Open Text Corp (OTEX) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Hummingbird Ltd. Q2 Earnings Announcement. We will conduct a question and answer-- instructions will be provided at that time for you to queue up for a question. 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 until April 20th, 2004 at 5:30 p.m. Eastern Time. I will now turn the conference over to Mr. Fred Sorkin, Chairman and CEO. Please go ahead, sir.

Thank you. Good evening, ladies and gentlemen. Welcome to our second quarter fiscal 2004 conference call. I have with me Barry Litwin, President, and Inder Duggal, Chief Financial Officer.

I am pleased to report strong second quarter results, showing quarter-over-quarter and sequential revenue and earnings growth. I will give some key quarter two performance highlights as follows. Total revenue for the quarter was 64.7m, which represents an increase of 16.3% over quarter two fiscal year 2003, and 9.3% over quarter one fiscal year 2004. Total enterprise content management revenue of 36.9m represents an increase of 25.9% over quarter two fiscal year 2003. The ratio of quarter two fiscal year 2004 enterprise content management and connectivity revenue is 68 to 32 compared to 62 to 38 in quarter two fiscal 2003. Adjusted earnings for the quarter was 34 cents compared to 36 cents in quarter two fiscal year 2003. Net cash position is 117m.

The results posted in the second quarter validate our strategy that focuses on the enterprise content management market segment. Our investments remain on five key initiatives. First is R&D investments in Hummingbird Enterprise will deliver an integrated enterprise content management suite that supports end-to-end content lifecycle management solutions. Second is complementary acquisitions that consolidate our market leadership in key vertical markets. Extend our product offering with high value line of business solutions that address critical enterprise content management requirements. Focus on maintaining customer loyalty, reserving high margins maintenance [inaudible] revenue and repeat business from the installed base of customers.

As I mentioned before, our key financial integration indicators support the merits of these investments. Within our enterprise content management market segment, we continue to strengthen market leadership in our core legal and government market segments, while our efforts to expand into new vertical segments are gaining traction. In particular, we are focusing on our progress on the manufacturing and financial services sector. Within the legal market segment, our integrated suite of practice-enabling solutions serves more than 1,000 legal firms globally. Hummingbird continues to be the leading vendor to the top grossing law firms globally. Fifty-four % of the top grossing U.S. law firms use the Hummingbird document management solution, more than any other document management software provider.

We continue to enjoy robust growth at all levels of government globally. We're capitalizing on increased demand for compliance [inaudible] management solutions that deal with the federal, state and local government markets in the U.S., Canada, U.K. and Australia.

During the quarter, the company had successfully delivered on a number of important initiatives. First of all is release of Hummingbird Enterprise 2004, which is a major advancement in the functionality and the level of integration between our content enabling technologies. The annual Hummingbird Summit conference this year, we held our annual Summit conference in Hollywood, Florida. Third one, we have received the prestigious Network Computing Editors Choice Award for integrated document management systems.

We are also pleased to announce the appointment, by the way, of two new additional board members to our Board of Directors. Mr. Jack Langer, currently a member of the Board of Directors for Atlantic Broadband Corporation and chairman of the compensation committee and audit committee member. Mr. Langer also served in senior executive capacity with Lehman Brothers, Bankers Trust & Company, Kidder Peabody & Company, Drexel VanHelm Lambert & Company (ph), and Hatton (ph), Company, Inc. Mr. Langer holds degrees from Yale College and Harvard Graduate School of Business Administration.

Then, Stephen Crane, Chairman and Chief Executive Officer of AlphaStar Insurance Group, Ltd. Mr. Crane holds directorship on the board of AlphaStar Insurance Company and First Security Benefit Life Insurance Company. Mr. Crane holds degrees from Princeton University and from Harvard Graduate School of Business Administration. The appointment of Mr. Langer and Mr. Crane will further strengthen our Board of Directors. Their extensive experience in investment banking will complement our board, and their invaluable guidance will help us shape the future direction of our company. The addition of these distinguished independent board members will also favorably add us corporate governancy [ph] clients.

Thank you, and I will now turn the discussion of our operational highlights to Barry Litwin.

Thanks, Fred, and good evening, ladies and gentlemen.

Success of our strategy is evidenced by the growth of our ECM business. Our Q2 results not only show a continuation of this positive trend line, but an acceleration of ECM revenue growth. There are five areas of investment that contributed to the positive results, and which will be the foundation for the continued growth of our ECM business. First, advance in the level of integration and functionality of Hummingbird Enterprise, the ramp in the adoption of Hummingbird Enterprise within our install base of customers, the consolidation of our market leadership in the legal and government sectors, increased investments in the manufacturing and financial services, and our focus on high value enterprise content management lifecycle solutions.

Let me turn to a discussion of our product investments. At Summit 2004, we launched our next-generation ECM platform, Hummingbird Enterprise 2004. Hummingbird Enterprise 2004 is a significant advancement in our ECM offering. It empowers our customers to build scalable end-to-end enterprise content management solutions, and it offers a number of important competitive differentiators. We've integrated an advanced workflow engine within Hummingbird Enterprise that empowers users to easily define business rules by which content lifecycle processes may be managed and automated.

We have leveraged our competitive strengths in business intelligence by embedding reporting capabilities into Hummingbird Enterprise. The reporting functionality provides an out-of-the-box ability to generate reports describing how content is used within Hummingbird Enterprise without the need to license a third-party reporting tool.

We recognize the importance of managing e-mail as a critical component of enterprise business content. Hummingbird Enterprise builds on our industry-leading integration with the Microsoft desktop and Microsoft Outlook by extending that competitive advantage with rules based on e-mail classification functionality. We provide a capability that streamlines the administrative burden associated with managing, classifying and preserving e-mail, and provide a simple-to-use capability to define business rules by which both inbound and outbound e-mail messages can be classified into the Hummingbird Enterprise content repository.

E-mail is the most frequently used application for managing critical business content. The volume of e-mail continues to grow exponentially, from 2.6t messages in 2000 to 9.2t by 2005. Yet, 50 % of organizations do not have e-mail retention policies in place, and we're targeting this business opportunity as organizations recognize the importance of managing e-mail as a critical knowledge asset. Given our already strong competitive advantages in being first to market with a fully integrated content and records management solution, we are in an advantageous position to capitalize on this opportunity.

We made a strategic investment in extending Hummingbird Enterprise functionality to support mobile users. By 2005, over 50 % of workers will be using mobile devices to access business applications. Our mobility support enables users to access, manage and act upon Hummingbird Enterprise business content from a wide range of mobile devices such as smart phones and PDAs.

Many organizations today prohibit the use of instant messaging applications for security reasons. Our strategic direction is to provide a secure corporate IM infrastructure that, by design, does not inter-operate with publicly available IM networks. To this end, we have significantly enhanced the value of Hummingbird Enterprise by incorporating presence management and secure Instant Messaging, which captures discussion content in real-time and preserves the context of discussions in a secure, searchable manner.

We've released and enhanced the Web top client that leverages all of our technologies. The new Hummingbird Enterprise Web top provides a highly considerable interface that is designed to present dynamic views of enterprise content. This enhanced capability enables our customers and partners to easily deliver highly considerable content management solutions that provide a unified view of business content in context, and we've made continuous improvements to the performance and scalability of Hummingbird Enterprise in order to facilitate both centralized and distributed deployments at the lowest cost of ownership.

Our product investments remain in delivering better integration between the components of Hummingbird Enterprise and enhancing our competitive advantage by providing seamless integration with the Microsoft desktop. There are four sources of incremental revenue that fuel the growth of the ECM business. First, the continued acceleration of our legacy docs [ph] open installed base to Hummingbird Enterprise DM. Second, we are further strengthening and consolidating our market leadership in our core markets in legal and government. Third, we are increasing our marketing and sales investments in the manufacturing and financial services segments. And forth, we are continuing to make incremental investments in cross-industry solutions designed to leverage the value of Hummingbird Enterprise.

Now, before I turn it over to Inder, as is our tradition, I'll give you some flavor on our deals in the quarter. This quarter, there were 70 deals over 100K, for a total of 15.7 m, and a few of the customers were Pfefferchance [ph], regional municipality of Waterloo, two large U.S.-based state police departments, Renault and Xerox.

Thank you. At this point, I'll turn it over to Inder.

Thank you, Barry. Good evening, ladies and gentlemen. Thank you for joining us on this conference call for the announcement of our second quarter, and I'll give you the details of financial highlights. Certain of our comments are forward-looking statements, which involve risks and uncertainties. Actual results could differ materially as a consequence of a number of factors, including changes in market and competition, technological and competitive developments, 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-- in various [ph] security commission and with the Securities and Exchange Commission. Also, please look at the press release for a complete statement on this.

We have reported our financial results in U.S. dollars and in accordance with U.S. GAAP. Some of the numbers exclude the affect of certain items, which are later defined. 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. Sales for the second quarter were 54.7m, up by 16.3% from a year ago. Hummingbird Enterprise Solutions revenues were 36.9m, while connectivity sales were 17.8m. Hummingbird Enterprise Solutions were up by 25.9%, significantly higher than the second quarter of last year, and 11.4% higher than the first quarter of this year.

Total operating expenses this quarter were 39.1m, up from 34m in Q2 of fiscal 2003. EBITDA was 10.3m, which was 18.8% of sales, compared to 10.1m, which is 21.4% of sales in the second quarter of last year, and also compared to 9.2m, which is 18.3% of sales in the first quarter of the current fiscal year.

Adjusted net income in the current quarter was 6m, up slightly from 5.9m recorded a year ago. As a percentage of sales, adjusted net income in Q2 was approximately 11% compared to 12.5% in the second quarter of fiscal 2003. Positive cash flow generated from operations in the quarter was 3.7m. Cash, including short-term investments and net of debt, was higher from the previous quarter at 116.9m [ph]. Before revenue [inaudible] increased quarter-over-quarter, and they were at 65.3m in the second quarter, up 8.7m from the first quarter of the current year and higher by 17.2m from a year ago.

I will now provide some more details of the operations here. As mentioned earlier, sales for the current quarter were 54.5m. Revenue from enterprise solutions was 36.9m, an increase of 25.9% from the second quarter of last year. In the current quarter, enterprise solutions accounted for 68% of total revenues compared to 62% of the same quarter last year. Revenue from connectivity was 17.8m. Product revenues were at 25.3m, higher by 3.7m from the first quarter of this current fiscal year. Services revenues were 29.4m, an increase from the last year of $7.2m and up by $1m from the first quarter of fiscal 2004.

As previously noted, adjusted net income, which excludes amortization of intangibles in process, research and development expenses and deferred income tax rate adjusted net of-- all net of related taxes was 6m for the quarter compared to 5.9m from the same quarter a year ago. Adjusted diluted EPS based on adjusted net income was 34 cents compared to 33 cents in the second quarter of last year, and 30 cents in the first quarter of the current fiscal year. The current adjusted diluted EPS is based on diluted weighted average number of shares of 17.8m. Geographical breakdown of the sales in the quarter was Americas, 60%; Europe, 34.2%; the rest of the world is 5.8%.

In the current quarter, the gross profit was 88.6% of sales, down from 91.7 in the same quarter of last year. The decrease is primarily due to companies acquired during last year, which have a higher service component. Sales and marketing expenses were 24m, which is 43.9% of sales, up from 20m from the second quarter of last year, which was at 42.5% of sales. The increase in sales and marketing once again is mainly due to inclusion of those companies acquired during the last fiscal year. R&D expenses were slightly higher, at 10m in the current quarter. This was compared to 9.1m from a year ago. As a percentage of sales, these expenses were at 18.3% compared to 19.4% in the same quarter of the previous year. Once again, the R&D expenses were higher due to additional expenses related to companies acquired last year.

G&A expenses were 5.1m in the current quarter compared to 4.9 m in the second quarter of last year. As a percentage of sales, they decreased to 9.4% compared to second quarter of fiscal 2003, which was 10.4% of sales. Total operating expenses, as I mentioned earlier, excluding amortization of intangibles and other items, were 39.1m, up from 3 m in the same quarter last year. As a percentage of sales, total operating expenses were 71.5%, down from 72.3% in the second quarter of the fiscal year-- of the previous year, and compared to 36.1m in Q1 of fiscal '04, which was 72.2% of sales.

Overall, operating expenses were higher in the current quarter, as I mentioned earlier, in comparison to the second quarter of last year, due to inclusion of expenses of companies acquired during the prior fiscal year. EBITDA was 10.3m, 18.8% of sales for the quarter, compared to 10.1m, which is 21.4% of sales in the second quarter of prior year. This was higher compared to 9.2m for the Q1, which is 18.3% of the sales there. Amortization of intangibles was 5.8m, up 1.4m from Q2 of last year. This increase is due to acquisitions that took place last year, the entire quarterly amortization amount related to various acquisitions made by the company.

Interest and other income consists from earlier of net interest income. Interest tax expense was 1.8m this quarter. Operational tax rate is approximately 38% for the purpose of adjusted net income and adjusted EPS. Overall, the company reported a net income of 2.1m, and basic and diluted earnings per share of 12 cents for the quarter compared to net income of 1.8m and basic and diluted earnings per share of 10 cents for the second quarter of the previous year.

Adjusted diluted EPS based on adjusted net income was 34 cents compared to 33 cents in the second quarter of last fiscal year, and 30 cents in the first quarter of the current fiscal year. Adjusted diluted number of shares for the quarter was 17.8m. The six-month results were revenue for the six months ended March 31st, 2004, were 104.7m, an increase of 14.9% over the previous year. Adjusted net income for the six months ended 31st of March, 2004, was 11.3m compared to 11m for the first six months of last year. Adjusted diluted earnings per share of the current six months based on adjusted net income was 64 cents compared to 61 cents of last year. Net income reported for the current six months was 8m-- I'm sorry, .8m, resulting in diluted earnings per share of 4 cents compared to net income of 3.8m and diluted earnings per share of 21 cents for the six months of fiscal 2003.

Turning to the balance sheet, total assets were at 368.4m, up from 366.5m as of the end of the previous quarter. Cash, including short-term investments and net of bank debt, was 116.9m as compared to 113.4m at the end of the prior quarter. Accounts receivables were 59.4m, up from 52.9m at the end of the last quarter. DSOs based on trailing four quarters was 105 days compared to 97 days for the previous quarter. The AR more-- less than 90 days is 86% of total AR. Less than 120 days is 87%. The fixed assets remained unchanged at 13.7m from-- same as the last quarter.

As mentioned earlier, intangibles decreased to 165m from 170.7m at the end of the first quarter. Goodwill at 31st of March, 2004 was 102.6m. Deferred revenue was higher at 65.3m, up from 56.5m at the end of the last quarter. Shareholders equity was 263.2m, slightly higher at the end of the previous quarter. Number of employees at the end of the quarter was 1,428.

For the benefit of those who may have joined the call slightly late, in summary, I'll just summarize the results. Sales were $54.7m, up by 16.3% from the second quarter of last year. Revenue for enterprise solutions were 36.9m in the quarter, up by 25.9% from the second quarter of a year ago. EBITDA was 10.3m, up from 10.1m in Q2 of last year. Adjusted net income was 6m, and adjusted earnings per share were 34 cents, both higher compared to a year ago. Positive cash flow generated from the operations were 3.7m for the quarter. Cash net of bank debt rose by 3.5m from the previous quarter. Deferred revenues continued to rise, and they were up by 8.7m in the quarter.

With that, I thank all of you, and now we will open for the questions.

Yes, I think all right now we will open for the questions, so if an operator can take care of all of this.

Thank you. One moment, please. Ladies and gentlemen, we will now conduct a 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-tone prompt acknowledging your request. Your questions will be polled in the order that they are received. Please make sure you lift the handset if you're using a speakerphone before pressing any key. One moment please for your first question.

Your first question comes from Paul Steep from Scotia Capital. Please go ahead.

Good evening, gentlemen. Fred, perhaps you could tell us a little bit about your outlook for Q3 and what you'd be looking for the business to deliver in that quarter.

It's quite-- not simple question of Q3, because Q3 goes to the summertime. Probably I will be really happy guy if we will do between probably 55, 55-1/2. It will be quite conservative in summertime. And usually, our-- the best quarters is second quarter and the fourth one.

And what about on the bottom line? What would you expect to see there?

On the bottom line, probably I will do it between 35, 36.

OK, great, and then, if we look at the pickup in Hummingbird Enterprise 2004, could you talk a little bit about any of the initiatives you're doing to try to drive upgrade from the install base?

It's constantly going on, I mean, upgrading from two tiers to three tiers, every quarter, every month, every day, these customers. So, what your question is, to give you how many seats, or what?

I guess I'm looking to see if you guy's done anything, because I notice there's a significant jump in the deferred revenue. Have you been doing anything to really motivate people to switch over to the newer version of the product, or is it just sort of--?

--No, absolutely. Absolutely first of all this one, and a few multi-year revenue maintenance deals we got during this quarter, anyway. This is probably why you will see deferred revenue, I mean, more than usually.

OK. And on those multi-year deals, was there anything specific that was sort of driving people to sign up for multiple years, or is this a new initiative you're after?

No, I think it's probably you're talking about familiarity [ph] of product or confidence in company, this is what they're doing. I don't see any really abnormal stuff here. We think it's OK.

Yes, Paul, I would just follow up with another comment after that because of these deals, which we hope to collect during the quarter. I think our DSOs, which have ticked up from 97 days last quarter to 105, we hope to bring it back to the same region of about 95 to 97 days end of next quarter.

OK. And the last one I'd have would just be on the sales rep plan. Is there plans to hire, or do you think you have sufficient capacity within the current staff out there, to make sort of the numbers for the remainder of the year?

No, I don't think so we need to hire anybody else in sales organization, from my standpoint. It's enough people we need to generate whatever we address next quarter, or even quarter four what I have in my mind.

Great, thank you.

Thank you.

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

Yes, good afternoon, gentlemen. Can you talk a bit about your acquisition pipeline? You had talked quite specifically about some large transactions you were looking at, and just wondering how that's progressing. And also, know that you did buy some stock back this quarter. Can you talk a little bit more about your intentions going forward on that front? Thanks.

First of all, we're still buying equity from the open market. During this quarter, we bought not so much, probably about 70-- 50,000 in this range.

Fifty thousand?

Yes, 50,000 we bought. We will probably continue to do it in quarter three and quarter four probably. It depends really on equity, what kind of price of shares will be tomorrow, after tomorrow and so on. But, last year, we researched about 950,000 gross [inaudible] shares. This year, we will see how the market will behave, because I think company is doing very well right now, and we will see what the market will-- how will react market all this. And if it's-- we will not satisfy this price, all the equities for sure we'll start to buy again, no doubt.

Now, what you were asking second question?

Your acquisition pipeline and how that's going.

Acquisitions. What-- interested in acquisitions, future acquisitions, or what?

You had talked previously about some substantial acquisitions.

Yes. Still, I mean-- again, I'm saying everybody has to have patience. We're still on the list, and still, we [inaudible] in our plans, and probably during this fiscal year, it will happen anyway, so this is not only on the paper.

And can you talk a little bit about how much of your revenue is coming from your existing customer base, please?

From existing customer base?

It hasn't changed, Howard. It's more or less about 60 to 65, and slightly higher than that. So, it's pretty much the same as what we have seen in the recent past.

And then, just one final question. You're obviously continuing to do very well in the legal vertical and the document management side. How much growth potential do you see left there, or is that getting to be kind of a saturated market?

Well, sure. I'm sure we see upside with our customers and new customers and so on, and mostly with Enterprise 2004 product, what we right now is very huge, much integration, and plus a lot of new features, I think.

Howard, it's mostly, don't forget, pushing our end product, other products oriented towards legal, such as docketing and client matter, also pushing collaboration there and various other components, as well, of Hummingbird Enterprise. So, the upsell is, you're right, it's not necessarily just in DM, but it's in everything else in Hummingbird Enterprise around it.

Okay, great. Thank you.

Thank you.

Your next question comes from David Shore from Desjardins Securities. Please go ahead.

Yes, thanks, couple questions. How many seats did you have upgraded to DM 5.X in the quarter?

You're talking about how many seats total upgraded this quarter?

Yes.

I don't know exactly right now. You really got me.

David, we don't have that number handy at this point in time.

We can [inaudible] give you after it. We have to take a look for these kind of statistics.

Okay. Can you break out for us-- you gave us some indication that-- some presentation about percentages by different vertical. Can you kind of update where you are in the quarter?

Legal was about 25%. Government, it was about 22, and now financials, it was about 12, and the rest is generic.

OK, last question. Inder, can you break out for us how much revenue this quarter would have come from acquired businesses?

David this is a repeated question which we have explained time and time again, that we have integrated the operations, and it's impossible for us to separate two businesses now, so I don't have that number with me.

OK, thank you.

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

Thanks very much. Actually, most of my questions have been answered, so a couple are minor things. When you're looking at your acquisition strategy, Fred, do you tend to look at private companies or public companies? What-- is there any trend there we can draw from?

What you're speaking, David, really doesn't matter, any private company or a public company, I mean, from point of acquisition. They all really focus on the companies will give us more presence on the market from point of market share. This is a major stuff, and it can be-- company is product in our area, in the enterprise content management, or it can be integrated, is vertical solution, what we'll be using our technology to bring the same solution what they're doing to their market. So, to my point is only one. It's increase market share as soon as possible, and again, I'm saying I have patience and company has patience, and I'm sure you guys have patience, and during this year it will happen.

Right, OK. Do you know-- is there a comment you can make about the pricing pressure in the marketplace? Are you finding is there any increase to pricing pressure, competitive pressure that way, or how are you feeling about things?

Yes, there pricing pressures, and there are pricing pressure from point of documenting, for example, from such companies, because right now they're already not public company, so probably they're not so worried about their figures. So they go really for very low prices, their seat on document management solution side what you find. But again, it didn't put us in such situation that we have to take our [inaudible]. Secondly, I think we see some, let's say, down prices from companies like I manage, would acquire from-- by inter [inaudible] guys. This is what I saw, too. The rest I think is more or less okay, this is okay.

Okay, thank you very much.

From point of connectivity market, it's very stable, and we're doing it-- I think it's okay. It's kind of-- economy works outside. So, it seems to me, again this quarter was very, very positive, from my standpoint.

Great, thank you very much.

Thank you, David.

Your next question comes from Richard See [ph] from Merrill Lynch. Please go ahead.

Yes, just a quick question on the connectivity side. You seem to have reversed a decline this quarter, which is positive. Can you attribute that to anything? You've talked before in the past that it's related to the economy. Is that the case, or are there any initiatives in-house that are being done to help out in this reversal?

No. First of all, still, R&D is working, and R&D-- special R&D for the connectivity we brought to the market. I mean, our 9.0 revision, whether it's from point of security, from point of many new features, from point of connectivity, I mean, the problem is-- and I mentioned before, during the-- probably last two years, this market stabilized, and I expect nearly every quarter let's say somewhere between $17 and $18m worldwide. This is what really has happened, and it seems to me it will be, until really, market will not recover, or economy will be not changed from point to be more at once to more promisable than today. I think until this time, I think connectivity will be in 17, 18m, in this range.

Okay, and second and final question. With respect to your strategy to kind of move beyond the legal and government market, can you kind of give us some examples of where you're going to be spending these resources, and examples of what programs are in place to kind of tackle other vertical markets outside of legal and government?

Well, we've been having a lot of traction lately in the financial markets, and what we've been doing is moving whatever we've been dealing with in one customer, we've been trying to move that off into others, and that's been quite successful. But even in legal, there's still traction there. We formed recently the Legal CIO Advisory Board, which has been, I think, enormously successful to actually find out where we should be going vis-à-vis other products within legal, as well as our core products. But wherever we're moving, I mean, the basic way you move into a new vertical is you get a couple of really-- sales within that space, and you see where the product actually ends up, and you try to make that as repeatable as possible, and that's basically what we've been doing for the last while. And I think in some of the areas that we've been moving, such as financial, that's been pretty successful.

Okay, great. Thank you.

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

Hi. Inder, you commented on your connectivity bookings last quarter, which was about 18.5. Was it about the same level in Q2?

Approximately, yes.

Okay, and next, on the gross margins, do you expect your gross margin to remain around the 89%, or do you forecast some improvement in the second half? Thank you.

No, we don't expect too dramatic change in the gross margin, Steven, and as I mentioned earlier, these acquisition-acquired companies have a higher service component. So, I don't expect a too dramatic change here in that number.

Okay, thanks.

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 key.

Your next question comes from Scott Penner from TD Securities. Please go ahead, sir.

Yes. Barry, can you just update me on your portfolio of industry solutions right now, and what ones we should be looking for?

Well, we've got a number of initiatives as you've probably heard in the past around GIS and contract management. There are-- it is the Hummingbird Enterprise 2004 for legal, which the product is totally oriented towards legal. There's a financial package that we're working on coming out. There's various other solutions along those lines. But basically, I think at Summit, you saw what we probably-- officially announced. There's a couple of others that we're working on now which haven't yet been announced, but they all tend to be within the same area. Either there's different twists in it within legal, financial, there is like that.

Is there any expected fine point on the time line for the financial?

Well, as I said, some of them I think are actually being deployed at customers now, but they're not actually officially released as a marketed, repeatable solution. I think we're trying to get as much as we can input from customers that are actually implementing this stuff now as to what we should actually be pushing forward. But, I'm pretty sure that, over the next few quarters, you're going to see stuff actually be talked about a little bit more in this area.

And is it possible to separate out the contribution in general from those-- from your vertical solutions?

It's pretty tough at this point because, as I said, they all start off the same way. They all start off basically by more or less generic product going in and being customized towards a specific solution, and then we try to repeat it at other customers. So, it's pretty hard at this point to break out what is a solution. It was easier, but it's pretty hard at this point.

Are these solutions generally taken to market by partners or by your own sales force?

They typically start off with our own sales force and, after that, they move off into partners.

Okay, great. Thanks.

Your next question comes from Paul Lechem from CIBC World Markets. Please go ahead.

Thank you. Just to follow up on the vertical market questions, have you done anything to the sales force in terms of putting specific salespeople into the verticals, focusing on individual verticals? Have you done anything like that to try and drive sales in the verticals like that?

Well, it depends. I mean, generally, there's-- in legal and government, there's specific salespeople, and there have been for quite a long time. There are people being trained in all this, and we have people even now working specifically within financials. There are people that have been trained on the other solutions, if you will, that we've been discussing, but it's not, at this point, an individual sales force.

So, out of the 150 odd sales reps you have on the content management side, how many of those will be focused on individual verticals?

You'd have to add up the legal, government and financial people. I don't maybe-- I don't know if Inder has that number.

It's probably three-quarters, 75%.

Okay. On the acquisition front, you mentioned that the acquisitions you made over the last year were more heavily focused on or slanted towards the services side of the business. Can you explain why that is, and are you doing anything to those acquisitions to start to drive more license-type revenues from them?

First of all, they [inaudible] licensing, too, for sure, but they're mostly involved in services because, again, from acquisition standpoint, what we did last year, it was mostly government sector and legal sector. If you take a look, for example, what it is was government sector, I mean, this [ph] for government sector, is in legal ones-- I mean, legal keys is what in New York. It was in legal sector, right, and - who left - and KLA was in legal in England. That's it. So, we're really-- everything what was acquired was positioned to increase presence and bring more experience in this kind of market spaces, legal and government. And it works, by the way, very well.

Now, we're looking for another vertical, like finance, and maybe utilities or manufacturing really to start this one. And this is, too, you have to bring extra people probably from point of expertise, and again, it's going on okay.

Okay. The geographic mix of business this quarter, looked like North America was a bit stronger and Europe a bit weaker than the last couple of quarters. Can you talk about that a bit?

Well, I will not say this, by the way. If you take a look on our staff, I mean, you have U.S. about 60% U.S., right, 60% U.S., 34.2% it was Europe, and 5.8 the rest.

That's about a 5% swing from Europe to North America. Compared to-- your last quarter to Q1, that's about a 5% swing in revenues from Europe to North America. I don't know if that's anything you can talk about in terms of the geographic.

[Inaudible] up on American side, right? Europe was down 4 or 5%. The rest is the same.

Yes. Paul, if you take a look at the whole of last year, North America was about 58 %, so we are in the ballpark numbers. There's nothing--no major shift there as such.

No. Sometimes it happens one quarter, but the U.S. then Europe sometimes it happens Europe better than the U.S.

Last question. Can you-- do you have a breakout in terms of what the foreign exchange impact was on the top line?

Well, I can tell you what the net impact on foreign exchange during the quarter was slightly negative, but it wasn't a material amount. I mean, this is what I'm saying, about 4 to 500,000.

Sorry, 4 to 500,000 on what?

Net, revenues minus expenses.

That's the net impact to the bottom line?

Yes.

Okay, but to the top line you don't break that out?

No, we don't do that. There are particular reasons for that, the way they sell in Europe, so it's a very detailed, long discussion on that, how exactly is to be calculated. That's the reason why we don't try to break that down.

All right, thank you.

Thank you.

Your next question comes from David Shore of Desjardins Securities. Please go ahead.

Yes, thanks. You had a nice little pickup in the larger deal category this quarter. Were there any deals over $1m?

Yes, one.

Okay, and was that a current customer or a new customer?

It was a new customer.

Okay. Inder, the sale and marketing expenses this quarter ticked up a little bit from first quarter. Is that mostly due to Summit? And we can expect that to come down a little bit?

Summit and a few other initiatives, which we have been taking, yes. No, we don't expect that to keep up that much dramatically increase, but more or less at these levels, you will see that sales and marketing expenses.

Okay, thank you.

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

Thank you, and good afternoon. I just have one question. It's regarding your Enterprise 2004. Can you just give us an update as to the timing of when you expect the revenue contribution to start to kick in, and just review what some of the components, where you expect to see some incremental revenue opportunities, or maybe another way of asking, were-- what is the revenue driver, or where should we expect to see incremental revenue from this product upgrade? Thanks.

Well, Hummingbird 2004, first of all, was announced at Summit, so there's people out there that are getting that product now. Second of all, we announced new areas of componentry completely in Instant Messaging and presence detection, some of the new mobility stuff, there was a new workflow component, much tighter integration between all the components. So, the point is, how many additional modules can you add in, but also how much more can these models contribute to actually making the sale in the first place is another way to do it, which is why it's pretty difficult to break out individual models, and it has been for years, because it's not just in Hummingbird Enterprise 2004.

The whole philosophy we've had, going back to when we first actually started this thing I guess in 2000, was develop the package to a point where you're pushing as much of the whole as possible so the customers can buy into it and see a migration path moving forward, whereby other modules can be put in. And then, one other example there is with our BI stuff. People don't have to go out and license third-party BI pools [ph] now with Hummingbird Enterprise because they can actually do all the reporting from within the package.

So, it's leveraging the stuff as much as possible to be part of a whole, and that's certainly evidenced with the new customers who are buying more than one component. I was out recently on a trip in the U.K. where I visited I guess between eight and 10 customers. There wasn't one of them that just had one component of our software, and that was actually quite interesting, because some of the ways they were using the product was actually quite novel. But certainly, in all cases, we've moved from a point where we're basically pushing just DM to pushing value-added, whether it's through records management, whether it's through collaboration portal, Instant Messaging, things of that area.

Okay. In terms of your sales force training on 2004, is that all fully complete?

No, it's not complete. As a matter of fact, there's some of it, which is happening later in this month.

And when-- so, everything will be complete by--?

--It's never complete. I mean, training is an ongoing thing, the product is ongoing involving, but certainly, Europe and the States, there's two major training sessions, which are happening. I think it's late April and early May is the other one.

Okay, that's great. Thanks.

You have a follow-up question from David Wright from BMO Nesbitt Burns. Please go ahead.

Thanks. I was just wondering your hiring plans, and I missed your total employee count, but do you have any plans for adding additional sales reps at this point?

Not at all.

Okay, and your total employee count?

1,428.

Thank you very much.

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

Okay. So first of all, I'm glad to see that-- to say the strategy for balance of fiscal 2004 is to stay focused on the fundamentals of our business and, specifically, continue to consolidate our strength in legal and government, expanding to additional targeted industries, especially manufacturing and financial services, extend our market [inaudible] solutions focus, remain committed to the proven management of the company's assets and financial resources, and to the principle of long-term and consistent wealth creation for our stockholders.

Once again, I would like to state that we are very happy with our quarter 2004 results, and again, thank you for joining us for this evening, and you will hear us probably after the third quarter. Thank you very much again for your time. All the best. Bye.

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