. But do you feel revenue balance declined sequentially in the quarter, which was the first time it happened sequentially in Q4 in a long time? Can you just comment on that?

Yes, it was -- primarily, it was just cash collection, Yun, where we recognized revenue on maintenance renewals on a cash-collected basis. And maintenance is about 90% of our deferred revenue, and we just had just an awesome quarter in terms of catch-up on collections.

Okay. And so that's really a function of strong Q3 collection or do you expect Q1 collection to be strong?

Strong, Q4, strong Q4. Because what happened -- we'll have catch-up revenue recognition in any quarter because we amortize the cash. Once we receive the cash, we amortize it in. So if the customer pays on time, there's no lumpiness by quarter. But if a customer delayed, say, for 6 months and in the third quarter, they pay, you get 6 months of revenue recognized in that quarter. So it creates some lumpiness from quarter-to-quarter. We had just a very strong collection Q4.

Got it. So should we expect Q1 deferred revenue to be more or less flat or maybe even down?

That's probably reasonable.

And we have no further questions at this time. I'll turn the call back to our presenters.

Very good. Well, thank you, Candace, and thank you, everybody, for joining us this afternoon. We appreciate your time, and we'll look forward to speaking to you again in right around 90 days from now. So thank you very much, and have a good evening.

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