Ladies and gentlemen, thank you for standing by. Welcome to the Manugistics Group, Incorporated, third quarter results conference call. Operator Instructions I would now like to turn the conference over to Mr. Nate Wallace, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Elizabeth, and welcome to the conference call announcing our third quarter fiscal 2006 results. In addition, we're conducting a simultaneous webcast of the call. This afternoon we have on this call Joe Cowan, our Chief Executive Officer, and Kelly Davis Stout, our Controller. First, Joe will review the business then Kelly will cover the key financial results and metrics. Their discussions will be followed by a brief question-and-answer period. Please bear with me while I review some important information before we begin the discussion of our results. You should assume that all of the operating performance measures we discuss on this call are non-GAAP. The non-GAAP financial measures presented in our discussions of the third quarter results as well as in the text of our press release and accompanying supplemental financial information represent the financial measures used by Management to evaluate our quarterly operating performance and to conduct our business operations. To review both the GAAP and the non-GAAP measures of our financial performance as well as the reconciliation from GAAP to non-GAAP, please refer to our press release which we issued this afternoon. You may find our press release in the investor section of our website at Manugistics.com or on the Form 8-K we furnished to the SEC this afternoon. Regarding the Safe Harbor, our discussions contain forward-looking statements that represent our current judgment about what the future holds for our company. However, they are subject to risks and uncertainties that could cause actual results to differ materially. We'll find information on these factors in our press release announcing our third quarter results that we issued this afternoon, and for further detail on them, and information subject to risks and uncertainties, you should review our recent filings of our quarterly report on Form 10-Q and our most recent annual report on Form 10-K, particularly under the heading Factors That May Affect Future Results. I will note that we assume no obligation to update the information provided in this conference call. Now, Joe will begin the call. Please go ahead, Joe.

Thanks, Nate. Good afternoon, everyone. I want to start by giving you an update on our performance for Q3. Manugistics is making progress in our march to profitability. Q3 is the third straight quarter where we are profitable on an adjusted operating basis. We achieved adjusted operating profitability this quarter despite a quarter in which we only recognized 4.1 million in software license revenue. I want to talk case in points about this. First, we had no major deals this quarter above $1 million. This is the second straight quarter where we have not closed any $1 million deals. We believe the business is shifting to smaller deals, but we still have several of the larger deals in our pipeline, and the quarters in which those hit we expect our average deal sizes to be more in line with the past quarters. We're finding not a lot of sense of urgency with our clients in closing deals. We had a good pipeline going into the quarter with several large deals. What we're able to get all, but weren't able to get all of those closed. As I've indicated to you before, we will not give the farm away on the last few days of quarter in order to get deals across the finish line. We've also had several deals that have slipped from Q3 to Q4. During the first month of this quarter, we have closed several of those deals, which gives us good start on the fourth quarter. We continue to manage our bottom line costs. As you can see from the expense line, we continue to drive costs out of our business. We will continue to evaluate where we're not getting a good return on our investment, and we will take the appropriate action as we go forward.…

Thank you, Joe. Good afternoon. I will begin with revenue. Overall revenue for the quarter was $39.9 million, down 11% from the third quarter of last year, and down $3.7 million from our previous quarter. Software license revenue of $4.1 million was down 39% from last year and down $1 million from Q2. The decline in software revenue is principally due to a drop in our average selling price to $288,000 from 491,000 in Q3 of last year. We signed ten significant software transactions in the quarter, which are deals greater than $100,000, which are signed and recognized in the quarter. As Joe previously mentioned, we do not have any transactions greater than $1 million in Q3. I will now give some additional metrics on software license transactions during Q3. The average selling price of 288,000 is broken out into 196,000 for new customers and 328,000 for existing customers. New clients accounted for 20% of the total software revenue, and 30% of the total deal size. The revenue by geography break down for software consists of 24% for the Americas, 63% for Europe, and 13% for our Asia Pacific region. Total revenue consist of 65% for the Americas, 28% for Europe and 7% for Asia Pacific. The breakdown of software revenue by vertical consists of 56% for consumer goods, 12% for travel, transportation, and hospitality, 8% for the government group, and 24% for our other verticals. Services revenue excluding reimbursed expenses was $13.2 million compared to 15.3 million in Q2. The sequential decline reflects the deferral of project revenue related to a previously closed transaction. Support revenue of 21.1 million was up 2% versus last year and reflects the continued strength of our support renewals. Adjusted operating expenses, which exclude amortization expense from intangibles exit and disposal charges and asset…

Thank you, Kelly. Operator, we're now ready to take questions. Questions and Answers

Thank you. Operator Instructions One moment, please, for our first question. Our first question comes from the line of Brad Whitt with RBC Capital Markets.

Good afternoon. Joe, you talked about the improving pipeline. I'm just curious whether or not you think that will lead to sequential growth in your software revenue this quarter?

You know, as we've stated, we're not going to, we're not going to give you guidance in terms of what's going to happen, but we felt that we did want to give you some indication in terms of what we're seeing in the market with the business and some of our investments are starting to pay off by increasing the number of opportunities that we see. And we've told you in the past that one of the challenges we've had is we don't see enough opportunities, especially when you start with the approach that you're not going to give the farm away in order to get business closed at the end of the quarter, you actually need more opportunities in the pipeline. We believe that we're seeing additional opportunities, we think it's positive. But we're not going to give any kind of guidance in terms of what's going to happen.

What about the pipeline for the government business? You mentioned that last quarter, that it was strong. I'm just curious as to whether you closed any software transactions in that vertical this quarter and what your expectations are going forward.

We did have one small deal that we closed there. The pipeline is still there. We haven't lost any deals there. But the thing that you see with the government business is the pipeline is actually made up of a lot more smaller deals. I think the days of the real big government deals are going to be few and far between. So we're really starting to focus on trying to actually build that pipeline with more smaller deals, and we also believe that there's an opportunity to engage in longer term service commitments in the government. So we're retooling some of our government business, refocusing those people. But yeah, we did close one deal and we stiffly all those same deals in our pipeline but we're still also aggressively working on building that pipeline with new types of business.

Also, John, correct me if I'm wrong, but last quarter you guys had deferred about 1.6 million in software into future quarters. I think you said that was 0.5 million this quarter. That 1.6 last quarter was any of that recognized here in Q3?

No, not a bit of it.

So all that 1.6 is still in backlog?

It's still in backlog and we're aggressively working on those opportunities.

Okay. My final question would be, Joe, looking at your software margins, I think 14% this quarter. Not sure I've ever seen them that low for a software company. I know you've got the amortization there, but other than improving your software revenue, is there anything else you can do to improve your gross margins in software? Maybe Kelly can answer that.

Yeah, I was looking at Kelly to see if she had anything, then I'll give you my comments, if she wants to say anything.

Brad, you're right. The 14% is definitely not excluding the amortization of capitalized software. The margin excluding that is 68%, which is also historically, is lower than our historical. We do typically run in the 80% or higher range. The biggest contributor is the software license revenue number. We are trying to make improvements on the cost of license revenue and will continue to try to implement ways to bring down the cost as well.

One of the programs that we've embarked on is we're looking, that we have third-party royalties, which make up some of those costs, and we're aggressively looking at all of those different partners, all of those different contracts and understanding how we can better organize or optimize those more in line with where our business is, so we're aggressively looking at that piece.

Great, thanks, that's what I was looking for. Thanks, Joe. That's all I have.

Thank you. Operator Instructions Our next question comes from the line of Brad Reback with CIBC.

Joe, can you get any more specific on the pipeline, what verticals you're seeing the strength in there, or products?

One of the areas is in the pricing area. We've started making investments, we're doing marketing, we're doing webinars, we've gotten aggressive. Pricing is an area that I've said in the past that I think the Company has failed miserably in our execution.

Is that retail pricing or hospitality pricing?

We're talking about both retail and consumer goods. We're talking about not the revenue management business but more of the pricing into both retail and CG. We believe, not we believe, we know from the different marketing studies that that's a growth opportunity. We think we have a product that's as good or maybe better than most. It's more of a complete suite of products. Our product can integrate in with more of the planning and forecasting, which no one else has that ability, but the problem is pricing cannot be sold as a subset of supply chain. It has to be sold as a pricing solution because a lot of times the buyers are different inside of an organization, instead of a supply chain person, it's a sales and marketing person. So we've gone out and aggressively recruited and brought in some pricing people. We going to continue to add more, and we're restructuring our sales organization to have specialists that know how to go sell pricing, and we're also doing the same thing in our transportation area. Does that answer your question?

Sure. You talked very optimistically about slit business that has closed here in the first five weeks or so of the fourth quarter. Can you quantify in a dollar amount how much is closed?

All I will say is that we had several deals, and some of them were good size deals, so we feel good about what's happening the first part of the quarter but we're not going to give you an exact numbers.

Any million dollar transactions close?

No, not any million, but we had one that was north of 500,000.

Great, and finally, obviously you've done a lot on the R&D side. You briefly mentioned during your prepared remarks about trying to move some of your service component to India. When I look back historically, it's the better part of three to four years that you guys have lost money on the gross margin line on your service business. Is there any reason you haven't moved there more quickly, to rectify that business, and when should we expect you to start making money there?

I don't know the numbers that you're quoting, because I don't have those numbers in front of me, but let me tell you about my strategy and what I'm doing. When we look at services, one of the things I came in, I'm a firm believer that services cannot be a loss leader in the business. It's important. As I've told you, all before, I view this as more of a solutions company. We're not just a software company, we're a solutions company. Our services business has got to be an important part of that strategy. Yet it can't be a loss leader. In the past we were out trying to sell software and services was almost an afterthought. Our focus now is to look at services, it's an important piece, we have to make money on it, we're aggressively selling it, we actually compensate our sales people now for selling services where they weren't in the past. And while we're doing we're looking at it from several standpoints: what can we do to drive the price that we charge for it, the dollars per hour up, and we've done some work in that area, and part of our compensation to our salespeople helps, but on the other side of the equation, we continue to look at the cost. We look at utilization, we look at all phases of that services business, and we have done some work with some contractors in India, to work on that some in the past, but we haven't gotten very aggressive in terms of our ability to do more of that work in India with a lower cost set of resources, and that's what we've announced that we're doing. We've already started that group in India. We've got the first few people hired. We believe it goes hand in hand with our development activities now, and we believe there's a certain percentage of our services work that can be done through that group out of India so we're really going to focus on that, but service is important to us and we will aggressively drive to make the best margins possible in that business.

One final question, just to clarify something in the press release. I think you talked about the end of, I'm not sure, I can't remember right now if it was fiscal '06 or calendar '06, the move to India increasing the headcount on the R&D side should result in a $2 - $3 million quarterly savings, so if I look at that and the 6.5 million you had on the R&D line on the quarter, does that imply somewhere in the order of magnitude of 3.5 to $4.5 million run rate in fiscal '07?

Be careful because, remember we capitalize R&D, so that number that you saw there is not your total R&D cost, you have to be able to capitalize the costs back into it. But all that Kelly or Nate,

I thought you're done, basically, capitalizing R&D going forward. I thought Kelly had said that in her prepared remarks.

Not quite, to answer your question, Brad, regarding the delta on the savings, you'll note in the press release that we said the delta would be from our Q3 FY '05 run rate. $2 to 3 million per quarter savings would come from. I think we'll, it looks to me like we'll exceed those savings that we projected, so there's more to come.

Got it. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Patrick Walravens with JMP Securities. Please go ahead. Mr. Walravens, your line is open.

Sorry about that. First question, what's the status of the CFO search?

How ya doing, Pat?

I'm good. Thanks.

Here's what we're doing on the CFO search. I made a decision when Raj left, and Kelly is sitting here, that I was going to evaluate her as one of the potential candidates. So we're aggressively looking. We've got candidates that we've interviewed, but we wanted to give Kelly a little time to get her feet on the ground so we can evaluate her as a potential person to fill into that role. So in the near future, we'll be making a final decision and, but that's kind of the process that we're going through.

Okay. Good. And then I thought it was interesting that William Gibson came back on the Board. What prompted that?

I had quite a few conversations with Bill. Bill is quite a major investor in the business. He still believes in the business. He believes that he can contribute, and I do, too. We spent a lot of time together, and I was in total agreement and recommended to the Board that he come back on.

Okay. Then you know lastly, Joe, where are you planning on taking this business? It's, you know, it's tough to be a software company of your size, and, what's the end game here? You're in a market that's growing, you know, 4 to 6% a year, right, and you're probably too small to get the kinds of economies of scale that we need for this sobs where are we headed?

You ask a very broad, open-ended question, but I'll answer that with some of the things that we've told you in the past. First of all what we're trying to do with the business is we've got to get the business focused, and we've got to understand how to make money and we're doing that. We've made progress. And I told you all from the very beginning that the first thing I had to do is figure out how to make money, and I wasn't going to depend on the market to help me. And we've done that, okay, and we are generating operating profits. Now that we're also starting to look strategically for areas where we can get growth because there's always opportunities for best of breed companies. One of the challenges or problems we've had is SAP has done damage to this company. We told you that. If you look at our core supply chain and planning that is not a high-growth market. It's actually had negative growth, and that's an area where we've run into the strongest competition from SAP. We believe that customer base we have is a good base for us so we're understanding, we have the strategy we talk about is all of the add-on opportunities, things like sales and operation planning, inventory policy optimization. So we've got a lot of add-on product that we're starting to sell intro the markets, which also accounts for some of the lower deal size and smaller revenue numbers that you see. We're also looking at areas of our growth. Pricing has a compound 30% per year growth so we believe there's opportunities that we can grow in the pricing area. Retail is a market that we don't believe that the majors can really solve the problems of some of the major retailers like we can with our suite of products. So we're going to focus on niches, on selected industries, we're going to get profitable, and once we get profitable and then we'll see where we take the business from there. But the real focus over the next year is driving to profitability and focus on these niche areas to try to generate some additional revenue.

All right. Fair enough. Last question. The debt situation, obviously the due date on that is getting closer, and sort of what are your options and how much flexibility do you guys feel like you have around that?

Well, I'll make a statement, then I'll let Nate or Kelly. We definitely, we know the debt, we understand the time frame on that, and that's something that is strategically we're looking at, we're evaluating, and we're assessing all of our options now, and it's obvious I can't tell what you they are, but I can tell you that we're spending time and energy looking at that and understanding the options available. Okay? And you don't—

Anything else, Pat?

I'm set. Thank you.

Okay. Great.

Mr. Wallace, there are no more questions at this time. I'll turn the presentation back over to you. You may continue.

Thank you, Elizabeth. And I want to thank everyone for participating on our conference call today. Just as a reminder, a replay will be available for two business days beginning at approximately 7:00 p.m. eastern time this evening and continuing through 7:00 p.m. on Monday, January 9th. The phone number and access code is printed on our press release that we issued earlier this afternoon. In addition, the webcast of this call will also be archived, but it will be archived for approximately three months, also beginning later this evening. You may access the archived webcast on the investor section of our website at manugistics.com. That's all we have today for our call, and appreciate your participation. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.