Open Text Corp (OTEX) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Hummingbird Ltd. first quarter 2005 earnings 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, 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, November the 19th 2005, at 5:00 p.m. Eastern time. I will now turn the conference over to Barry Litwin, President and CEO. Please go ahead, sir.

Good evening, ladies and gentlemen. Welcome to our first quarter fiscal 2005 conference call. With me today is Inder Duggal, our CFO. I'm very pleased to report strong Q1 operating performance. It reflects consistent execution of our strategy of profitable growth and diversification in the enterprise content management market segment. The key operating highlights are as follows. Total revenue for the quarter was 53.9 million, which represents an increase of 7.8 percent over Q1 '04. Total enterprise content management revenue of 36.6 million, representing an increase of 10.6 percent, over Q1 '04. Total connectivity revenue for the quarter was 17.3 million, compared to 16.9 million in Q1 '04. Adjusted earnings for the quarter were 6.1 million, which represents a 16 percent increase over Q1 '04. The distribution of Q1 '05 enterprise content management system and enterprise revenue to total Q1 revenue is 68 percent and 32 percent respectively, compared to 66 percent and 34 percent in Q1 '04. Q1 '05 EPS of $0.35 which represents a growth of 17 percent over Q1 '04.

Our Q1 performance reinforces the success of the investments we have made in accelerating our growth in the ECM market segment. We attribute our success to our consistent focus on three fundamental dimensions of our operation strategy. Aggressive customer loyalty programs that enable us to upsell Hummingbird enterprise into our install base, market consolidation initiatives in our core legal and government market segments and diversification of our enterprise content management business to the financial services and manufacturing segments with high value targeted line of business enterprise content, life cycle management solutions. We continue to stay focused on having a balance between top line growth, while maintaining healthy operating margins. Delivering on our earnings guidance and generating sustained positive cash flow from operations. I would like now to provide additional detail around our key operating highlights and achievements in quarter 1.

First some operational highlights. We continue to focus our market development activities around 3 fundamental priorities. The first of these 3 priorities is to strengthen and consolidate our market leadership in the legal market segment. In Q1, we have seen a combination of accelerated upgrades by our legal customers from Docks Open to Hummingbird enterprise and at the same time we have signed significant number of net new clients globally. We are proud of our track record of preserving and in fact increasing product and services revenues from our top grossing law firms in. In Q1 we have signed new customers within the legal market segment. In addition, many of our customers are successfully deploying Hummingbird enterprise as an integrated suite to deliver some of the most innovative solutions in the market. In addition, our acquisition of Legal Key has enabled us to deliver an integrated document and records management solution to our legal customers. The integrated solution has significantly increased our market share for practice support solutions within the legal market. As a result, we are in a strong market leadership position. 66 percent of the Am Law 200 law firms today use Hummingbird software. 3 of the top 5 law firms in the U.K. use Hummingbird software. The number 1 law firm in the U.K. use Hummingbird software and 7 of the top 10 law firms in Canada use Hummingbird software.

Organizationally we have created a legal CIO advisory board with the mandate to help Hummingbird develop market driven product requirements. The board has been operational for the past year and has been instrumental in providing guidance to us for the next major release of Hummingbird enterprise that will be unveiled at Summit 2005. We are confident that the investments we have made in this new release will further increase the competitiveness of our solution resulting in further consolidation and strengthening of our leadership in the legal market segment. Our accelerated momentum in the legal vertical is a continued reflection of our commitment to this important market. Competitive pressures notwithstanding, we are delivering continued value. As a direct result of our strategy, we have outperformed our principal competitor in this segment in terms of both revenue growth and profitability. Our strategy for legal is to deliver an integrated suite of end to end practice support solutions, tailored specifically for law firms. Law firms are subject to the same competitive pressures as other organizations. They focus on improving efficiencies in their IT infrastructure, while at the same time attempting to make better use of information technology and software to increase billings, and to share work product.

Our strategy has been to deliver a market-driven and customer centric solution for our legal clients to help them achieve their key business drivers. The preferred client application for lawyers is Microsoft Outlook. Our investments in integrating Hummingbird enterprise with Microsoft Outlook and an end to end management of e-mail are considered to be high value requirements. To this end, we have made substantial R&D investments to empower our Hummingbird enterprise users to seamlessly access and manage their content from within Microsoft Outlook. Significantly reducing the time and effort required to manage work product. The positive results of these efforts are already valuable. Recently Hummingbird enterprise was ranked by more than 400 records managers as 1 of the 2 market leaders in the e-mail records management survey published by Ferris Research. Allow me now to turn to a discussion of our achievements and momentum in the government market segment. We are demonstrating traction across all levels of government and geographies. Government agencies across the board are engaged in a number of strategic initiatives to lower the cost of service delivery to their constituencies. Share services and self service by virtue of which government agencies standardize on a common platform for managing documents and content is becoming a standard framework for procurement.

While sales cycles tend to be longer for these types of solutions the investment made justifies the downstream value of repeat business. Our focus over the past 3 years has been on identifying strategic opportunities within the government sector where we have compelling competitive advantages to secure long term high value contracts. This initiative has paid significant dividends for us in fiscal 2004 that now form the foundation for accelerated growth in fiscal 2005. Some examples to illustrate our successes include the following. We are now the standard compliance and records management solution within the U.K. central government and police forces. We have secured a framework agreement by virtue of which U.K. government agencies can procure our freedom of information solution which is now a mandatory requirement for all U.K. government agencies. We are the standard document and records management vendor for the Canadian federal government ArcIMS initiative which is an initiative to standardize the desk top configuration for 250,000 government employees. We have won a number of mission critical installations within the U.S. federal government that span both civilian and defense agencies. We also have significant penetration at the state and local governments in the U.S. as well as municipal governments in Canada that span a wide range of solutions for policies, procedures, records management applications. We are continuing to build our government specific line of business enterprise content management solutions, such as correspondence management, agenda management, and freedom of information solutions. These solutions are designed to further entrench Hummingbird as a long-term supplier of enterprise content management solutions, for government agencies, and to ensure a continuous stream of incremental high value revenue from this vertical.

I will now turn to a discussion of our newer markets. While we continue to strengthen our leadership within our core market segments, we've been successful in penetrating new market segments. Fiscal 2004, we've invested in solutions that are designed to extend our market reach to highly targeted and differentiated solutions in financial services such as dealer management and contract management. This strategy has resulted in a number of major wins for us against our leading peer group of competitors. I'm pleased to report that we are now entrenched in a number of high profile investment banks for deal management solutions that leverage virtually all of the components of Hummingbird enterprise and extend it with reusable templates and business processes designed to streamline the deal management process. We are confident that these solution initiatives create the foundation for high value repeat business within the financial services sector. The deal management solution consists of a packaging of Hummingbird product and services that deliver an environment that allows investment bankers and deal participants both internal and external to securely manage and share dealer related content. We're now working with a number of influential and global investment banks where the initial implementations have been successful. We anticipate that these early stage deployments will provide the foundation for incremental revenue growth.

We've also made significant progress within our contract management solution. Gartner anticipates that contract management, deal management, and procurement management solutions will emerge as mission critical solutions built on enterprise content management platforms. The research anticipates that at least half of all global 2000 firms will have a chief procurement officer reporting directly to the CEO or CFO. We have been focusing our energy's investments on this subsegment of the ECM market by delivering an integrated contract management solution that leverages all the key components of Hummingbird enterprise. The contract management solution is an integrated suite of content enabling technologies the foundation of which is a scalable content management repository designed to manage contract life processes from creation, revision cycles, clause management, dynamic repurposing of contracts based on pre-existing templates, secure extranet based collaboration and executive dashboard all of which provides business process driven alerts and reports as to contract status, renewal and key supplier terms. Our contract management solution is built on this architectural foundation and is targeted at multiple industry verticals including manufacturing, energy, and utilities. Our strategy is to focus on those segments of the industry, where there are a large number of contracts where contract management as a practice constitutes a significant percentage of administrative overhead costs. In the past quarter, we have secured a number of contract management solutions both in EMEA and in North America. We anticipate continued acceleration in the market adoption of our contract management offering.

I will now turn to a discussion of our investments in operational efficiencies. In quarter 1, we have undertaken a number of initiatives designed to achieve operational efficiencies while we continue to realize increasing yields from our product and marketing investments in the past 2 years. In particular, we are better leveraging our sales operations by distinguishing between transaction oriented product sales and solutions focused business development. While the former is territory based, the latter is cross functional in initiative consisting of domain experts from within the marketing and sales organizations. We're better aligned to scale enterprise class solution sales and which support territory sales in the sales cycle. We have realigned marketing to put more emphasis around solutions marketing and staffed it with domain experts who are responsible for the positioning and support of these solutions globally. And we're improving our support infrastructure so that we can better anticipate and analyze customer related issues and further improve our already strong record of recurring maintenance renewal revenues. Now, as is customary I would like to share with you some of the deals in the quarter which were over 100 K. This quarter, there were 83 deals over 100 K totaling just under $18 million. A few of the customers are City of Austin, General Networks, Swell (ph), Gotschell (ph), and Managers Ltd., LLP, rather, NATO, Telecom Italia, France Telecom, London Development Agency.

And I will now provide some texture around our going forward product strategy. In fiscal 2005, we will continue to build on the strength and functionality of Hummingbird enterprise that were developed or rather delevered in fiscal 2004. The primary design objectives for our next release of Hummingbird enterprise will be unveiled at Summit in a couple of weeks. I don't want to let the cat out of the bag so I'm not going to go into any detail now in what we're announcing. Hummingbird enterprise 2005 will deliver a number of significant benefits to our customers. Our fundamental objectives remain on delivering an integrated suite of content enabling components within Hummingbird enterprise that deliver high level of usability on the desktop providing the best integration possible to the Microsoft Office suite and operating system, low cost of deployment and administration, deployment options to support centralized distributed and hybrid installations with special emphasis on disaster recovery and user experience in remote locations. Reusable solution templates that extend their value of Hummingbird enterprise to line of business, content, life-cycle solutions. Typically now, it is where I would turn it over to Inder to let him read his part. Inder unfortunately has a bad flu. And in order to help out while he is going to be available for questions, I am now going to read Inder's part. So please bear with me.

Certain of our comments are forward-looking statements which involve risks and uncertainties. Actual result could differ materially as a consequence of a number of factors including changes in market and competition, technological and competitive developments, and potential downturns in economic conditions generally. Additional information and these and other potential factors that could affect the Company's financial results are included in documents filed with the Ontario Securities Commission, and with the Securities and Exchange Commission. Also please look at the press release for a complete statement on this. We've reported our financial results in U.S. dollars and in accordance with U.S. GAAP. Some of the numbers exclude the 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 operations. Sales for the first quarter were 53.9 million up by 7.8 percent from a year ago. Hummingbird enterprise solution revenues were 36.6 million while connectivity sales were 17.3 million. Hummingbird enterprise solution sales were up 10.6 percent, higher than the first quarter of last year. Total operating expenses this quarter were 38.4 million, up from 36.1 million in Q1 of fiscal 2004. EBITDA was 9.6 million. 17.8 percent of sales, compared to 9.2 million, 18.3 percent of sales in the first quarter of last year. Adjusted net income in the current quarter was 6.1 million, up from the 5.3 million recorded a year ago. As a percentage of sales, adjusted net income in Q1 was approximately 11.3 percent, compared with 10.5 percent in the first quarter of fiscal 2004. Positive cash flow generated from operations in the quarter was 4 million. Cash, including short-term investments was higher than the previous quarter at 134.2 million.

I will now provide more details on operations. As mentioned earlier, sales for the current quarter were 53.9 million, revenues from enterprise solutions were 36.6 million, an increase of 10.6 million, sorry, 10.6 percent from the first quarter of last year. In the current quarter, enterprise solutions accounted for 68 percent of total revenue compared with 66.2 percent in this same quarter last year. Revenues from connectivity were 17.3 million, product revenues, connectivity and enterprise solutions, were at 22.3 million, .7 million higher than the first quarter of last fiscal year. Service revenues were 31.6 million, an increase of 3.2 million from a year ago. As previously noted, adjusted net income which excludes the amortization of intangibles, restructuring and other charges, and deferred income tax adjustments all net of related taxes was 6.1 million for the quarter, compared to 5.3 million from the same quarter a year ago. Adjusted diluted EPS, based on adjusted net income was $0.35, compared to $0.30 in the first quarter of last fiscal year. The current adjusted diluted EPS is based on diluted weighted average number of shares, of 17.6 million, and 17.7 million in Q1 of fiscal 2004.

In the current quarter, gross profit was 87.4 percent of sales, compared to 88.6 percent in the same quarter of last year. Sales and marketing expenses were 21.7 million, 40.3 percent of sales, up from 20.8 million, from the first quarter of last year, 41.7 percent of sales. R&D expenses were 10.7 million in the current quarter. As compared to 9.9 million from a year ago. As a percentage of sales these expenses remained the same at 19.9 percent, in comparison to the same quarter of the previous year. G&A expenses increased to 6 million in the current quarter, compared to the first quarter of last year. As a percentage of sales, they increased to 11 percent compared to the first quarter of fiscal 2004, when it was 10.6 percent of sales. Total operating expenses excluding amortization of intangibles, were 38.4 million, up from 36.1 million in the same quarter of last year. As a percentage of sales total operating expenses were 71.2 percent, down from 72.2 percent in the first quarter of the previous year. EBITDA was 9.6 million, 17.8 percent of sales for the first quarter, compared to 9.2 million, 18.3 percent of sales in the first quarter of the prior year. Amortization of intangibles was 4.9 million, down 1.3 million from Q1 of last year. The entire quarterly amortization amount relates to various acquisitions made by the Company.

During the quarter, the Company recorded restructuring and other charges as 7.4 million. This was on account of constant review of its global operations and in particular considered areas where there was an overlap of its operations due to the acquisitions. One of the significant items is a $2.1 million related to reducing employees to a better line costs with revenues in the affected areas. The other significant item amounting to 4.3 million is associated with retirement and related special compensation payments made to certain senior executives. Interest and other income consists primarily of net interest income. Income tax recoverable was 1.3 million this quarter. Overall, the Company reported a net loss of 1.7 million, and basic and diluted loss per share of $0.10 for the quarter, compared to a net loss of 1.3 million, and basic and diluted loss per share of $0.07 for the first quarter of the previous year. Adjusted diluted EPS based on adjusted net income was $0.35 compared to $0.30 in the first quarter of last fiscal year. Adjusted diluted number of shares for the quarter were 17.6 million. Total assets, assets were at 371.5 million, compared to 371.7 million as of the end of the previous quarter.

Accounts receivable were 58.7 million, up from 57.6 million at the end of the last quarter. DSOs based on trailing 4 quarters was 96 days compared to 95 days for the previous quarter, due to timing of collections, and actually 89 percent of these are under 120 days. Fixed assets were 12.8 million, down from 13.3 million in the previous quarter. Intangibles decreased to 153.7 million, from 157.8 million, at the end of the fourth quarter of the last fiscal year. Goodwill at December 31, 2004, was 107.1 million. Deferred revenue was higher at 66.2 million, up from 65.5 million at the end of last quarter. Shareholders equity was 265 million, down from 265.9 million, as of the previous quarter. Cash and short-term investments increased to 134.2 million in the current quarter, from 130.5 million at September 30, 2004. Operating cash inflow was 4 million. The accrued liabilities are up due to the restructuring and other charges. Employees at the end of the quarter were 1,417.

Now, for the benefit of those who may not have joined the call in time, I will summarize. Sales were 53.9 million, up by 7.8 percent over the first quarter of the last fiscal year. Revenues for enterprise solutions were at 36.6 million in the quarter, up by 10.6 million from the first quarter a year ago. EBITDA was 9.6 million, up from 9.2 million in quarter 1 of '04. Adjusted net income was 6.1 million, and adjusted earnings per share was $0.35 both higher compared to a year ago. Positive cash flow generated from operations of 4 million for the quarter, and cash was 134.2 million at the end of the quarter, with no bank debt. In closing, I would like to reiterate that our strategy for fiscal 2005 is to remain focused on the fundamentals of our business. Specifically to continue our focus on our traditional strong presence in the legal and government markets, to continue to expand into additional targeted industries, to further extend our market reach within our targeted solutions focus, and to remain committed to the prudent management of the Company. At this point I'd like to turn it over to questions, operator, thank you.

Thank you, one moment, please. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press star followed by the 1 on your touch-tone phone. You will hear a tone acknowledging your request. Your questions will be polled in the order that they are received. Please ensure you lift the handset if you're using a speaker phone before pressing any keys. One moment please for your first question. Your first question comes from Paul Steep from Scotia Capital. Please go ahead, sir.

Great. Barry, maybe you could talk a little bit about what the driver was this quarter in terms of the enterprise 2004 rollout strength and maybe how far you are in the install base, in terms of having the upgrades sort of take hold?

It is a little tough to answer, Paul, because quite frankly, a lot of the strength this quarter was from upselling other products into the install base. Not nearly just the traditional upgrades of DM as well. We continue to see strong push up -- putting up more and more products into the mix. Within the install base and quite frankly external to the install base as well, and I think the other driver outside of that was the -- certainly a lot of new stuff that's coming in from our solutions pitch. Which we definitely think is going to be larger in the future.

And then a couple of financial questions. 1, just any plans for the cash? I didn't hear you mention in Inder's prepared remarks anything about a buyback in the quarter. I know you've been active. Did anything happen there? Any thoughts around a dividend?

No, Paul, we have not done any buyback for this particular quarter, but we still have our program active, and as far as the dividends are concerned, no, I don't think there is any current plans in paying dividends out.

Okay. And then finally, I will make it short so you don't have to talk too much, on the restructuring front, if you could just let us know if that was all paid out primarily all in cash or if it has just been accrued for next quarter, and what the expected savings would be?

No, it is -- part of that is accrued as well. As far as savings, savings, this was done mostly towards the end of December, so on a go forward basis, we would have some savings, but at the same time, as we've always been saying, a lot of those moneys would be reinvested as marketing dollars on a go forward basis.

So basically net neutral. No real gain?

As you know, that we have given the guidance for the whole year, which is showing slightly uptick in the bottom line as far as the percentage of revenues, so we hope that there would be some savings account of this, and some other synergies coming out of operations.

Okay. Thanks, guys.

Thank you.

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

Thanks. Maybe just to tag on to Paul there, Inder, can I assume from what you just said that consistent with last quarter, your guidance would be, you know, for the year, 2.35 to 2.37 and EPS of 1.58 to 1.61?

Well, EPS was 1.55 to 1.60. And the top line was 2.35 to 2.37. That doesn't change. Yes.

Okay. And any comments, Barry, or Inder, on the second quarter in particular?

Yeah, on the top line, it's 56 to 58. On the bottom line, it's 36 to 38.

Okay. Great. And then Barry, can you just give a little bit more of the components of the special charge, specifically the retirement and other payments?

Yeah, part of this was 2.1 million is government related, and the other one is primarily related to the retirement allotted to Fred at his retirement which is according to his contract.

Okay. And the -- the other thing I wanted to ask is just on the vertical exposures, if you could kind of update, you're seeing some traction on the financial and manufacturing side, if you could update the exposures to the legal and the government market.

I'm not sure what you mean by exposures.

Percentage of revenue.

Okay, I don't know if Inder has that.

Well, it is pretty much the same as what we have said. Earlier, the legal of the solutions revenue is roughly about 20 to 25 percent. And the government is agreeing 25 to 30 percent or so.

Okay. Great. And then just one other quick one for you, Inder, you sound like you're deteriorating on me, so --

Sorry about that.

On the tax rate for the quarter, being 35 percent, you had kind of said it would be between 35 to 38 for the year. Is that comment still about -- could it still range from 35 to 38?

That is correct. And we are hoping that it may -- you may be surprised on the pleasant side by coming down from 35 or better, so we have been saying that for quite a while, that we are taking some steps to reorganize the corporate structure, so there could be a possibility that this could come down less than 35 percent as well.

Great. Thanks.

The wide range is that so far.

Thank you.

The next question comes from Howard Lis from GMB Securities please go ahead.

Good afternoon. Not to belabor the point on the restructuring but if we could go through a little more detail. How hasn't employees were actually let go? I see the net reduction was 16 but how many were related to the reduction plan?

Yes, I can give you the exact number here, Howard. The number were 26 people in December quarter.

Okay. And was the full restructuring related to -- the 2.1 related to severance to those people?

That's right. Severance and related costs to them, that's right.

And how much of the full 7.4 was paid in the quarter and how much has been accrued in terms of cash.

I don't have the exact number, but I would say of 7.4, roughly about -- close to about 4.5 to 5 million was paid in the quarter.

Okay. The rest is due in the next quarter or is it spread out over a further period?

In the next couple of quarters or so

Okay. Great. And then last quarter, actually for the last couple of quarters, you guys have commented on how competitive things are out there and that you're seeing pricing pressure in the enterprise market, and sort of competition on every deal. Can you provide some color on the environment right now? Thanks.

I don't think it has changed much. I mean you know, the competitors are the same. There is nothing different at all on the competitive landscape. I think that, you know, if anything, what I'm heartened by is the fact that we're seeing more traction on leveraging all of our technologies, and I think that we're getting a number of deals that we're in on where in the past we might not have been even, you know, been invited simply because we're seen as a broader supplier now and I think that's been working well for us, and the ability that we have, because of, you know, I guess all the toys we have in the tool chest to put together a more comprehensive solution has really been paying off for us. As far as other vendors, I mean it's exactly the same. Pricing pressures, I don't think they've changed. I think there are still some people out there that are being very aggressive on taking a deal at all costs. But honestly, I don't see much has changed in the competitive landscape.

Okay. And just one final topic. Back the last few quarters when Fred was at the helm, he talked pretty openly about a desire to do a large acquisition. And I know you guys sort of said you have been looking quite aggressively. What is the thinking behind growing through acquisition, and what activities are you involved in? Thanks.

Our strategy has not changed. We are still actively looking and perceiving different roads, and I -- there is no change at all in the strategy vis-a-vis acquisitions. We are still committed to doing, if possible, a substantial acquisition.

Would it be for product extension or for channel extension, market reach?

You know, we said a number of times in the past, we are not really lacking for technology. I mean, you know, more than not would be for, you know, for product -- I mean sorry for market reach or possibly some deployment capability within one of the solutions that we're targeting. But just on a -- I doubt very much it would be a pure technology type of acquisition.

Great. Thank you very much.

You're welcome.

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

Yes, thanks. On the alert deals in the quarter, were there any $1 million or greater deals?

You know what? Something I forgot to check. If you hold on a second. One second. Just bear with me.

Sure.

Yeah, there was one.

There was one? Okay. Looks like you had a pretty good quarter in Europe. Can you comment, Barry, there about anything specifically going on? Or is it just increased penetration?

No, I think we're having a lot of success with solutions in Europe. You know, Europe remains -- the strong points remain the same. Typically U.K. and I guess Italy, Benelux is doing well. You know, there is always some slight fluctuation between Europe and North America, but Europe I think is maybe a little bit farther ahead on some of the solution stuff than North America but marginal, if anything.

Okay. On the competitive front, Oracle putting out their new version the collaboration suite looks like it is going to be very aggressively priced and probably targeting to the lower end of the market. Have you seen them making any noise -- I know it's probably early, but have you seen anything in that regard?

No, and I've read some comments on, this and quite frankly, the markets we play in are invariably involved with very, very heavy integration with other systems, such as especially Microsoft Outlook and Exchange, Oracle is not playing there at all, it is much more of a lightweight framework and while I do think it has a space in the market, it is not the type of deals that we typically play in anyways, we play in, you know, heavier deals such as, you know, the financial sector deals, we play into, and in the legal deals, and quite frankly, even the government deals that we're involved with are typically much heavier integration component deals. So I don't personally see -- well, we have not seen them at all yet. And I don't personally see them really affecting our segments of the market that we're in today, anyways.

Okay. Last question, can you tell us about the revenues on a new versus existing customer basis? You said that a lot of it is the upsell to customers.

Yes. It was between 25 and 30 percent on the new customers, David.

Okay. Thanks a lot.

Your next question comes from Bob Ricci from Columbus Capital Management. Please go ahead.

Good afternoon. Just a point of clarification. Did you say 25 to 30 percent of your revenue came from new customers for the quarter -- during the quarter?

Yes, the license.

Very good. And then what percentage of your revenue was from Europe, please?

It is about 60 percent. We had that. Just give me one quick second.

While Inder is looking that up, I apologize, I missed one, there was actually 2 deals over a $1 million this quarter.

It was 43 percent from Europe.

43 percent from Europe. And what benefit, if any, was realized due to currency exchange?

Yeah, we normally take the net effect of the currency exchange. As far as the worldwide base is concerned, because of our operations, more heavily into Canada, there was a negative exchange rate. In fact, on the expenses as well as revenue.

I see. And just not to belabor this topic, I know in the past you've alluded to looking for ways of growing your business. Looking at large acquisition. I wonder if you can tell me if you're looking at brand new markets, or is it more of what you've done in past where for example you end up dominating the legal vertical and you contemplate maybe possibly extending your footprint to new verticals. I mean is that what you mean when you say we're not necessarily looking for technology, but more, you know, markets and customers?

Yeah, it certainly could be verticals or market segments that we're not in. You know, I can immediately dispell, there is absolutely no way we're going out to look for a completely new product that takes us down new roads. I mean we're fully committed to the path we're on now. So if anything, yes, if we went down that path, there possibly could be acquiring somebody, possibly, I don't know, somebody that's in some different vertical segment than we are or some different market segment. Sure.

I see. And do you feel just on a comment about continued pricing pressure, in the enterprise deals, do you feel that eventuality of what we have in front of us is further consolidation in the industry to sort of moderate some of these pricing pressures, where market is somewhat fragmented and maybe fewer players are going to be more rational with pricing?

I mean I'm not -- I mean who knows if there is going to be more consolidation or not. I mean it is possible. There is not all that many vendors left. And I'm not quite sure that quite frankly pricing pressure is due to the number of competitors as just compared to the general state of the economy, where people are doing whatever they can to take a deal. So I would like to answer your question accurately somehow, but I'm not quite sure I can.

I see. I see. So in some sense, maybe within each vertical, for example in legal, you may be a dominant player, and others may be in other verticals, I don't know, say for the sake of this conversation pharmaceutical, and in each case, it's more driven by ROI, than pricing pressure, and less about somehow the -- you know, each vertical being fragmented which in actuality it is not if you go down through each verticals.

Well, you know, I mean first of all, I mean pharmaceutical maybe is a good example because we don't play there at all but you know, nobody buys software today simply because it's a good price. So nobody is buying any of these solutions from Hummingbird or any of our competitors or peers out there, it's all about solving a particular problem and that's why people are investing in ECM software today. And that's really the only justification. I think once their mind is made up, at that point you can enter some sort of price negotiation phase but it's certainly not like in the old days where people were buying software because they thought it might be interesting to do it. So those days are long gone.

I see. So domain expertise is pretty critical in order to convey your values to the customer.

Right. Can you -- whatever their customer's taint point happens to be, can you address that problem.

I see. And with respect to, you know, you've talked about this acquisition for a couple of quarters and it would definitely redefine the business and take it to another level; is that something that you contemplate, you know, happening in sometime in the '05 time frame or are we talking about multi-year sort of -- since you floated the (AUDIO DIFFICULTIES)--

I would like it to be in '05. Let me answer it that way. It would be nice. I would rather not drag it on for a couple more years.

I see. So you're actively looking until you find the right combination.

Correct. We are always actively looking.

I see. Thank you very much for the clarifications.

Thank you.

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

Thanks. Good evening.

Hi, David.

Hi. Could you qualify further the success that you're having in the financial services area? Are there names or anything else you can kind of point to?

It's quite tough, David, and you might see some of the names at Summit just by seeing some people who are there. But we've all got in all of our contracts today disclosure until they're fully deployed. Most of these people are underway in deployments or have finished a pilot and are beginning a deployment and we can't actually give their names out. Believe me, I would love to, as soon as we can generate case studies or stuff, you will be the first to know. But again, at Summit time frame there, you might see some of those names presented.

Okay. Are they more North American, more European, spread out?

Actually it is kind of interesting that the good ones are spread out. They're not North American or European. They're more or less global deals?

Okay, and could you quantify the number of, kind of, pilot projects you have going, is it 10, 20, 30? Is there a way to quantify?

I don't really know the number. It is probably not that high a number, David but the deals tend to be fairly large.

Oh, I see.

The good thing about financial is that the deals within financial tend to be a larger deal size than -- by any measure, whether it's price, number of seats, et cetera, than most of our -- certainly within the legal vertically typically.

Okay. And similar questions about the contract management field, you said that you're gaining traction, but how could we quantify our qualify that?

Yes. I don't think yet it's something pervasive that we can separate as a percentage of revenue yet. But you know, we're looking at it -- we're still looking at every deal there, and there were a number of deals this quarter in that area which is making us happy.

And your larger sized deals, are they showing up as either financial services or contract management or are they just larger sized deals in, you know, your core areas of legal and government?

No, I think it's -- no, no, as a matter of fact, there is deals showing up in outside in what we call commercial, I guess, or financial, outside of legal and government. The first one I found that was over a million was definitely -- was government. The second one I missed and Inder found so I'm not quite sure.

That was the one in Holland. I forgot the name. Holland, Netherlands.

Yeah, I think -- I think actually both of the ones that were over a million this quarter were government.

Okay. Government. And you're showing a nice trend on large size deals up to 83 for over 100,000. That is largely the enterprise business that's growing there or --

Yes, yes and that's largely because of selling more products into the -- as opposed to just selling point solutions.

Right. And the connectivity business is just kind of holding its own as well?

Yeah the connectivity business still has some deals represented in that number as well. I think, you know, connectivity, our story is the same. It's stable. It's stable as it's been now for probably, you know quite a while. No great uptick or downtick there at all.

We're seeing some employment growth in the U.S., but I guess globally, employment growth is not driving the business?

Well, I think there is going to be some lag there. I'm still optimistic that if we actually see some sort of real turn around in the economy and that, you know, certainly the larger companies, you know Fortune 1000 companies start hiring more, that we could see some growth in the connectivity business, because again, you know, the reason it's holding its own and it's stable is because nothing has replaced the stuff so it's possible that if we start seeing some pull-through from those modest numbers that we've seen in employee stuff, that certainly, you know, the connectivity stuff theoretically could grow.

Okay. A couple of income statement or balance sheet questions. The clarification, Inder, I think you said, did currency have a negative revenue impact?

No, net effect on the -- on the revenue and expenses.

I see. Okay: So do you have a constant currency dollar revenue growth number for us, by chance?

Well, say that again, David.

Constant currency, how much did your revenues grow?

I think we had a gain on the revenue side but it wasn't very material compared to last quarter, but expenses, we had a more decline on the expense side.

Okay. And then accounts receivable grew quarter to quarter. And so I was just wondering what was driving that. Usually I would have expected it to come down into Q1. So is that a currencies issue or is that because you had larger deals close late in the quarter?

It's partly currency issue. Partly some obviously larger deals closing through the quarter. We actually did more revenue during the quarter, but everything could not be recognized, part of that went to deferred revenue, and there were some increments expected from Europe inside which actually did not come through and we have already mentioned some of the countries which have been difficult in paying them off, so hopefully we are -- should be able to collect those moneys in the Q2. But in Europe, it has been difficult for us. And particularly in some of the countries, especially when it comes to the larger deals to collect the money within 90 days or 120 days. So it's a combination of these 3 factors.

Okay. And lastly, just on the restructuring, and it seems like you've added some people as well as restructuring, is it safe to assume that the number of -- most of the people restructured were over in Europe where you had done your acquisition in the U.K. and are you adding people in North America or --?

Well, mostly, yes, mostly people -- the reduction happened in Europe, that's right.

Okay. And generally, where are you adding people, Barry?

Well, some of the people, there is not a plan to add too many more people in any case. So if the people have been added, they have been fairly generically, and in some of the cases, where we have let go people, they have obviously been replaced, that doesn't factor into the restructuring costs of course.

Okay. Thank you very much.

There is no area, David, where we're adding people, if that's what you meant.

Right. Okay. Thank you very much.

You're welcome.

Get better.

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

Hi, Blair.

Hi, guys. Nice quarter.

Thank you.

Just I wanted to drill into the connectivity side a bit more, following Dave's question. Just can you give us some sense right now with the product lines Exceed, the Host Explorer, Maestro, where are you generating, what is the leading product out of that, what are you generating the bulk of your new license sales?

Well, I would say off the top of my head that the bulk of it is Exceed, but quite frankly it is somewhat difficult to say sometimes because we're now selling the Hummingbird connectivity suite quite a bit which has everything in it.

Okay.

So it is sometimes we put together a bundle that has got all this stuff in it together and matter of fact we have a SKU for it, and it's hard to say why the customer is really -- like what their main driver is to buy it. But sometimes if they have even 2 out 3 of the requirements, they're actually buying the whole thing together. But you know, certainly I would estimate that connectivity -- sorry, that Exceed was still the number one driver there.

Okay. And are you finding on that side of the business, is Linux providing a boost or a refresh at all to the business?

You know, I think -- I don't know if Linux provides a boost. I mean we go to Linux shows. I mean certainly Exceed is a great way to get from Windows Desktops to Linux and that's always been the case. I think actually over the last quarter, I've seen a little bit -- a little bit of uptick on Linux requests. I don't think it's anything monumental. But maybe marginally.

Okay. And just turning to the ECM side, can you -- Barry, can you talk a little bit about the e-mail management opportunity, where you guys are seeing your traction there, and who you are going up against, if you're going up against anybody?

Well, I mean we go up against the usual group of competitors first of all but the e-mail management is quite comprehensive. We have got server side stuff which actually (INAUDIBLE) on exchange which you can actually totally automate how the e-mails dispense. We have got client side stuff for the actual automatic profiling of e-mail. We have got quite a bit of work that we've done over the last year and quite frankly there's even more coming vis-a-vis the integration with Outlook and stuff. So I think you cant' -- the day was going back that e-mail was thought up as separate from documents, that's certainly not the case anymore. E-mail is probably the most prevalent document type that any one organization has. So, you know, we will be talking in the future about some other interesting partnerships that we're going to have with various other vendors out there as well.

And what -- just in terms of where you -- where you've sold into, is it just in your traditional, you know, government and legal for the most part, or are you seeing other opportunities, other verticals?

Well again, I don't see e-mail management within Hummingbird's space as a stand-alone thing. So I don't think we've gone out and sold any systems just to do e-mail management, okay? Let's put it that way. It is typically a broader scope project. And that, I think, has been across the board. Whether it is part of a component of a financial deal, whether it's in legal, whether it's in government or whether it's in industry. E-mail is, you know, probably close to the number one critical issue for people pretty much across the board.

Okay. Great. Thanks.

You're welcome.

Your next question comes from Richard Tse from National Bank Financial. Please go ahead.

Yeah, I just wanted to clarify, a quick question on the impetus for the restructuring charge. Can you clarify again, because to me, is it something to do with an operational issue here, because it seems like it's sort of coincident with what seems to be some trending lower margins.

Richard, sorry, could you explain that question? First of all, this is restructuring and other charges, it's not only restructuring. That's the heading.

Yes. Yes. I know that part of it had to do with some of Fred's severance here. But the timing of this, you know, why now on that 2.1 versus in a prior quarter.

Well, it's not the timing, because Fred retired as of 1st of December so the typical -- the payment would have been done at the same time and restructuring, that's how the board decided to do it. It had nothing do to do with Fred's going on.

Yes. But now I'm referring to like the 26 people that you let go.

No, I don't think it was related to anything or anything to hide anything or -- it's just we decided -- you know, I think somebody else mentioned before, there was a number of people that we had in Europe, based on getting the various places to the level we wanted, where we felt we had some excess capacity and I think we're always going to be like that. I don't think we're going to -- Hummingbird has always been the type that we don't -- we like to run exactly what we have to run, not under, and not over.

Right. So it has nothing to do with the fact that the margins have been kind of trending down. It's something operationally outside of --?

It has got nothing to do with anything except that we felt we had excess capacity.

Margins if at all anything, Richard, if you go back 2, 3 years margins have actually been becoming better over the period of time.

Yes. This quarter it looked like it was down a little bit, but okay.

Well, it's very difficult to manage sometimes quarter to quarter because in any case first quarter and when the revenues are down somewhat the margins are dead but we're still talking about the margins for the whole year which are expected to be better than last year.

Okay.

When I say margins, I again emphasize is the net margins which we talk about after the tax rate.

All right. Okay. Thank you.

It was not -- there was nothing in there that was specifically quarter or result related. Let's put it that way.

Okay.

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

Inder, was there a small acquisition in Q1?

No.

I'm just referring to the $1 million item on your statement of free cash flow for acquisitions.

No that -- no that, sorry, that is the earn out which we have to pay on account of Legal Key which has been accrued.

Oh. Okay. Thank you.

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

Good evening. Thank you. Just on demands and competitive trends in '05. On the demand side Sarbanes-Oxley, do you think that will be a better driver of demand for software companies like yourself in '05 than it was in '04?

Yes. It's possible. But again, I'd like to state what I always say is that, I think, the issue is really compliance not just Sarbanes-Oxley.

Sure.

And I think that's been a very good driver for us which is why we've had a number of records management offerings at different markets. So I'm not -- I hear a lot of people talking about the Sarbanes-Oxley solution, quite frankly, if anybody can figure out how to do more than about 30 percent out of the box for any one specific company I'd be amazed. While the compliance market space is a lot broader, so I think Sarbanes is part of it. I think the push towards SOX might cause an uptick in compliance purchases and that's very possible. But not specifically to buy stuff just for SOX.

Okay. And just on the demand side then, you're talking a lot about the integration of Office. Where do you see Microsoft right now as a competitor and how do you see that changing in '05?

I don't think we see it changing much, I mean typically Microsoft now plays at anywhere at very, very small deal sizes where, quite frankly, I don't get personally too involved. We don't really see them in any of our larger type deals or even too many of our mid-sized type deals. So if anywhere, they play in the smaller, you know, if anything certainly it's smaller plays where there's maybe 15, 20 users, 50 users max who are completely involved in Microsoft technology. So obviously, everybody always keeps their eye on Microsoft and I'm not trying to say that we don't. But realistically today we don't see them too often.

Do you think that might change with Uconn, particularly on the repository side? Do you think they'll get a little bit more aggressive in content management?

I don't know. It's hard to say when Longhorn or Uconn or any of these things are actually going to ship and what they're actually going to have in it. Again, we play in very heavy content integration between various different components and different departments within organizations. And, you know, while Microsoft quite frankly has enough money to do anything, I don't really see them playing heavily there at least not this year.

Okay. Thanks, Barry. Inder, I hope you get well soon.

Thank you very much.

Your next question comes from Damian Wojcichowsky from CSFB. Please go ahead.

Maybe I missed this, but did you provide guidance?

Yes we did. Guidance for the next quarter was 56 to 58 on the top line and $0.36 to $0.38 on the bottom line.

And do you have anything yet for fiscal '05?

Yes. We've given guidance for the year at, top line is 2.35 to 2.37 and bottom line is $1.55 to $1.60.

Great. In terms of the e-mail archiving can you give us a little more color on where you are in that in terms of customer penetration? Are you winning deals against some of the guys that go open text? Just where are you guys in that market?

Well, we're definitely winning deals. For some strange reason we don't -- this quarter at least we don't seem to have seen open text too much. At least that's what I was told. This is not anything that's down on a piece of paper anywhere. Yes. We're definitely winning deals based on our ability to do e-mail archiving, but again we don't go out and sell, or typically, just an e-mail archiving solution. So it's typically is a part of a bigger opportunity and I think that's where our strength lies. We're not looking to become a stand-alone -- to have a stand-alone offering to do simply e-mail archive.

Okay. Did you mention how many sales reps you have currently?

Yes. I can give that to you. It's 207.

207. And on the DSO, I think I come up with 99 days.

96.

96?

Yes.

Okay. And are we going to see that number start dropping down at some point?

Yes. Damian, we have said that consistently. We want to bring it down to less than 90 permanently and if not even more. But because of a couple of things which I have mentioned right here, because of some large days came in the quarter plus currency effect plus some large payments were expecting it to come into Q1 from Europe which did not come in because of some delays in the customers because of which we have not been able to bring it down. So while the DSOs were up it is likely less (INAUDIBLE).

Okay. Thank you gentlemen.

Thank you.

Your next question is a follow-up question from Mr. Scott Penner from TD Newcrest. Please go ahead.

Thanks. Inder, just one quick one, the product -- product revenue in particular has there been a change in the splits, product versus service in either of the -- particularly the content management business or can I use that, kind of, 3 percent growth year-over-year as a good proxy for that side?

Well, no there has not been any material change in the product mix on the solutions side. The only difference, just to retread on that is Q1 is somewhat lesser on the product side and the services is more. But on the overall year basis it's consistent than what's been happening in the last few years in the Q1. And the year as a whole we don't expect any material change in the product revenues on solutions side.

Okay. So versus, specifically versus Q1 last year there hasn't been much of a change?

No.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) Gentlemen there are no further questions at this time. I'l turn the conference back to you.

Thank you. I'd like to finish on a personal note. We -- Hummingbird recently celebrated its 20th anniversary as a leading enterprise software Company and throughout this time Fred Sorkin, my friend and co-founder, has guided the Company through periods of unprecedented growth and through challenging economic times. And during these cycles Fred's delivered an enviable track record of growth, profitability, and shareholder value. I am honored and privileged to assume the responsibility of Chief Executive Officer and to guide the Company through its next phase of growth and diversification in the enterprise content management market segment. And I'm personally committed to preserving the rich heritage of Hummingbird. While we've continue to build on that foundation and deliver on the enormous potential that we have in the coming years. Thank you very much for attending today. Hopefully I'll see some of you if not all of you at Summit over the next few weeks, and if not we'll talk to you next quarter. Thank you.

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