Open Text Corp (OTEX) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Hummingbird Limited Q1 earnings announcement conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star-zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded, on Wednesday January 21, 2004, at 5:30 eastern standard time. I will now turn the conference over to Mr. Fred Sorkin, Chairman and Chief Executive Officer. Please go ahead sir.

Thank you. Good evening ladies and gentlemen, and thank you for joining us for our first quarter fiscal 2004 conference call. With me today are Alan Litwin, Hummingbird's President, and Inder Duggal, our CFO.

I am pleased to report strong revenues and earnings growth in our first quarter. We continue to generate sustained quarter-over-quarter growth of enterprise content management software revenue, while connectivity revenue has stabilized. Key highlights of our Q1 performance are; total revenue for the quarter was $50m, which represents an increase of 15.5% over quarter one fiscal '03. Total enterprise content management revenue of $83.1m represents an increase of 28.4% over quarter one fiscal '03. The proportion of quarter one fiscal '04 enterprise content management and connectivity revenue to total revenue is 67% enterprise content management, and 33% connectivity, compared to 59% and 41% in quarter one fiscal year '03.

Our adjusted earnings for the quarter was 50 cents, which represents a 7% increase over quarter one fiscal '03, and net cash of $113.4m. There are several indicators that contributed to reported results we have posted in quarter one. They are as follows; first the combination of increased regulatory compliance, IT consolidation, and continued pressure to streamline costs are driving our customers to find more effective ways to manage business content. These business drivers are accelerating market demand for our enterprise content management solution across all of our key markets globally, and across our core industry segments such as legal, government, financial services and utilities.

Second, our customers expect integrated functionality that reduces their cost of ownership for managing enterprise business content. Our strategy of an integrated Hummingbird Enterprise product architecture is paying off. Our customers are accelerating deployment of end-to-end content management solutions, and they opt for Hummingbird Enterprise because it is out of the box, protects their existing IT investments, and lowers deployment and administration costs.

Third, the accelerated market consolidation evidenced increased M&A activity, reinforces our customers concern about long term supplier viability. Our sound financial performance, global reach, and integrated products, lead to the high level of repeat business and renewal rates, and therefore a continued source of high margin incremental revenue.

Fourth, we were firing on all cylinders in quarter one. While our enterprise content management business continued to be on a positive path of sustained growth, our connectivity business is showing signs of stability as well.

Fifth, our targeted companies are working. Our market position continued to strengthen in enterprise content management, and further consolidate in connectivity.

Our strategy is to stay focused on the fundamentals of our business, capitalize on our product investments, continue to preserve and grow our leadership in our core market segments, and appropriate more value from our solution institute. The demand for enterprise content management software is expected to ramp up. We are in a strong position to capitalize on this growth opportunity, and deliver top line revenue, earnings growth, and shareholder value.

We have the financial resources to accelerate growth through acquisition, which is a part of our investment strategy for fiscal 2004. Our strategy, however, is to make prudent investments that compliment our core product, and we shall build on the strong foundations that we have established. I am proud of the professionalism and tenacity of our employees. They are the front lines giving our customers trust and confidence. We are committed to earn their trust every day, and continue to advance our products and services.

I am confident of our future. We have seen continuous improvements to our fundamentals, top line growth, and earnings. We expect this trend line to continue into the balance of fiscal 2004. For quarter two 2004, we are anticipating top line revenue between $52m and $53m, and earnings of 32 and 34 cents. I will now turn the discussion of our operational highlights to Barry Litwin.

Thanks Fred. Good evening ladies and gentlemen. Our Q1 operational performance is evidence of the success of our product strategy, and anticipated the market consolidation underway in the enterprise content management market segment. Adoption of Hummingbird Enterprise continues to accelerate. The combination of out of the box functionality that supports end-to-end content life cycle processes, seamless integration with the MS desktop, and scalability to support enterprise deployments, are key considerations behind the increased demand for Hummingbird Enterprise.

We are seeing accelerated ramp in the adoption of core Hummingbird Enterprise licenses across the board. This trend line reinforces our planning assumptions that customers expect 100 degrees of integration between content enabling technologies. The results of our efforts in this endeavor over the past two years are reflected in the quarter-over-quarter growth of our enterprise content management system's revenue. An important dimension of our product strategy is our focus on line of business solutions built on Hummingbird Enterprise. Our solutions sales pipeline, and the number of deals closed, continue to increase.

Our going forward product strategy will focus on the following priorities; continued investments relating to the performance of our products, as our customers scale up deployment of enterprise content management solutions. Many of our customers are moving from distributed content management solutions to centralized deployments, in order to reduce IT infrastructure costs and to preserve data integrity and security. Accordingly, we are making significant incremental investments in the scalability and performance of Hummingbird Enterprise.

Supporting the mobile worker, demand and corporate deployments of PDAs was 31% of all PDA shipments in 2003, up from 23% in 2002. This trend is expected to continue in '04.

E-mail management. E-mail is a key application for managing business content, and we are making additional investments to advance our already market leading, client side-based integration with Microsoft Outlook, with rules based e-mail classification capabilities integrated with Hummingbird Enterprise.

We're extending Hummingbird Enterprise with instant messaging, presence management, and real time collaboration capabilities. We're going to advance Hummingbird Enterprise to support process centric content management, with more advanced workflow capabilities. We're continuing to advance tighter integration between the components of Hummingbird Enterprise.

Our annual summit is just around the corner. We will be formally launching an exciting new release of Hummingbird Enterprise that will considerably strengthen our market leadership in enterprise content management solutions. This release has been in the works for a while, and will be a significant advancement in the way that our customers will be empowered to realize even greater productivity gains from our products.

This year the focus of summit 2004 is on return of investment and content enabling solutions. It will be a celebration of our customers' innovative solutions based on Hummingbird Enterprise. Summit 2004 will explore the key business drivers behind the adoption of enterprise content management solutions, and will provide a framework to identify and measure ROI.

We're pleased that Aaron Brown, the noted CNN news anchor, will join us this year as our primary keynote speaker. His insights on issues relating to corporate integrity will cause everyone to pause for reflection on the key policy and ethical issues that shape corporate investments to manage and mitigate risk.

Now, as is our tradition, I'll give you a flavor for some of our deals in the quarter. This quarter there were 59 deals over $100,000, for a total of $11.8m, and a few of the customers on this list were Sherman and Sterling, Caterpillar, Southern California Edison, Sport England, Gucci, and Wells Fargo. Thank you, and I'll now turn it over to Inder for the financial highlights.

Thank you, Barry. Good evening ladies and gentlemen. We have reported our financial results in U.S. dollars, and in accordance with U.S. GAAP. Some of the numbers exclude the effect of certain items, which are later defined. Certain of our comments are forward-looking statements, which involve risks and uncertainties. Actual results may differ materially as a consequence of a number of factors, including changes in market and competition, technological and competitive development, and potential down trends in economic conditions generally. Additional information on these and other potential factors that could affect the company's financial results are included in documents filed with the Ontario Security Commission, and with the Securities and Exchange Commission. Also please look at the press release for a complete statement on this.

The following are a few highlights that summarize the results of the current quarter, after which I will discuss the detailed results of our operations.

As Fred mentioned, sales for the first quarter are $50m, up by 13.5% from a year ago. Hummingbird Enterprise solutions revenues were $33.1m, while connectivity sales were $16.9m. Hummingbird Enterprise solution sales are up 28.4%, significantly higher than the first quarter of last year. The total operating expenses this quarter were $36.1m, up from $32.4m in Q1 of fiscal 2003. EBITDA was $9.2m, which is 18.3% of sales, compared to $8.8m, which is 20.1% of sales in the first quarter of last year.

Adjusted net income in the current quarter was $5.3m, higher than the $5.1m recorded a year ago. Positive cash flow generated from operations in the quarter was $13.2m. Cash, including the short term investments, and net of bank debt, was higher than that previous quarter, at $113.4m. Deferred revenues continue to increase quarter-over-quarter, to $56.5m in the first quarter, up $1.8m from the fourth quarter of last year, and higher by $13.3m from a year ago.

I will now provide more details on the operations. As mentioned earlier, sales for the current quarter were $50m, revenue from the enterprise solutions were $33.1m, and enterprise solutions accounted for 66% of the total revenue, compared to 59% in the same quarter of last year. Revenue from connectivity was $16.9m, even though the actual billings for connectivity products were higher at $18.5m. Product revenues were $21.6m. Services revenues were $28.4m, an increase of $6m from a year ago.

As previously noted, adjusted net income, which excludes amortization of intangibles, deferred income tax adjustments all net of taxes was $5.3m for the quarter, compared to $5.1m from the same quarter a year ago. Adjusted diluted EPS, based on adjusted net income, was 30 cents, compared to 28 cents in the fourth quarter of the last year.

The geographical breakdown of the sales for the first quarter was, Americas 56%, Europe 39.2%, and the rest of the world at 4.8%. In the first quarter the gross profit was 88.6% of sales, slightly down from 91.3% in the same quarter of last year. The decline is mainly due to companies acquired during last year, which have a higher services component.

Sales and marketing expenses were $20.8m, which is 41.7% of the sales, up from $18.9m from the fourth quarter of last year, and down from 43% of sales last year. The increase in sales and marketing expenses are mainly due to inclusion of costs of the acquired companies.

R&D expenses were higher at $9.9m in the current quarter, compared to $8.7m a year ago. As a percentage of sales, these expenses were 19.9%, compared to 19.7% in the same quarter of the previous year. Once again, the increase in R&D expenses is primarily due to additional expenses for the acquired companies during last year.

G&A expenses were $5.3m in the current quarter, compared to $4.8m in the first quarter of last year. As a percentage of sales, they decreased to 10.6% compared to the first quarter of fiscal 2003. The increase in G&A expenses of the last year was primarily due to the last year's acquisitions and an increase in the public company expenses, and some other general expenses.

The total expenses, the total operating expenses, excluding amortization of intangibles, were $36.1m, which is 72.2% of sales, up from $32.4m, which is 73.6% of the sales in the same quarter last year.

Overall, the operating expenses were higher in the current quarter in comparison to the first quarter of last year, due to inclusion of expenses of companies acquired after the first quarter of last year.

EBITDA was $9.2m for the quarter, compared to $8.8m in the first quarter of last year. The amortization of intangibles were $6.2m, up from $4.4m in the Q1 of last year. This increase is due to the acquisitions, the four acquisitions which took place during the last year. The entire quarterly amortization amount relates to the latest acquisition made by the company.

Interest and other income consist primarily of net interest income. Income tax expenses were $3.6m this quarter. The operational tax rate is approximately 38% for the purposes of adjusted net income and adjusted EP [ph] assets.

Overall, the company reported a net loss of $1.3m in basic and diluted loss per share of 7 cents for the quarter, compared to a net income of $2m and the basic and diluted per share, earnings per share, of 11 cents for the first quarter of the previous year. The change is mostly due to increased amortization of intangibles, resulting from last year's acquisition and increased income tax expense.

Our deferred tax credit balances are determined based on the anticipated tax rates at the time these balances will be drawn down. As in the past, when the governments have changed their tax rates, we have had to adjust our deferred tax balances based on the new rate. The recent change in the province of Ontario's tax rate has resulted in a one-time $2.1m charge for the quarter. Excluding this income tax impact, the company would have reported a net income of $800,000 in the current quarter.

Adjusted diluted number of shares for the quarter was 17.7 million, compared to about 18.3 million a year ago. The total assets were $366.4m, up from $365.8m as of the end of the previous quarter. Cash, including short-term investments and net of bank debt, was $113.4m, as compared to $101.8m at the end of the prior quarter.

Accounts receivable were $52.9m, down from $56m at the end of the last quarter. DSOs, based on the trailing four quarters, were 97 days, compared to 106 days for the previous quarter.

One other pertinent item of information, which we have been giving you in the past few quarters is, DSOs, as a result of deferred revenue increase, as well as commodity taxes, such as [inaudible], GSD and sales and other use taxes, is 10 days. So, if you exclude this 10 days out, DSOs are 87 days.

Fixed assets were at $13.7m, slightly higher than $13.6m in the previous quarter. Intangibles decreased to $170.7m, from $176m at the end of the fourth quarter of the last fiscal year. Goodwill at the end of the quarter was $102.6m. Deferred revenue, as mentioned earlier, is higher at $56.5m, up from $54.7m at the last quarter. Shareholders' equity was $260.5m, slightly lower than the end of the previous quarter.

The number of employees at the end of the quarter was 1,447. With that, I will hand it over to Fred to conclude our presentation.

OK. Once again, probably I would like to state that we are very happy with our quarter one, '04 results and the increased momentum in the adoption of our products. We are committed to continue our efforts to deliver to shareholders value by continuing to focus on the causes and demands of our business and on the strategies that focus on high value across the industrial solutions.

I'm sure that we will meet our goals. I'm looking forward to personally seeing some of you, ladies and gentlemen, at our upcoming summit. Thank you very much, and right now it's time for questions.

Thank you; one moment please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-toned prompt acknowledging your request. Your questions will be polled in the order that they are received.

If you would like to decline from the polling process, please press the star followed by the two. Please assure that you lift the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first question.

Your first question comes from Scott Penner, from TD Newcrest. Please go ahead.

Oh, thank you. Just relative to your previous guidance of $46m to $48m for this quarter, I'm just wondering, did you see pipelines get stronger during the quarter? Were closure rates better than expected?

Yes, absolutely right. I think [inaudible] and it will pick up right now. And we have [inaudible] rates, a little bit shrinking right now. It's faster, I mean, that we really close the business. And from my standpoint, policy-wise speaking, it's the economy. It's economy and, I mean the first quarter when we really fire on all cylinders, we really get such kinds of revenue.

And, I assume by your comments, Fred, that the pipeline exiting the quarter is at least as strong-?

Oh yes, the pipeline is strong for sure. I think so too, and even quite stronger for quarter two.

OK, and Inder, do you happen to have the contribution of the acquired businesses, maybe on a year-over-year basis?

Well, what we have mentioned in the last few calls as well that the businesses, and especially the way we are selling the products, are all integrated. So, it's impossible to sort of separate it out, in terms of what the acquired companies have done, and what our people have done. Even the last quarter, we had mentioned that two or three companies out of this have integrated the sales forces. So, it's very difficult to separate that out now.

OK. Just lastly, Barry, maybe on the line of business solutions, on the vertical side of things, I guess, you mentioned in the press release some strength from verticals outside of legal and government. Could you just go into the investments you're making there?

Yeah. I think we're quite happy with what's going on. Financial is doing very well, and some of the utilities as well, as far as that stuff. And some of the other stuff, we're doing very well now, with Hummingbird for ESRI as well also, over the last while. That's the GIS stuff.

OK. I'll hand it over, thank you.

Your next question comes from Steven Lee, from Raymond James. Please go ahead.

Yes, thanks. I have just a few questions. Fred, can you update us on your outlook for Connectivity this year?

To update on Connectivity what?

Yeah, just your outlook for this year.

Ah, outlook on Connectivity.

Should we expect about $17m a quarter? Or, can it go back up-?

I think so. You have to expect that it is staying between $17m and $18m per quarter. Business on Connectivity stabilized for the last two years, you know. And right now, we can expect [inaudible] this economy really will pick up and there'll be less bumpiness, I think it will go up.

But I expect, on every side, results or changes in the economy, whatever it is today, between $17m and $18m, for sure.

OK, maybe a question for Barry. Were there any [Inaudible] deals that Valid won during the quarter?

Well sure Valid won deals this quarter.

Any comments in terms of size of--?

I mean, all of our subs won deals this quarter.

I will also answer this question, probably. You know, the point is it's again I'm saying right now, we completely integrated this company from sales forces. And on the [inaudible], it's very difficult for us to say what really previous companies, or whatever it was, [inaudible] what was the revenues they brought to the table.

But, Valid, whatever it was, Valid before was selling to the government, mostly the U.K. government, RM [inaudible] new product. I think they're really doing it quite successfully, quite successfully.

OK, thanks.

Your next question comes from Paul Steep, from Orion Securities. Please go ahead.

Hi, I guess I'll throw this one to Barry, since you did the product review. Maybe just talk a little bit about whether it's build out, or intentionally an acquisition, there are two areas that jumped out at me. One would be the area of archiving and storage, and I know you do have a storage product today. And I guess, on the other half of it, on the BPM side, if that becomes part of the strategy here Fred, with improved workflow? Where the thoughts sort of are, give us a peek at what we're going to expect at Summit?

Well, you're certainly going to see more stuff about workflow at Summit. I don't want to give too much away now, but you can assume you'll see more stuff there. As far as offline storage, we're not doing anything more now. I don't see anything over the short-term, that we're not doing right now, as far as offline. We have partners that do Co-Lo. We have partners that are selling all that stuff, but we're not looking to actually build that into the package.

OK, so we shouldn't expect to see you guys out there, fishing around in that market. Is that the bottom line?

No, I mean that stuff's been around for a long time. Quite frankly, there has been even a number of people that have been approaching us over the last few years, whether we want to get into that. But certainly, the BPM stuff is much more interesting to us. You're going to see a lot of--a lot more workflow-oriented type stuff, pervasive throughout the product, at coming Summit.

OK, and then, I guess, maybe on the RM side, you could talk a little bit about, it's still early days, I guess, with some of the acquisitions but how its progress is being made in terms of rationalizing the Hummingbird, the traditional Hummingbird RM?

Absolutely, I mean certainly we're moving towards having one RM product. You're going to see much more stuff coming already, with integration, as to the legal tailor infringements [ph], the legal key product, as it applies to Hummingbird Enterprise, and to our other java-based product throughout the company. You're going to be seeing, over the next year, much, much more rationalization of those products, even a than you've seen until now.

Great. And the last one, I might've missed it. Were there any major, like, sort of mega-deals, million-dollar-plus deals in the quarter that would've pushed the results around?

No.

Great. Thanks, guys.

Your next question comes from Blair Abernathy, from Paradigm Capital. Please, go ahead.

Thank you, nice quarter, guys. Inder, I wasn't sure if you touched on this or not. But on the enterprise side, did you give a breakout of license, service and maintenance from that side of the business?

No, I've not. We've given total combined product revenue.

OK. Can you give us some sense of where the license number was, in the quarter?

Yeah. We've always mentioned this about--on the solution side, it's between 40% and 45%. On the Connectivity side, it's 55% to 60% licenses.

OK. That's great, thanks. Do you have a breakdown on the enterprise side, a percentage of revenue by vertical, just to give us a flavor for how, what financial and utilities are actually producing?

Legal is roughly about 25%-plus, and government is, if you call that a vertical, about 20% to 25%-plus, or so. These are the two major verticals. The rest is all pretty much across all the industry side.

OK, so it was legal, did you say 25% or 35%

25%.

25%, OK, thank you. And, just on the Four-X impact, do you know what the Four-X impact was, year-over-year, on the revenue?

Well, there will always be an impact of that. The net impact was slightly negative in any case, because our expenses were somewhat higher, because of foreign exchange here.

OK, but you don't know what the breakdown is on your revenue line?

No.

OK. And, two last things. Do you have, the number of reps, or the headcount by division? And also, what's your outlook on your tax rate, going forward?

The tax rate is pretty much the same, 38%. And the number of reps is about 244, out of which 90 are connectivity, and 154 are solutions.

Great, thanks guys.

Your next question comes from David Beck from RBC Capital Markets. Please go ahead.

Good evening gentlemen. Inder, you made a comment about the connectivity revenues coming in at $16.9m, but billings to bookings were more like $18.5m. Could you elaborate?

Most of this, the reason is because of maintenance, so some of the maintenance revenue came in the last month of the quarter. So the billings have been fairly consistent with what we have been doing in the last year. That's why I gave the numbers, about $1.4m of that went into deferred revenue.

Oh, that's what the difference is.

That's right.

OK, I understand. So it's just a timing element. Some quarters the billings would be less than the actual revenue recognized?

That's right.

OK, I understand. Any thoughts--you talked about some of your e-mail archiving capabilities. This seems to be a pretty hot area. Comments as to what Open Text is doing with Ixos [ph] and how you're kind of lining up against that? Is there any thought on that? It seems to be a name that's obviously close to a lot of Canadian investors.

I don't even know actually what they're doing vis-à-vis the integration now with Ixos [ph] and with live link. Our stuff is across the board on all the products. The server side, on the exchange side, stuff that we've developed that will actually feed into all of our products, RM and DM as well, and it's pretty agnostic, so it goes right across the board. We're looking at everything now as how do you get the biggest bang for the buck across all the products. E-mail is hot, so we're tying it into as many of our products as we can, even when it comes to reporting some of the stuff that's happening to the BR system.

OK, so it's not a direct comparable. Yours is actually built in, what they're talking about, even some of the print output, they are archiving that, as opposed to just e-mail archiving. That's a little bit of a different area all together.

No, we're not into storage. We're not into that side of the business.

Right. There have been some comments, this is maybe a little bit too high a level of a question, but I'll throw it out anyway. There's been sort of a little bit of kickback as to what Sarbanes-Oxley and some of these initiatives are really contributing toward driving fundamental business. Some companies, like Hyperion, have suggested in fact that they're really not experiencing the same kind of pull through as they may have expected, with all the hype out there. Is Sarbanes-Oxley a real business driver with a lot of your records management work right now? And is there any way of kind of assessing to what degree it is? At what point people implement, comply with Sarbanes-Oxley; does this cease to become a factor?

It's hard to give you an exact number, David, because I don't have it. But certainly the sales people are saying that this is helping. Part of the way it works with Sarbanes-Oxley is you've got to have a record management system in place. So if you don't have a records management system in place, certainly you've got to talk about putting one in place in order to become compliant. So it's certainly, I'd say, a positive factor.

Suppose you factor on the legal space for sure, and some public companies (inaudible). It absolutely helps, but (inaudible).

OK, fair enough. Thanks guys.

Your next question comes from Howard Lis, from GMP Securities. Please go ahead.

Good evening gentlemen. A number of my questions have been answered, but I just want to follow up on a few things. You mentioned there were 244 reps, Inder. Do I have my numbers right? Was that 267 last quarter?

257.

257, so you trimmed the force by about 13 folks.

This includes some of our inside sales as well, so that could be, I don't have the exact numbers of what the inside were.

And was that in the connectivity side, or was it spread across both businesses?

It was spread across the businesses.

OK. Percentage of sales coming from new customers, as opposed to existing customers, do you have an estimate for that?

Well I can give you a rough estimate, yes. It's between 25% and 30% is new customers.

Right. Last quarter you did actually provide guidance for the entire year. I'm just wondering if you care to comment on that? You had said 213 to 215 and $1.35 to $1.40.

From my standpoint I think we will leave this estimation. I think if there will be changes, it will change after the second quarter. I don't want to change anything, from going from 213 to 215, what we gave before.

OK, just because you shaded the guidance in Q2, obviously, by curving on the bottom line.

The bottom line too, I think, its average was about $1.41, so I don't want to change.

OK, and just a final question on the DSOs. Do you have an estimate for what percentage of your receivables are greater than 120 days?

Yes, just give me one minute.

Sure, and total headcount as well, please.

Total headcount is 1,447, and 85% is less than 120 days.

Thanks very much, and good quarter guys.

Your next question comes from David Wright from BMO Nesbitt Burns. Please go ahead.

Thanks. Good evening, and good quarter. Most of my questions have been answered, so I guess I'll just ask one question. Are there further milestones, in terms of the acquisitions that you did last year that we should be looking for in the coming year?

David, I mentioned before that in our strategy during 2004, there is an acquisition provision too, but we'd like to, during 2004, for sure to make some acquisitions, no doubt. When we'll exactly do this stuff and when this will happen, is very difficult for me to say. But it's absolutely on the list.

OK, fair enough. The ones that you've done, do you have them all where you want them now? Is there further cost cuttings and synergies that we should look for in the model? Or, are they all pretty much integrated the way you had hoped to get them?

You mean from companies we acquired already?

Yes, like Legal Key and Key Automation.

I think we don't expect really big ones, restructuring (inaudible), but this can be changed maybe after the second quarter, some small ones.

OK, thanks.

Your next question comes from Ben Yakich [ph] from Desjardins Securities. Please go ahead.

Good evening, this is Ben Yakich [ph] for David Chart. Just a few housekeeping questions. What was the average deal size in the quarter?

Barry Litwin gave, I mean over 100,000 is what we usually-- it's about $11.8m total and 59. [Inaudible].

OK. Inder, just a quick question. I think you mentioned this, the breakdown between services and the product, for revenue?

Yes I did, $21.6m is the product revenue.

OK. Just to get back to the sales reps, is there any plan for trimming the force further in 2004? Where do you see SG&A as a percentage of revenue? Is 41% a fair number?

Could you repeat the question for me, please?

SG&A as a percentage of revenue in 2004, and where do you see the sales force? Are you planning to kind of keep it here at 244?

I think from the point of really the quantity of sales people, I think it's enough. I think we have to get better results, for sure, with such a quantity of people. But anything is possible. There are people who are meeting their quotas, and there are some people who do not. So it's maybe small trimming sometimes happens in any company. But you don't expect any kind of big cutting, no.

Just circling back on acquisitions. If you can give a little bit of color on some of the criteria that you might use, in terms of geographic region or vertical? Are you looking at entering some new vertical or solidifying legal or something, where you're already strong?

I think what you're really looking at first of all is to increase market space for Hummingbird. Technology wise we don't need anything right now for the near future. From the point of acquisition from vertical is possible. It's possible acquisitions, let's say integration houses are possible, who are very strong in some verticals and can place their solution on our technology. This is possible. Or a possible acquisition of a company who is in our space to increase market share. So this is mostly the definition that we have in our mind.

OK, thank you.

Is that enough?

Yes.

OK, thank you very much.

Your next question comes from Ralph Garcea from Credit Suisse First Boston. Please go ahead.

Good evening gentlemen. Just some quick questions on the government side. Have you seen a slowdown in the Canadian government, as we go through this transition with Paul Martin and that?

Yes, correct.

Have projects been delayed at all?

Usually when the government changes, provincial government or federal government, and it was, by the way, changed, the budget is frozen for some period of time before they start to spend. So you can see right away on the federal and the provincial side we were lucky that foresight was changed. Yes, you have slowdowns, no doubt, you're right.

But that should pick up in the second half of the fiscal year?

Probably, yes. Probably they will unfreeze the budget in the second half, because they cannot keep this frozen for a long time.

OK, and I don't know if you can give some rough estimates, what are the splits between Canadian government, U.S, and UK? Have you guys ever looked at that?

Canadian government, U.S. government, and UK government?

Yes. Is it split similar to the geographic lines, Inder?

Not really, I mean sometimes UK government will have a big deal going on and the Canadian government is frozen this quarter, and federal budget is frozen this quarter. So possibly next quarter it will be better, because right now (inaudible). Who knows? But it's going in ups and downs between regions depending on the government. So it's very difficult for me to say what I can really calculate and spend some time and give you updates and figures between the UK, the U.S. and Canada.

OK, I'll follow up later. I guess for Barry, on the sales force, have you integrated the sales force to the point that they're cross-selling now? Or are the Valid guys just selling their sort of solutions and not really pushing some of your other products?

No, there have been crossovers on sales done already, absolutely.

Was this the first full quarter of that?

Are you talking about crossover from companies that we acquired?

Yes.

Yes, I was afraid you were talking about between connectivity and--.

No.

Ralph, this is not the first quarter. We had started doing that almost immediately after we acquired the companies.

OK. Then on the DSO side, Inder, what's your target for the end of fiscal '04? Do you see that coming under 90 days, and what are you doing to get there?

Fred is saying zero. We still want to bring it down, I keep repeating myself maybe, sound like a broken drum, but we still want to bring it down to less than 90 days.

What are you doing differently this quarter to get it down to 97? Do you have specific programs where guys aren't getting paid unless they collect cash?

Well a mixture of everything, plus the process we had mentioned earlier, that making extra efforts to get people involved in collecting faster if not too much faster. So it's a joint effort involving sales people as well as financial people.

OK, thank you.

Your question comes from Jeffrey Fan from UBS. Please go ahead.

Hi, good evening. A couple of questions, one on the sales side. I guess in the enterprise content management area it is starting to become more strategic, and budgets are starting to come together nicely, at least in terms of how it's being categorized. I'm just wondering, in terms of your dealings with customers, are you still mostly dealing with the IT side, or has it elevated beyond that to more line of business people and more executive level people?

For sure. We've been saying for a long time a large part of this stuff is still coming down from the C-level. I mean sometimes the IT department may be the preliminary vehicle to actually start the negotiations. But certainly this is not infrastructure stuff where you're starting off with some IT people saying, "Hey wouldn't it be nice to put this in?" The requests for this type of stuff that we're selling now is all coming from the business users, which means that it actually filters through the C-level.

Do you expect that type of thinking to start to see deal sizes increase over time?

For sure, as the economy gets better, and the budgets open up, we absolutely believe that.

OK. The second part to the question, again, is on the sales front. Can you explain again why the number of your sales reps were down sequentially? And given that, it sounds like you guys are, you know, seeing better times ahead of you. Why is there a decrease in the sales reps?

Well, it's a question of when exactly you count that, there. So on a day like, you know, from the 30th of September to the 31st of December, some people may have had the [inaudible], but that is not to say some people leave, and then we hire some new people.

So, it's that, at a point of time, you've seen a decrease of 10 people, [inaudible], 12 people. So, we're talking from 244.

12 people, right? What is [inaudible], and usually, and I can't be very--maybe this is a strong statement, but maybe half of them were not really performing and we got rid of them.

It's inside; some of those people were inside, as well. They weren't all commission sales people [inaudible].

Sure.

OK, that's fair.

You know, it's really irrelevant, even.

OK, and then going forward, in terms of the sales capacity, I guess, on the quarter, are you seeing more of your sales people hitting their quotas? And, how much more do you think you can go, in terms of sales capacity, before you have to add?

Again, if I understand how many people are making their targets? I don't understand, really, what you are asking?

Yeah, what portion of your sales people--?

How long, for example, people are up? Do they make some figures, or what?

How many, like, what's the change, in terms of the proportion of sales people that have been hitting their quotas? And then, how much more do you think the organization can go, before you have to add sales people again?

My point, I never saw in any kind of reports on conference calls that I will give you an exact number on how many people are hitting their targets. It's such, I will say, quite confidential figures for any companies.

Secondly, I'm sure, and I see it every quarter, there are more and more people reaching their targets. It is because, don't forget, we started [inaudible] years ago and opened this business. Today, we [inaudible] up on any, any analytical research companies, like one of the leaders.

But my point is, it's very difficult for me to--I know those figures, but it's very difficult for me to [inaudible] this because how many sales people make their targets? It's very, I will say--.

Well I guess the bottom line is, the trend is positive.

Oh yes, sure. There's no doubt.

OK, thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the one. As a reminder, if you are using a speakerphone, please lift the handset before pressing any keys.

You do have a follow up question from Steve Bothier [ph], from RBC Dominion Securities. Please go ahead.

Could you just restate your guidance for the next quarter? I just missed it.

Yes. The top line it's between $52m and $53m. And, the bottom line, adjusted EPS, between 32 and 34.

32 to 34?

Cents, yes, correct.

OK, thank you very much.

Gentlemen, there are no further questions at this time. Please continue.

OK, so I'd like to again thank everybody for participating in this conference call. I hope that we will bring you the same successful figures in the next quarter. Thank you very much, and God bless you all. Goodbye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.