Open Text Corp (OTEX) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Hummingbird Limited Q3 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 question. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at anytime. I would like to remind everyone that this conference call is being recorded on Tuesday, July 20, 2004, at 5:30 PM, 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 third quarter fiscal 2004 conference call. I have with me Barry Litwin, President, and Inder Duggal, CFO. I am pleased to report strong revenue and earnings growth in our third quarter. Total revenue for the quarter was $56.2m, which represents an increase of 16.9% over quarter three fiscal 2003. Total enterprise content management revenue is $39m, represents an increase of 25.3% over quarter three fiscal 2003. Total Connectivity revenue for the quarter, it was $17.2m. Adjusted earnings for the quarter was $0.36, which represents 38% increase over quarter three fiscal 2003. Now it's net cash, what we finished this quarter, it's $127m. The enterprise content management market continue to consolidate. Demand for integrated content life cycle management solution is accelerating.

A recently published document titled, content and document management markets shows growth. Estimated total worldwide enterprise content management software license revenue is $1b in 2003, up 9% from $940m in 2002. The primary business drivers, was increased demand, our efficiency improvements, and regulatory compliance. A recent AM industrial watch survey of 1800 users of content management technologies, shows that their top priorities are document control or asset management, and information capture, including email management. The AM survey concludes, that the predominant business driver besides the implementation of content enabling technologies, is on expense reduction in revenue enhancement.

This market drivers shape our product and marketing strategy. We are now well into the execution phase of our strategy, that we initiated two years ago when we delivered the first version of Hummingbird Enterprise. Due to a release of Hummingbird Enterprise in 2002, we have been steadfast in maintaining our focus on the three basic fundamentals of our business. They are as follows. First, preserve our high-margin maintenance revenue. Revenue streams by bundling our content enabling technologies into an integrated suite. To provide incremental volume by up selling the integrated Hummingbird Enterprise suite to our installed base, and extend our market reach lease content life management solution. Our key performance indicators for the past three fiscal years show a consistently positive trend line. Our strategy of delivering an integrated suite and focusing on line of business enterprise content management solutions it sounds and generate shareholders value.

Distribution of total revenue between our core Connectivity and our Enterprise Content Management business has shifted from 41% Connectivity and 59% Enterprise Content Management in fiscal 2002 to the current split of 34% Connectivity and 66% Enterprise Content Management revenue. Year-over-year growth of our Enterprise Content Management business is outperforming overall investment growth. Our Enterprise Content Management business continues to diversify. In fiscal 2002, approximately 35% of our Enterprise Content Management revenue was derived from the commercial sector. Today, it now contributes commercial sector around 51% of our Enterprise Content Management's revenue in fiscal 2004. Within the commercial sector, we have seen increased adoption of Hummingbird Enterprise in financial services and manufacturing segments. We continue to foster customer loyalty and maintain high maintenance renewal rates from our existing installed base of customers.

Investments in line of business enterprise content management solutions such as Contract Management, Correspondence Management, and GIS are generating higher value revenue. These solutions are based on an integrated packaging and branding of Hummingbird Enterprise. Our Messaging and consists business challenges that our customers solve with Hummingbird Enterprise help us develop more market-driven and value-based packaging of Hummingbird Enterprise along with services and partnership that results in higher transaction values. As the Enterprise Content Management market mature, not only can we anticipate further consolidation, but also a shift to higher value enterprise content life cycle solutions. Our research tell us that our customers are looking to us not only to deliver an integrated content-enabling suite, but reusable templates to help them accelerate time-to-market delivery of specific content management solutions such as Compliance, Contract Management, and Case Management. Accordingly, our investments, going forward, will continue to focus on the delivery of industry-specific content life cycle management solution. We are also making significant and ongoing investments in advancing the functionality and performance of Hummingbird Enterprise.

During the second quarter of fiscal 2004, we have released Hummingbird Enterprise 2004 that delivers significant advancement in functionality, integration, and performance. In the third quarter, Gartner recognized Hummingbird as a market leader in the Smart Enterprise Suite market category. This recognition serves as an important acknowledgement of Hummingbird as not only a visionary in having delivered to market an integrated suite ahead of our competitors, but also it is an indication of our ability to execute. The Enterprise Content Management market is going through turbulent and, at times -- and incredible changes. M&A activity is rampant. In this rapidly changing competitive landscape, we are standing our ground, and we remain focused on the fundamentals of our business. We maintain and consolidate our market position in the Enterprise Content Management increase as a whole of value to prudent combination of organic growth and acquisitions, while maintaining a conservative fiscal management of the company assets and generate free cash flow from operations. Not too many of us can claim to get delivered and we are committed to this strategy and stay the course. I will now turn the discussions to Barry Litwin.

Thank you Fred. Good evening ladies and gentlemen. As Fred mentioned, we continue to see excellent adoption of Hummingbird Enterprise 2004 in both our existing customer base and new accounts across multiple verticals. There are number of factors that should lead to the success of Hummingbird Enterprise 2004. We have correctly anticipated the need for integrated e-mail management functionality as part of an enterprise content management solution. Hummingbird Enterprise 2004 features excellent integration with Microsoft Outlook, providing our customers access to their business content from within Outlook while seamlessly managing e-mail in Hummingbird Enterprise repository. In addition, a server based rules-driven automated e-mail management server provides IT with the ability to store corporate e-mail and manage the lifecycle along with corporate documents for corporate governance and regulatory compliance. We continue to elaborate on any competitive advantage in providing advanced search and information retrieval capabilities in our enterprise content management offering.

Based on customer feedback, this quarter, we released new capabilities that provide knowledge workers with advanced knowledge management functionality from within Microsoft Outlook. Hummingbird Enterprise users can now have access to their enterprise taxonomy and perform federated searches across multiple content sources, including non-Hummingbird repositories such as file systems, ODBC data sources, Microsoft Exchange repositories and websites. This level of advanced knowledge management functionality is unique in the industry. Further enhancements result in optimizations for our platform to better perform in large global deployments. Our latest service release, released this quarter included WAN optimization for up to five times faster performance for common tasks over a slow WAN connection, as well as more sophisticated caching functionality to better serve remote office locations in a multi-office deployment scenario.

Some of the largest global organizations around the world are Hummingbird Enterprise to store and access their enterprise content and these enhancements ensure a consistent delivery of enterprise content to every desktop, regardless of where the user is physically located. Our ability to deliver certified records management capabilities for all the major markets we plan allows us to meet and exceed our customer's records management needs, making Hummingbird Enterprise the ideal platform for corporate governance and regulatory compliance initiatives. Our industry leading mobility solution that provides access to enterprise content through a variety of mobile devices continues to give Hummingbird an edge over competition, especially in deals involving government and law enforcement. A well-documented solid API set is at the foundation of Hummingbird Enterprise. Coupled with the expertise of our own professional service organization and our excellent partner network able to integrate and provide customer functionality faster on time and on budget, compared with our peer group of competitors.

And last but not least, our new in focus of line of business solutions for a variety of verticals is now bearing fruit and is helping us deliver real business value to our customers rather than just deliver generic enterprise content management functionality. We continue to look for reputable business solutions so that we can package to decrease customization effort and deployment time line to our customers in order to provide WAN with a competitive edge. Hummingbird Enterprise 2004 has a mature, proven, feature-rich enterprise content management platform. We will continue to build on this robust platform, deliver new features and functionality and provide package business solutions based on market demand. We believe we have a unique competitive advantage over our peer group of competitors, most of which have recently made acquisitions and now face the integration challenges. We are confident we will continue our leadership position in the enterprise content management market.

Now as it is our tradition, I'd like to share with you some of the deals in this quarter which were over 100,000. This quarter, there were 72 deals totaling $19.9m, within the 72 deals that represents an average deal size of 277,000 compared to the number of last quarter where there were 70 deals totaling $15.7m and within those 70, there was an average of 224,000. Some of the customers within this set were Capital Metropolitan Transportation Authority, Department of the Army, Commerce Bank, NA, London Fire and Emergency planning, Barclays Capital Services Ltd. and the New York Police Department. Thank you, and I'll now turn it over to Inder for some financial and operational highlights.

Good afternoon, ladies and gentlemen. Dozen '05 comments are forward-looking statements, which involves risks and uncertainties. Actual results could differ materially as a consequence of a number of factors including changes in market and competition, technological and comparative development, and potential downtrends in economic condition generally. Additional information on these and other potential factors that could affect the Company's financial results are included in documents filed with Ontario Securities 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 results in US dollars and in accordance with US GAAP. Some of the numbers exclude effects 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 operation. Sales for the third quarter was $56.2m, up by 16.9% from a year ago.

Hummingbird Enterprise Solutions revenue were $39m, while Connectivity sales were $17.2m. Hummingbird Enterprise sales were up 25.3%, significantly higher than the third quarter of last year, and 5.8% higher than the second quarter of this year. The total operating expenses this quarter were $40m, up from $36.2m in Q3 of fiscal 2003. EBITDA was $10.6m, which is 18.8% of sales compared to $8.1m versus 16.8% of sales in the third quarter of last year, and $10.3m, which was 18.8% of sales in the second quarter of the current fiscal year. Adjusted net income in the current quarter was $6.3m, up from $4.6m recorded a year ago. As the percentage of sales, adjusted net income in Q3 was slightly higher at 11.3% compared to 9.6% in the third quarter of fiscal 2003 and about 11% in Q2 of the current fiscal year. Positive cash flow generated from the operations in the quarter was $12.1m. Cash including short-term investments was highest on the previous quarter at $127m with no bank debt this quarter. Deferred revenues continued to increase quarter-over-quarter to $67.3m in the third quarter, up $2.1m from the second quarter of the current year, and higher by $16.5m from a year ago. I will now provide a little bit more detail on the operations.

As mentioned earlier, sales for the current quarter were $56.2m, revenue from Enterprise Solutions were $39m, an increase of $25.3m from the third quarter of last year. In the current quarter, the Enterprise Solutions accounted for 69.4% of our total revenue compared to 64.8% in the same quarter last year. Revenue from Connectivity was $17.2m, product revenues, Connectivity and Enterprise Solutions together were $27.5m, higher by $2.2m from the second quarter of this year and $4.5m higher at third quarter of last year. Services revenues were $28.7m, an increase of $3.6m from a year ago. As previously noted, adjusted net income, which excludes amortization of intangibles, in process research and development expenses and deferred income tax rate adjustments, all net of related taxes was $6.3m for the quarter compared to $4.6m from the same quarter a year ago. Adjusted diluted EPS based on adjusted net income was $0.36 compared to $0.26 in the third quarter of last fiscal year. The current adjusted diluted EPS is based on diluted weighted average number of shares of 17.7m. In the current quarter, the gross profit was 88.3% of sales compared to 90.1% in the same quarter of last year. The decrease is mainly due to the companies acquired during the last year, which has a higher service component. Sales and marketing expenses were $24.7m, which is 43.9% of sales up from $21.1m from the third quarter of last year, which was 43.8% of the sales. The increase in sales and marketing expenses are mainly due to inclusion of cost of companies acquired during the last fiscal year.

R&D expenses were $10.1m in the current quarter compared to $9.9m from the year ago. As a percentage of sales, these expenses were 18% compared to 20.7% in the same quarter of the previous year. G&A expenses remained unchanged at $5.2m in the current quarter compared to third quarter of last year. As a percentage of sales, they decreased to 9.3% compared to third quarter of fiscal 2003, which was 10.7% of sales. Total operating expenses including amortization of intangibles and extraordinary items were $40m up from $36.2m in the same quarter last year. As a percentage of sales, total operating expenses were 71.2% down from 75.2% in the third quarter of the pervious year. Overall, the operating expenses were higher in the current quarter in comparison to the third quarter of last year due to inclusion of expenses of companies acquired during the prior fiscal year. EBITDA was $10.6m, 18.8% of sales for the quarter compared to $8.1m, 16.8% of the sales in the third quarter of prior year. Amortization of intangibles was $5.8m up $1.1m from Q3 of last year. This increase is due to the acquisitions that took place last year. Interest and other income consist primarily of the net interest income. Income tax expense was $1.9m this quarter. The operational tax rate is approximately 37% for the purposes of adjusted net income and adjusted EPS. Overall, the company reported a net income of $2.4m and basic and diluted earnings per share of $0.13 for the quarter compared to a net income of $1.4m, and basic and diluted earnings per share of $0.08 for the third quarter of pervious year.

Adjusted diluted EPS based on adjusted net income was $0.36 compared to $0.26 in the third quarter of last fiscal year and higher than $0.34 reported in the second quarter of the current year. Adjusted diluted number of share for the quarter was 17.7m. I'll come to the nine months results; the revenues for the nine months were $160.9m, an increase of 15.6% over the previous year. Adjusted net income for the nine months ended 30th June, 2004 was $17.6m compared to $15.6m for the first nine months of last year. Adjusted diluted earnings per share for the current nine months based on adjusted net income was $0.99 compared to $0.87 for the prior year. Net income for the current nine months period was $3.1m reported resulted in diluted earnings per share of $0.18 compared to net income of $5.2m and diluted earnings per share of $0.29 for the first nine months of 2003. Coming to the balance sheet, the total assets were $367.7m compared to $368.4m as at the end of the previous quarter. Cash including short-term investments were $127m compared to $116m at the end of the prior quarter.

Accounts receivable were $54.2m down from $59.4m at the end of the last quarter. DSOs based on trailing four quarters were down to 92 days compared to 105 days for the previous quarter. The fixed assets were $13.4m, down from $13.7m in the previous quarter. As previously mentioned, intangibles decreased to $159.2m from $165m at the end of the second quarter. Goodwill at 30 June, was $102.6m. Deferred revenue was higher at $67.3m up from $65.3m at the end of the last quarter. Shareholders equity was $264.2m, slightly higher than at the end of the previous quarter. During the quarter, 68,300 shares were repurchased at a cost of $1.5m. And the total numbers of employees at the end of the quarter, were 1,438. For the benefits of those who may not have joined the call in time, I will just summarize the results once again. Sales were $56.2m up by $16.9% over the third quarter of last year. The revenue for enterprise solutions were at $39m in the quarter up by 25.3% from the third quarter a year ago. EBITDA was $10.6m, up from $8.1m in Q3 of last year. Adjusted net income was $6.3m, and adjusted earning per share was $0.36, both higher compared to a year ago. Positive cash flow generated from the operation was $12.1m for the quarter. Cash rose by $10.1m from the prior quarter, deferred revenue continued to increase, up by $2.1m in the quarter. With that, I'll hand it over to Fred for a final remarks here. Thank you once again.

I think we're ready for the 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 touch-tone phone. You will hear a three tone prompt, acknowledging your request. Your questions will be polled, in the order that they are received. Please ensure you lift your handset, if you're using a speakerphone before pressing any key. One moment please, for your first question. Your first question comes from Scott Penner from TD Newcrest, please go-ahead sir.

Thank you. Barry, just on the large deals first of all. Obviously, the average is up quite substantially. Are there any big deals in there that skew it?

No. There's not that many extraordinarily large deals in there. No.

Are they just for the record or there any million-dollar deals of course?

No.

Okay. And Fred, last quarter you mentioned seeing some pricing pressure from -- specifically some of the acquired Companies Documentum and iManage. Is this sort of -- did it continue this quarter or did it get any worse?

Not worse, but still. We have always feel -- price, I mean, pressure and mostly from iManage guys, probably the Documentum staff to. I'm impressed with the low price deficit, but, mostly it's iManage doing this stuff, but I think we're staying on the course and as usual really trying to keep the prices necessary to generate the profit.

Okay, the DSO was down nicely this quarter. Is there anything that you can kind of point to, as a trend or a reason why the DSO was down and are you still kind of looking at the ninety-day level for the end of the year?

No Scott, as I mentioned, last quarter was a bit of anomaly, but the quarter before that was 95 days, and I have mentioned this time and time again, that our target is to bring them down less than 90 days, if not less than 80 days or so. So, it's a continued positive collection network and educating the sales people to sell properly, I guess.

Okay. Thank you.

Thank you.

Your next question comes form Paul Steep from Scotia Capital. Please go ahead sir.

Hi. Fred maybe you could chat a little bit about your outlook on the market given the difficulties we've seen from a number of different firms. You got to get your perspective on what you would seek, I guess heading into the next quarter and the remainder of the year, maybe?

As I mentioned before, mostly it wasn't right now, I mean consolidation is consolidation. Everybody looking to be, really as big as possible from point of critical mass. Now, but right now in position, I mean to do probably the same thing and always have the same patient guys, because we'd like to really go for traditional, what it really makes difference from company-wise and from point of shareholder's value. Now, does it change some -- our in market, tremendously changed the from another point I don't think so. I think it's right now, it's everybody accept what you call Enterprise Smart Suite business or Enterprise Content Management business, and honestly speaking, we execute the task what we promised before. And I think whatever you see during the year, what we did and what we are doing, I think it is proof that we are on right course, and again I am saying it's from market standpoint, we are still in leadership position for really only to be three, three and a half years in this business. So, if I answered your question.

Now, you gave me a good perspective. I guess maybe be more specific. Did you see any slow down at the end of June? Everyone is talking that the market has fallen off here in the last few weeks. I am curious because you obviously delivered your numbers as you promised what you have seen at this time.

No. I didn't see this. I mean whatever we promised we are delivering right. As we slowed down, I think it is market not booming to let you say very simple. But I don't see this market slow down fast on the second quarter. I didn't see it. But again I am saying market is not booming, again if somebody thinks that the market pickup and going to - you know, this fantastic speed in increments, I don't believe it. Market still is very tough and for every deal, we're fighting.

Great, and I guess the other one, I had here is just on the upgrades of customers to Hummingbird Enterprise 2004. You or Barry can just comment on what you have sort of seen in terms of the number of customers migrating to the latest release?

I don't have the exact numbers for you Scott, but generally, a large part of it is still people upgrading from where we have been and a large part of it is new customers. I mean, everything we are selling is all the new stuff. It is all Hummingbird Enterprise. There is no more selling of the old legacy stuff and they are all new ones.

Great. Thanks.

Thank you.

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

Yes. Good afternoon. Thanks a lot. Congratulations on a solid quarter, gentlemen. Just a couple of quick questions, first of all for house keeping. How many shares were repurchased in the quarter and Inder, if you can just re-clarify the product revenue number from last quarter, please?

Yes. 68,300 shares were repurchased during the quarter, Howard. And sorry, what was the second question?

The product revenue last quarter, I have in my notes here $20m. Yet I thought you mentioned that the $27.5m this quarter was up over $2.2m from last quarter. Maybe I got that wrong?

Yes. Just a second. I can get --

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

We haven't finished the last question yet. You want to hold one second we haven't --

I will just give that to you David.

You can give it to me Inder.

Hi David.

Hi guys -- Are you ready? Or do you want me to ask?

Yes. No, no I have. The product revenues in Q2 were $25.3m Howard.

Thank you, .

Howard will have to dial back in and get back in queue. So, I was wondering can you tell us what the foreign exchange contribution on a year-over-year basis for the quarter was, and would you tell us what the acquisitions contributed in the quarter on a year-over-year basis?

The foreign exchange there was a net effect of little bit negative roughly in $300,000 to $400,000, which was compared to the last quarter, it was about $400,000 to $500,000.

So, the US dollar decline relative to the euro has negatively impacted your topline?

The net impact on revenues and the .

Okay. How about those revenues?

On the bottom line. Yes.

How about on the topline?

David, I don't have those numbers.

That's okay. Okay very good. Any comment on, the US Federal Government has been an important client of your company. It was a little bit weak for some software vendors in the quarter and a number of companies pre-releasing. Do you have any color on -- can you provide us any color on how you did in the US Federal Government sector, if you noticed similar weakness and obviously, we are able to compensate in other areas but if that was not the case in terms of your execution.

No, government I think was good for us this quarter.

Okay. Is it that both governments or just --

I am looking at government everywhere. Government across the Board was good for us.

US Federal Government as well?

Yes. Correct.

And any comments on guidance for -- to wrap this fiscal year and potentially into next year?

Yes, I think my guidance will be probably on the revenue side between 58, 59, and on bottom line probably between 38, 40.

If possible next year, Fred, or you're going to wait until the following Q4?

I think it's following Q4. We will give next year for sure.

Okay, thank you.

Thank you.

We have Mr. Howard Lis back on the line. Please go ahead, sir.

Hi, can you hear me?

Yes, for sure.

All right. Let's not press the eject button this time. In terms of new customer revenue, how much of the new customer -- how much of your sales is represented by new customers in this past quarter?

New customers, it was about probably 35% to 40%.

35% to 40%?

Right. In this range, right, total sales.

And you mentioned earlier that you are sure having to fight for every deal. Is that suggesting that the sales cycles maybe a little bit lengthened as you go through several more customers and go through more dew diligence in evaluation and the products in reference checks or is it --?

No. I think from point of festival, from point of -- really customer puts pilot before they're making decisions if nobody buying mouse to mouse. And the last one seeing from point of customers, I think it's from my stand point, it's yes, it will be fighting, there is no doubts, again I repeat, and well everybody fighting today. I don't believe that, that you know standing very easy like, you know, 2000 or 2099. It's no such things anymore. Absolutely no. You have to festival put the pilot, after you have to really deliver return on investment calculations, and I say the customer will make decision, so that you really starting between six to nine months, by any deal.

And one final question, just on the gross margins, they've kind of been trending a little bit down for the five quarters now. Is there something going on there? Is that just a function of some other pricing pressures you talked about earlier?

No, It has got nothing to do with the pricing pressure, Howard. It's just that some of the acquisitions, which we have done, which are mentioned, have more service component in the sense they have more professional services work, and sometimes they are selling with little bit of third party software. So, that's very, very, small negligible amount, but even a $100,000 makes a difference in the percentages there.

Okay.

But, there is nothing material happened on that side.

All right. Thank you very much.

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

Thank you. Just turning back to the larger deals, the deals over a $100,000 you mentioned, what is driving that increase of it? Is that, are you selling more seats per customer? Are you selling at a higher price per seat or is it the line of business solutions? What's actually driving the increase?

Well. It's definitely selling more comprehensive solutions. It's not just one point product. We have been saying this for years and years now. More and more of the deals that are coming in have multiple components, which is been the whole strategy all along, and that's definitely what's driving the seat price up.

Have you seen any increase in the numbers of seats?

I think that there has been some increase in the number of seats, I think, it's the increase in the number of components that are going in. It's been in the increase in the number of templated type solutions we are selling. It's a lot of factors, but it's, you know, it's all around areas that we have been pushing to increase the value of the sale.

And what about the new verticals of --- do you see any difference in terms of average sale price in the financial services and manufacturing verticals versus the legal and government?

I wouldn't say that. And we are seeing it already, its added value is more, contract management, GIS, things of that nature were getting more prestige. But certainly, a number of the deals in the new sectors that you mentioned were really pushing harder on our larger type deals as well. So, they are being more reflected within the deals over a 100K.

Under these larger deals, there were existing customers typically or they are often new name accounts?

No, lot of them are new accounts.

Okay. In this quarter, you are looking to be very strong versus the last few quarters, and I think going on Europe, that you saw?

In Europe, you mean?

Europe.

Yes, what is going on in Europe?

Yes.

Germany still, I say in , probably partitions of many country in Europe. As the best countries to gain, I mean, like I'd mentioned before England, I mean Benelux, Italy, in actually France. But Germany probably is a last one from point of business attraction, and from point of buying power.

You already now seem to be very strong for the quarter in Europe. What drove that?

What's this, this is what I am saying, I mean, it is good business going on in England. There is good business in Italy and good business in Benelux. These are three countries, which really brought big difference right now compared to previous quarters.

Okay. Fair enough. Okay, thank you.

Thank you.

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

Thanks very much and congratulations on a good quarter. Obviously, there has been consolidation and your competitors have changed somewhat. Could you go back over, how is the environment different today compared to what it was, let's say a year ago in a -- when you were pitching for business?

A lot less people today, David than that was year ago, but whether are not, and I think it is more consistent now. As the technologies have emerged and as people have started buying more and more solutions and move all this stuff together. Certainly, the number of people that we meet has gone way down, and more and more people are moving to cover as many bases as they can. So, you are seeing a lot less point players than we did in the past, most of them don't even exist anymore, but the number of companies we see is probably a handful now across all of our deals.

Thanks. And when you look at those competitors in your -- when you are winning your business, can you point to any specific factors as to why you are winning, I mean is the fact that your product is more tightly integrated in those situations?

That the solution, David, for sure.

Wrapped up solution, okay and integration of solution or you might putting --

No, integration as well. We have been integrating this stuff for about three, three and a half years now.

Yes, I know you have been doing it, as the market recognizing that now you are winning more deals because of--

We do apply it and somebody is trying to put some stuff together that they have purchased over the last six months, it's a lot harder to get the integration to work. So, we put a lot more effort into it. So, I mean, the integration as we move forward, quarter-by-quarter gets better and better even with every point release that we do. So, certainly its integration, but absolutely its breadth of the solution of being able to encompass. I think on a number of these large deals, last few quarters just much more of a solution than any other single vendor could.

Okay, that's good. Perhaps I missed in the -- did you give about the geographic breakdown, I might have missed that, the importance of America's versus Europe?

No I will get that, it is 52% in America, 43% in Europe and rest of the world with 4% -- 4.24%.

Thank you and congratulations on getting your DSO's down and you expect that trend to continue, do you?

Thank you.

That is good. Your -- Fred's guidance, your guidance is what's your guidance is. I was just wondering though what you are expecting for the coming quarters? I mean, are you expecting that the environment gets a little better. Certainly number of people think that the economy is picking up and that there will be more spending on technology. Are you already anticipating that or you just keeping a fairly conservative view?

No. First of all, I mean, I'm always keeping conservative view. I think it's first quarter between $0.58, $0.59 and bottom line $0.38, $0.40, quite respectable, very respectable quarter it will be. And from my standpoint always you know history first quarter always is a good one.

Yes.

I love to, you know, to keep but this will be really a challenge, and if we will get it, we will be heroes probably. But, I think in environments the same as like in Feb quarter, I think more deals we have on release from point of backlog and a lot of guys from pilots right now and I hope it will be very successful ending the first quarter.

Okay, and just a word on Connectivity, I guess the declines have slowed down, do you - is there any change in that environment or do you expect this to continue with single-digit declines?

No David, it's not really changes. There has been declining, I mean couple of 100,000 here, couple of 100,000 there. I mean it's not substantial. We think it's a - as always I was saying, we're expecting till 70, I mean our Connectivity business, solid 70 somewhere in this range, make can be 72, can be 70, can be 71. In this range for sure, business stabilized and I think this what I expect from Connectivity, where we have not spent too much money at all.

Okay and how about on the hiring fund, you really have not increased the headcount at all, is there any reason at this point and time to be adding sales people, or -?

No, I don't think so. We have had enough people, sales people, enough presales people, enough telesales people. From this standpoint, we quite, I mean really in the figures what I expect to generate such revenues, I think we will not increase for sure, people in next quarter over there or even the next couple of quarters, I don't see it. I hope it we will continue in the same rate and the fixed, no I do not.

Okay.

But right now from hiring standpoint, you're very, I am in particular, very strict not to increase people at all.

Okay. And my last question is on R&D and I guess as a percent of revenue, it would seem that most of your significant development has been done now. Do you continue to spend the same sort of percent of revenue on R&D or, is there some that can you trim back there?

I'm saying David that, first of all I that most of your development is done, it is impossible for a software company.

Yes, that is fair to say.

In our point, it is never done. If it is, probably you are not going to be around in here.

Correct.

So there's always the next major release of the product that you're working on, and there is always more integration to work on. Even last year alone you saw work flow, you saw mobility, you saw instant messaging, you saw all kinds of new things come out down the pipe last year. There's going to have to be new things coming out this year.

Okay.

Now new major releases, as the products new, you know things of that nature have to brought outside, I think that state, of course, is probably a good way to look at it.

Okay, that's fair.

As from my standpoint, I mean on R&D side, I mean it was not so more companies, probably no companies, it's all chapter, if that is below 18% on R&D side. I don't see it.

Then should we expect an increase?

No, no. You cannot expect increase, but I'm saying it's probably - we'll be the same as what's today.

Thanks for your time.

Thank you.

Your next question comes from Martin Cecchetto from UBS. Please go ahead sir.

Hi, thank you. Good afternoon. Two questions. First one is, you are talking about getting more traction in manufacturing and financial services verticals. Can you talk about how you're approaching that? Are you using direct sales there or are you using more the system integrators?

First, system integrators and direct sales, because usually, I mean from point of verticals, it's quite a bit of business is coming from set parties with their solutions and using color of before it. But direct sales provides the same thing, it's, I mean so we will be selling probably let me say, somewhere probably 40% on this sector through I mean set parties and 60% probably direct.

Okay, and how would that compare to the rest of your business then?

What do you mean compared to this?

Well, direct versus --

If you -- for example, take legal market. Legal market is probably quite substantially direct and probably -- percent, maybe 20% going through or maybe 15%, 20% going through the resellers to commercial market.

Okay. Thank you and next question, you were talking about that your pipeline is increasing, could you quantify the change that you're seeing in your pipeline? What was that and how much is it growing?

I cannot really claim on percentage though it's growing or whatever it is right now. But, I see from point of projects and from point of pilots what's going on right now, it's much bigger than we said, for example in quarter two and quarter three today. It's for sure.

Okay. Thank you.

Thank you.

Your next question comes from Blair Abernethy from Paradigm Capital. Please go ahead sir.

Thank you. Nice quarter guys. Couple of questions, just, Inder, do you have a breakdown of ECM product revenue by vertical?

ECM product, yes, -- it's roughly I would say it's -- Legal is between 25% and 30%, and the government is more or less the same, and the rest is all generic, and the financial and insurance is roughly touching at about double figures, and then after that it's fairly generic across the various industries.

Okay. And also, there was a question earlier on the contribution from acquisitions year-over-year in your revenue number, do you have that?

No. Blair, -- question, which is asked every time and has the same response, as we've integrated most of the operations, it is impossible to find out where is the contribution coming from, whether it's --

But it helps for sure.

Okay. And just on some of the new verticals that you're trying to expand into -- that you are expanding into. Can you give us some sense of -- are these more departmental implements for the new customers, are they more departmental approaches or are they more enterprise approaches and who you seeing competitively when you're bidding in these new verticals?

The answer is exactly both, I mean, financials for instance tends to be large, non-departmental type deals, and certainly if you look at some of the templated type of solutions such as Contract Management, GIS, those are definitely much more departmental because it typically is used by a smaller segment. But, they're looking at buying a much more complete solution as opposed to just a technology; they're looking at buying a complete solution. So, the seek price is higher, the value is higher, but it's typically a smaller sale. Financial tends to be throughout the organization, and a lot of the commercial stuff we're doing as well throughout the organization. So it goes both ways and we're happy to take it both ways.

Okay. And who you -- who you guys seeing in the financials and in the manufacturing side?

And people we see pretty much everywhere else -- and people we see --- I mean, it's Documentum, OpenText, sometimes Filenet in government or financial, not very often; I don't know why, but sometimes -- I don't think -- in the other places, it's typically -- in the pure vertical such as Contract Management and GIS, a lot of times there's some smaller player and they're trying to put something together by a lot of pieces, but it's rare that anybody else goes in and actually presents the entire solution.

Okay. That's great. Thanks guys.

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

Hi, that's fine, guys. My questions have been asked and answered.

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're using a speakerphone, please lift your handset before pressing any key. Gentlemen, there are no further questions at this time. Please continue.

Okay. So, what I'd like to really summarize about our strategy and about our figures, first of all, our strategy for the balance of fiscal 2004 has not deviated from what we have stated in the past and this is quite important. We will remain focused on the fundamentals of our business specifically. We will continue to focus on our traditional strong presence in the legal and government markets. We will continue to expand into additional targets and industries, specifically financial and manufacturing -- this is what I probably repeat, not one times. We will further expand our market reach with our targeted solution focus, and finally we will remain committed to the prudent management of the Company and dedicated to increase shareholder value. With this life statement, I'd like to really conclude our conference call and I'd like to ask everybody who participated today, thank you very much, and probably I will hear from you after three months. Thank you and god bless you.

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