Open Text Corp (OTEX) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Hummingbird Ltd's Second Quarter Fiscal Year 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I will now turn the conference over to Mr. Barry Litwin, President and CEO. Please go ahead, sir.

Thank you. Good evening, ladies and gentlemen. Thanks for joining us this evening. I'm joined by Inder Duggal, our CFO and Dan Coombes, our Director of Investor Relations. During our second quarter, we continue to grow our Enterprise Content Management business, which now represents over 70% of our total revenue mix. Our Connectivity business experienced slippage in some deals that we finally closed in the quarter. These deals were primarily in North America.

We maintained our position of profitability on an adjusted net income basis in the quarter, despite a moderate short fall in revenue on the Connectivity business. Our pipeline to sales ratio for Connectivity has not fundamentally changed from historic trends and we continue to expect fiscal 2005 Connectivity revenue to be in line with previous years. The fundamentals of our business remains strong and we are confident in the positive growth prospects for Hummingbird. The key financial highlights for the quarter are as follows; total revenue was 54.3 million, total Enterprise Content Management revenue was 38.2 million, representing an increase of 3.4% over Q2 '04, an increase of 4.2% compared to last quarter. Total Connectivity revenue was 16.1 million. Q2 '05 Enterprise Content Management revenue represented over 70% of the total revenue mix versus 67.5% last year. Adjusted earnings were 3.7 million and adjusted earnings per share were $0.21. Let me now turn to the discussion of second quarter highlights.

We're encouraged to see the continued adoption of Hummingbird Enterprise, our flagship ECM offering. We are having continued success in selling our full suite of products, not just point solutions and we are getting invited to larger deals where customers seek a comprehensive ECM solution. This validates our early move or integration strategy that puts us in a position of competitive advantage with the breadth of Enterprise suite with seamless integration, ease of use, and tight integration with Microsoft on the desktop.

Hummingbird's Summit 2005, our yearly user group event held in Miami, Florida in February was a great success with attendance up over 20% from the previous year. I'm pleased to report that close to 1000 customers and partners from 26 countries around the world attended the event, where we unveiled Hummingbird Enterprise 2005, our next generation Enterprise Content Management platform. I'd now turn the discussion while I discuss the traction you've seen in our primary vertical markets.

In the legal vertical in Q2, Hummingbird continued to maintain its strong leadership, our focus in delivering a unique value proposition with an end-to-end matter lifecycle management suite including the legal key practice suite of products, combined with our deep knowledge of the workings of law firms just paying off. More and more law firms understand the need to manage the entire lifecycle of their matter related content with a single tightly integrated suite from a single vendor, providing the best integration with the Microsoft desktop. The traction we're seeing among our customers validates our focus strategy and successful execution in the legal marketplace. In the government sector, we continue to demonstrate 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 while concurrently improving service levels for their constituencies and ensuring proper security, retention and disposition. This further documents the DoD 5015.2 and 2002 certified electronic records management system. We continued to build on our market leadership and competitive strengths in the federal government sector globally. In the UK, Hummingbird was selected as the standard freedom of information solution for all UK government departments, police forces and fire departments. Also during the quarter, we completed re-certification of Hummingbird Enterprise under the DoD 5015.2-STD including chapter 4 certification, which provides hierarchical security. Hummingbird Enterprise meets and exceeds the complex security requirements of our US government customers for records and compliance management solutions. We are particularly encouraged by the accelerated adoption of Deal Management solutions within the financial services sector.

Based on Hummingbird's leading Enterprise Content Management platform, the Hummingbird Deal Management solution provides financial services premise, a collaborative environment for internal and external participants to work together throughout the deal negotiation process. In February, we announced the leading Spanish insurance group, Caser Seguros has implemented Hummingbird Enterprise to provide easy access to all correspondence and policy documentation for 500 system users. The solution has sped up the policy renewal process by as much as 75%, leading to greatly enhanced customer experience. In addition, the solution will facilitate regulatory compliance and reduce administrative cost significantly.

During the second quarter, we signed 80 deals over 100,000 totaling $18.1 million. Some of the customers were the US Army, County of San Luis, Obispo, the Alberta Energy and Utilities Board, Stites and Harbison, NSSPA, and Barclays Bank. In Q2, we were again recognized for our market innovation and leadership. KMWorld magazine recognized Hummingbird as one of the 100 companies that matter in knowledge management. Hummingbird in one of the only a few companies that received this honor for five consecutive years. In addition, Network Computing magazine has recognized Hummingbird Enterprise Collaboration as a top solution in comparison with collaboration tools from seven other vendors.

Our Collaboration platform was ranked highly for its advanced security features, ease of use, mobility and instant messaging capabilities, and seamless integration with the overall Hummingbird Enterprise suite. We remain confident that our enterprise content management strategy is on track and will remain the basis for sustained growth and shareholder value. Today, nearly 70% of our business is generated from Enterprise Content Life Cycle Management Solutions. We've made significant investments in the delivery of product and solutions that are now starting to yield a healthy sales pipeline in vertical industries outside our traditional markets.

In the coming quarters, we will continue to accelerate our solutions delivery capacity. We have built a strong foundation for growth and we are committed to our stakeholders to maintain our strong record of profitability, innovation, and market leadership. With that, I will turn it over to Inder to share some of the details of our financial and operating results.

Thank you, Barry. Good evening, ladies and gentlemen. Certain of our comments are forward-looking statements, which involve risks and uncertainties. Actual results could differ materially as a consequence of a number of factors including changes in market and competitions, second logical, and competitive developments, and potential downtrends in economic conditions generally.

Additional information on these and other potential factors that could affect the Company's financial results are included in the document filed with Canadian securities administrators and with the United States Securities and Exchange Commission. Also, please look at the press release for a complete statement on this. We have reported our financial results in US dollars and in accordance with US GAAP. Some of the numbers exclude the effect of certain items, which are later defined. The following are a few highlights that summarize the results of the current quarter, after which I will discuss the detailed results of our operations.

Sales for the second quarter were 54.3 million relatively unchanged from a year ago. Hummingbird's Enterprise solutions revenue was 38.2 million, while Connectivity sales were 16.1 million. Hummingbird's Enterprise solutions sales were up 3.4%, higher than the second quarter of last year. Total operating expenses this quarter were 42.7 million compared to 39.1 million in Q2 of fiscal 2004. EBITDA was 6 million compared to 10.3 million in the second quarter of last year. Adjusted net income in the current quarter was 3.7 million compared to 6 million recorded a year ago. Cash including short-term investments was at 129.1 million.

Deferred revenues continued to increase quarter-over-quarter and they were at 67.8 million in the second quarter, up 1.6 million from the first quarter of the current year, and higher by 2.6 million a year ago. I will now provide some more details on the operations. As mentioned earlier, sales for the current quarter were 54.3 million, Enterprise solutions revenues were 38.2 million, an increase of 3.4 million from the second quarter of last year, and 4.2% higher than in the first quarter of the current fiscal year.

In the current quarter, enterprise solutions accounted for 70.3% of the total revenues compared to 67.5% in the same quarter last year. revenues from the Connectivity were $16.1 million compared to $17.8 million in the second quarter of last year. The product Revenues for Connectivity and Enterprise Solutions together were $23.2 million. The product revenues for Enterprise Solutions were higher in the Q2 over the previous quarter, that's first quarter in 2005 as well as Q2 of last year. Service revenues were $31.1 million, an increase of $1.7 million from the year ago. The geographical breakdown of revenue for the second quarter were; America is at $28.4 million, which was 52.2%, Europe at $22.7 million, which was 41.9%, and rest of the world at $3.2 million, which was 5.9%.

In the current quarter, the gross profit was $47.8 million, which was 88.1% of sales compared to $48.4 million, which was 88.6% of sales in the same quarter of last year. The sales and marketing expenses were $25.2 million, 46.5% of sales compared to $24 million from the second quarter of last year. So that's 43.9% of the sales.

R&D expenses were at $11.7 million in the current quarter as compared to $10 million from the year-ago numbers. As a percentage of sales, these expenses were at 21.6% compared to 18.3% in the same quarter of the previous year.

G&A expenses were $5.8 million in the current quarter compared to $5.1 million in the second quarter of last year. The total operating expenses excluding amortization of intangibles, restructuring, and other charges were $42.7 million, up from $39.1 million in the same quarter of last year. The overall increase in expenses was mainly due to the changes in foreign exchange rates, the effect of inflation on cost, and increased stopping cost, primarily compensation and benefit increases.

Sales and marketing costs were also increased due to higher compensation and related cost of sales. As a percentage of sales, total operating expenses were 78.8%, compared to 71.5% in the second quarter of previous year.

EBITDA was $6 million for the current quarter compared to $10.3 million in the second quarter of the prior year. Amortization of intangibles was $4.5 million, down $1.3 million from Q2 of last year. The entire quarterly amortization amount relates to various acquisitions made by the company. Interest and other income consist primarily of net interest income. Income tax recoverables were $1.1 million this quarter.

Overall, the Company reported a net loss of $1.2 million and basic and diluted loss per share of $0.07 for the quarter compared to net income of $2.1 million, and basic and diluted earnings per share of $0.12 for the second quarter of previous year. Adjusted net income which excludes amortization of intangibles, restructuring, and other charges, and deferred income tax rate adjustments, all net of related taxes was $3.7 million for the quarter, compared to $6 million for the same quarter a year ago.

Adjusted diluted EPS based on adjusted net income was $0.21 compared to $0.34 in the second quarter of last fiscal year. Adjusted diluted number of shares for the quarter was $17.6 million, compared to $17.8 million in Q2 of fiscal 2004.

Little bit about the six months results. The revenue for the six months ended 31 of March 2005 was $108.2 million, an increase of 3.3% over the previous year. Revenues from Enterprise Solutions were $74.8 million, up 6.8% from the six-month period last year, and accounted for 69.2% of year-to-date revenues compared to 66.9% last year.

Revenues from Connectivity were $33.4 million compared to $34.7 million in the same six-month period last year. Product revenues, Connectivity, and Enterprise Solutions were at $45.5 million compared to $46.9 million last year for the similar period. Services revenues were $62.7 million, an increase of $4.9 million over the same six months period a year ago. Geographical breakdown once again for the revenues for the first six months of fiscal 2005 were; America is at $56.8 million, Europe at $45.8 million, and rest of world at $5.6 million.Net loss for current 6 months period was $2.9 million resulting in diluted loss per share of $0.17 compared to net income of $800,000 and diluted earnings per share of $0.04 for the first 6 months of fiscal 2004. Adjusted net income for the 6 months ended March 31, 2005 was $9.8 million compared to $11.3 million for the first 6 months of last year. Adjusted diluted earnings per share based on adjusted net income for the 6 months period was $0.56 compared to $0.64 in the prior year.

Coming to the balance sheet, the total assets were at $365.3 million compared to $371.5 million as at the end of previous quarter. Account receivables were at $58.8 million, relatively unchanged from $58.7 at the end of the last quarter. DSO's based on trailing 4 quarters remained the same at 96 days compared to the previous quarter. Out of the receivables, less than 90 days receivables were accounted for about 82%. Fixed assets were $12.5 million, down from $12.8 million in the previous quarter. As previously mentioned, intangibles decreased from $149.2 million from $153.7 million at the end of the first quarter of the current fiscal year. Goodwill at March 31, 2005 was $107 million.

Deferred revenue was higher at $67.8 million, up from $66.2 million at the end of the last quarter. Shareholders' equity was at $264.2 million compared to $265 million of the previous quarter. Cash and cash equivalents were $129.1 million in the current quarter. Income taxes of $900,000 were recoverable as of March 31, 2005 while income tax payable at 31 December 2004 were $2.9 million. Number of employees at the end of the quarter was 1416.

With that I will just once again give an executive summary of the results for the quarter for the benefit of people who may not have joined the call in time. Sales were $54.3 million for the quarter. Revenues for Enterprise solutions were at $38.2 million in the quarter, up by 3.4% from the second quarter a year ago. Connectivity revenues were $16.1 million. EBITDA was $6 million. Adjusted net income was $3.7 million and adjusted earnings per share was $0.21. Cash was at $129.1 million at the end of the quarter with no bank debt and deferred revenues increased to $67.8 million. With that, I hand it over to Barry for his final comments.

Thanks, Inder. In closing, I would like to reiterate that our strategy for fiscal 2005 is to remain focused on the fundamentals of our business: To foster a traditional strong presence in the legal and government markets, to continue to expand into additional key industries such as financial services with targeted solutions, and to remain committed to the prudent management of the Company's assets. At this point, operator, I will turn it over for questions.

[OPERATOR INSTRUCTIONS] Paul Steep, Scotia Capital.

Barry, maybe you could give us, I guess, first, your outlook for what you are expecting for Q3 in terms of the top and the bottom line across the business?

Okay. Q3, we are estimating roughly $55.5 million to $57 million on the topline, and $0.30 to $0.32 on the bottom line.

In terms of the deals that slipped on the ECM front, has there been any big news in terms of closing some of those deals? You obviously said some smaller ones had closed in the pre announcement call.

I can tell you that we have closed deals on both ECM and Connectivity side already in this quarter.

Okay. And then finally, I guess Inder, on the free cash flow side could you just clarify since that was negative for, I guess, the first time in like 12 quarters, what the retirement benefit and the severance amounts were in there and if those were sort of extraordinary items forcing those numbers down this quarter?

Sorry, are you talking about the restructuring or other than that?

Yes, the restructuring and then the retirement benefit for Fred as well. I am assuming that would have been in this quarter.

No, that was in the first quarter. That is not in this quarter. But they were basically on the restructuring. We terminated 8 more employees during the quarter and that is pertaining to that amount.

Howard Lis, Gmp Securities Ltd.

Barry, did you have any guidance for the full year or just the upcoming quarter?

No, I think we are going to wait a little bit to see how the quarter goes before we get too committed to Q4. I don't see anything really different for the entire year at this point. But I think we are going to be a little bit -- I am left to say we are going to wait a little bit and see how things go, but we are just giving guidance now for the next quarter.

Okay, great and couple of housekeeping items. Any deals over $1 million?

No, there were no deals over $1 million.

And, average deal size, what was that Inder?

Well, average deal size, we normally give it for 100,000 or so, which are -- which we always give is number of deals were 80. Total amount was 18.1 million. And average price for those deals were $225,000.

And in terms of the deals in both business lines, it did slip. Can you provide some color on sort of what has closed since the end of last quarter?

Well, I can say that some of the deals have closed already, some of them have not. But some of the deals have already closed and it's in across both sectors. There was more slippage on the connectivity side. So more closed already on that side if you are talking about slipped deals.

Okay, and in terms of your share buyback, you talked previously that you intend to remain sort of accurate in that regard yet. You haven't bought stock now for 2 quarters. Can you comment on that especially given where the stocks are?

Yes, we are still looking at it. And we will see to where we go. We are still thinking forward towards potential acquisitions. So we will feel where we go at the stock buyback. We still have some room to move there, on what we can buy.

Scott Penner, TD Newcrest.

Barry, could you talk about on the productivity side. I guess now if -- had some time since the pre-announcement. What was the split of the short fall between the product revenue and on the support side?

No, I think it was probably due to new sales that the slippage took place. So it wasn't -- in bringing in for instance -- when you say supportive connectivity, assume you are talking about maintenance. Because it will not support connectivity at all. So it wasn't that we weren't bringing in maintenance deals. So it was new deals that we are working on populating new .

And you mentioned during your presentation that the enterprise product revenue in Q2 was higher or sequentially in year-over-year. Could you put some numbers to exactly what the growth rate was?

Scott, good question and that has been asked of us, many a times. But at this point of time we are not ready to diverge the numbers at this time, if you don't mind. But I just wanted to give those color to everybody out here, showing that the shortfall which came on the product licenses was primarily due to connectivity, not because of solutions revenue.

Okay, if you look at the product revenue year-over-year, it looks like it's down about 2.1 million. I am just looking at the productivity year-over-year drop, looks like it's down about $1.7. So I am just trying to get a little bit more on, why there was growth on the product side on the ECM?

Scott, as I have just said, that there is an increase in product revenue for the enterprise solutions in Q2, over previous quarter as well as Q2 of last year. That's the best I can give you at this point of time.

On the vertical side, can you just divulge as you do quarterly, what the exposure was to the legal and government side?

Yes, certainly. This is out of the solutions business. The legal was roughly running at 24% of the total revenues, and the government federal is at about 30% of the total revenue. And the financial institutions are roughly about 11 to 12%.

Okay, it looks like the combination of legal and government seems to be pretty consistent quarter-over-quarter, when you give the break down. May be you could just give us some metrics that we can use or that you are using to talk anecdotally about the increased traction on the other side of business.

Well, one is of course, it is tough to share because lot of these guys don't let us give their names until they are deployed, just the financial institutions that we are actually signing. The other is on the solutions, I can say that our -- certainly our pipeline is starting to show, I think, the benefits of all the work we put into solutions, particularly in the area of contract management, correspondence management, things of those lines. So, that's what we look at internally is how many deals we have outstanding in the pipeline for natural templated solutions, if you will, as opposed to segment solutions.

Okay, then just finally Inder, Paul was talking a little bit about free cash flow there. There seems to be some pretty wild swings in some of the tax accounts. Is there any way for you to just give a quick description, what's going on there?

Scott, just before Inder answers, sorry, one more point. One of the metrics that you can see is, I did announce one customer today and you are going to see more in the future within the solutions that we are actually closing.

Okay.

Sorry.

Yes, Scott, I don't think they have any wild fluctuations. I mean we have been making some advance payments on the tax side depending on where we think our total numbers would end up to. So, there are some payments made, but if you -- basically the cash flow shortfall has happened because of, I would say, the restructuring charge and the other charges, which we have taken in the first, I would say, six months though it's basically falling from those payments. If you take a look at that, the total amount is roughly about 10 million plus or so. So, the fair amount of the cash outflow has been pertaining to that as well, and plus some pertaining to income tax payment that is being made.

Okay. So I can read your comment by saying that the restructuring, structuring charges that we have seen, have all been paid out?

No, they have not all been paid out, but fair amount of that has been paid out.

Okay, how much remains in the payable?

I don't remember the exact number, but roughly I would say about $3 million or so, which is still sitting in the accrued liabilities.

Okay. Thanks, guys.

Richard Tse, National Bank Financial.

Just wanted to follow up on Scott's question here. Is there any chance that you can maybe break down the pipeline by vertical and kind of giving us some percentages here by legal, government, and financial, and other?

It's pretty hard for us to break down our going forward pipeline, since the pipeline first of all doesn't just stand one-quarter expense, at this point, probably are three quarters. The pipeline is -- I'm not, let's just say, I am not terribly worried about what our pipeline looks in any sector at this point. Some of that comes in quite frankly, comes in, completely for Legal, sometimes we actually have to form out the differences in government from the rest of the commercial and every thing. And quite frankly we don't typically do that while the quarter is going on. I mean, again in some areas such as Legal, we see it separately as it is coming in, but in others it just comes in as a pool, and we actually break out the verticals and traction as, after the fact, if you will.

Okay. And I guess, on the competitive side, one of your competitors, Interwoven, last week basically made a couple of claims that they wanted 9 replacements of you on the legal side and that some of the partners have deflected over to Interwoven. Can you kind of add, I guess, your perspective on that?

Well, first of all, as I have been saying all along, is that any time Interwoven takes a deal, it's from us since they don't really compete in legal with anybody else. Second of all, we haven't lost any big customers. Historically we have never really lost any big customers. We continue to grow in legal. As far as partner defections, I haven't heard of any real partners that have defected. We have partners that all along have been doing our stuff and Interwoven's. So I don't know if I count that as a defection. So, I mean there is aggressive stuff going on in Legal right now with Interwoven I can say and I can say that I've heard their talk about growing market share, growing market share without necessarily growing licenses, but I think you can draw your own conclusions. But there is a lot of stuff being done. We fight whatever we can based on what we have to offer, but there are certain times -- there are certain customers and typically they are smaller, we will just let them go because we are not going to, let's just say, meet the pricing or lack of pricing.

Okay. And finally on the enterprise side, I don't know if you gave these numbers, but do you have a split between new and existing sales on the license side?

Yes, Richard that amount has not changed from what we have given in the previous quarter. It is roughly between 25% to 30%.

Okay, great. Thank you.

Thank you.

Blair Abernethy, Clarus Securities.

Just a couple of questions for Inder. Just on the $3.4 million restructuring charges this quarter. I just want to clarify, is the 3 million that you are referring to in the accrued liabilities relating to the 3.4 or is it more to come there?

Well. We are always looking at our cost in relation to total revenue side, so if you are saying that if there could be more coming out there, I mean we keep evaluating our operations from time to time and make adjustments where need to on the cost side. As you know that we are a Company with the belief and then strong topline growth as well as the bottom line. So if we have to make some adjustments go-forward basis we will certainly do so depending on how the business stands out here.

Okay. What is your amortization of intangibles are, is this the level we should expect for the rest of the year, your 4.5 million quarter?

It is roughly more or less this amount. Yes. Right.

And Barry just on the UK Government announcement, can you just fill out a little more on that recognition as the standard for selection of the standard and sort of what you see the potential is down the road there?

Well, the FOI is sort of mandated there and that's what has been driving a lot of the business in UK Federal for a while now. We have just been recognized as being part of the standard and I don't have all the details on but basically for the RMP's we are the standard. I think it just shows that over the years people have been asking us why do you have more than one records management solution. I think the answer we have always been giving and I think that sort of proves that out is that you got to have different solutions for different markets that meet the various standards. So the UK based TNA standard for records management is different to a certain extent from the US based DoD 5015.2 and we have different offerings which we meets those separate standards. That has enabled us to go after aggressively the (samplewise in UK. So I think it is going to continue to drive our business and I think our business is doing well there already.

David Wright, BMO Nesbitt Burns.

Do you have a shipment date for Enterprise 2005?

We are saying summer timeframe, it is possible it will hit within this quarter but we are saying summer timeframe. Basically we are going through a fairly extensive beta test process which is in place now, and we want to make sure that we actually meet the requirements where everybody is testing it on beta. So far things are going okay.

Should we see a boost in revenues on shipment, does the timing matter in terms of our model?

I don't necessarily think so. Historically, the date of our shipping and the date of adoption by customers that are already deployed is typically quite skewed. What it will mean when we ship is that new customers will start deploying immediately on the new stuff but as far as other customers within the base usually risk a significant time lapse there David.

So your guidance doesn't really change based on when you ship '05?

No. Some new customers that are looking at this stuff, now that we are lining up that are definitely interested in the new stuff, and that is why they are talking about going with us because of the new advancement in stuff. So it is always possible there that you will see some sort of up tick but the cycle of new products for us is -- it's probably consistent with typically one major release a year. For us now in our current reality means we have to have one major release at everything at the same time concurrently within ECM's base, so it is a fairly large undertaking and we are going as I said through an extensive beta test to make sure that we get there with what we expect.

And going a bit into the product offering itself, you talked about the content drive a number of times, and I think at the analyst meeting down at Summit you were talking about there were 6 or 7 kind of prospects, I think, that may not have been the exact number but I think it was around there for that. How have the prospects on the content drive changed. Are there more and more customers looking at this thing, I really want that feature or is it--?

There are 3 extremely large deployments which are either just starting or going on right now which involves the early drop in the cycle which includes content drives and that is one of the primary reasons in those 3 cases.

So this will become -- you expected this will become a significant reason for people to look at your product?

Yes, absolutely. Especially within the financial sector where a content drive has enabled us to make significant advancements as to how the DM/RM system actually interoperates with excel where we had cases with links over 3000 cannot be opened in 14,15 seconds compared to literally over an hour. There is a lot of advantages there and certainly there are a number of large prospects going right now where the main drop in that opportunity was probably because of content drive.

Okay sounds good. And on the contract management, the deal management you are talking about, you are getting some success, but first of all, who are you competing directly against in that area and is there any way you can give us some kind of indication of how important is this to your overall revenues?

Well, I think I will answer the second part first. And the second part as I think you are going to see in these calls moving forward more and more announcements of deals that involve these solutions. There was one already this time which I was allowed to announce when the customer that was in there. We announced when last quarter with the Canadian government. We talked about it so much as well with the correspondence management. As far as competition, I think we come to the deals a little bit differently, we tend not to come in and compete as much as you would expect the people at our court contract management vendors because we are coming at it from a much broader type of scenario. We are coming at it because we have the mix of document management, records management, some contract management, specific stuff for its business intelligence reporting. You don't think that's interesting I guess along this line is that I can say that we have seen an up tick as we projected in some of our traditional vertical such as legal with BI over the last while because of the integration work that we have done with BI into their own proprietary billing systems, things of that nature. So, I think you are going to see more information as the customer stories over the course of the quarter and certainly within the conference call. So, I think that's the way it's going on.

Okay, incremental, I guess. In their back on the restructuring though I think you said that it involved eight people with also facilities involved there or were these fairly seeing your people? The number was just a bigger number than I would expect which is just eight people?

Yes, there were some senior people, yes, and there were some facilities amounting that as well there.

Does it at all lower year expenses going forward? Because I know it is like the total headcount hasn't really changed quarter-to-qurater?

Yes, but that's what we had mentioned even when we talked about the restructuring last time that we need to spend some excess money 'in where we have not spent earlier. So, we need to a sort of start spending some money on the marketing side and R&D as well. So, it has done that, but overall period as we just mentioned that this would make some difference to the go forward expenses, but at the same time we are already -- always looking at aligning our costs with our revenues as well.

Okay, and I guess my last question is a broader one, but it has to do with your guidance and the various product lines, your profitability level is lower than I would have expected considering that in Q1 you had $0.35 earnings on just under $54 million of revenues. Now, is this an issue of where you lowered your guidance is on the Connectivity side, I mean are you on the ECM side you had about 4% revenue growth? So, is there any change in the outlook of the growth rate for ECM? Are you expecting it's going to continue to grow and you have just seen more weakness on Connectivity here? What is driving your overall top line guidance in the effect on profitability?

Well, I think on profitability side, David, I think we are seeing a continued growth in the ECM side and we are going to invest -- continue to invest in areas where we think we can do the growth. That's going to cost us some money moving forward. Topline, let me look, you know, this quarter as we said there was slippage which came very late in the quarter, which makes us some -- this would give us less time to react, because we are very proud of the fact that we are very good at reacting to the realities of the quarter as it progresses and since it's much tougher to react to the quarter when it start happens in the very last days. So, I think that the top line guidance reflects just our cautiousness on what happened last time. Again, I don't see any indicators that Connectivity business is radically changing moving forward, the ECM business were happy with the way it's progressing, but I think the differences in the bottom line also reflects some of the investments we are going to make moving forward.

But you see, so do you expect continued growth in the Enterprise business next quarter?

Right.

Okay, so effectively the weakness is on the Connectivity side that the numbers are coming in lower than you expected six months ago, let's say?

Well, I mean they came in lower this year and I am still not -- again I don't see anything drastically moving forward. That's different. But, I think certainly what we have been more optimistic and bullish were for a quite a while now on the prospects toward the ECM side of the business needs to be our determination to keep connectivity at least flat.

Right.

No, I mean the answer is yes. Certainly all the effort and everything is being put on the ECM side of the business.

Okay, thank you very much.

Thanks David.

Chuck , Emancipation Capital.

Thanks so much. Just a few a questions. Inder, did you give out a number for support revenue, maintenance revenue for the quarter?

Service revenue which includes maintenance as well as support and professional services is 31.1 million.

Do you give out that number just on the maintenance support line, i.e., excluding professional services?

We normally don't break that down. This is a combined revenue since it's numbers.

Can you give an indication on maybe a percentage range it typically winds at?

Yes, last year it was running at roughly about, I would say, 12% to 15%, the service revenue, professional services revenue.

And there is no reason to think that materially differ from that now?

No, not materially.

Okay. On the connectivity space there has been a lot of consolidation with WRQ and mail Attachmate. Can you talk about how maybe competitive, how the environment has changed or how you expect maybe the change going forward with the new players involved?

Well, I don't think we have seen any change yet, certainly Attachmate is very recent and WRQ, we haven't seen any change yet because they have been operating up to that point pretty much as WRQ. So I am not quite sure what's going to happen with the merger of Attachmate and WRQ and the providentity because quite frankly I assume there is going to be some rationalization of product. It is possible it might even help us because if there is going to be rationalization of products there is going to be certain customers, I am not sure from which side that are going to find their product is no longer supported and then I have to look at another alternative. So, if we know about this, we are sure we're going to be in there aggressively trying to take the business and that to a large extent has been a lot of it, the sustainability of connectivity over the wireless that we have been keeping up on all the Microsoft platforms whether it is the new 64 bit platform or the other stuff. So it is possible that there could be some changes in the landscape, I am not quite sure of moving forward what it is going to be. Connectivity is pretty heavily product oriented. There is not solution per se there at all these, there is virtually no services. So, a lot of it is going to depend on how they rationalize the various product lines and how customers react to it.

Okay. And I guess seeing the short form of connectivity side, I guess, is in contrast to folks over at NetManage who actually had a good Q1. Is it just such a fragmented space that it is hard to drive any conclusions from that or do you have any comment there?

Well, I mean, you know, they had a good Q1, I mean their Q1 was okay. Like I said, it was a number of -- primarily due to a number of deals, which has swept, some of which has already come in the early days of this quarter already. Unfortunately, it is tough to -- in some cases especially for some of the larger deals whether it is in connectivity or to get our customers to be nice enough to line them all up evenly with our quarters.

How big the big deals are getting the connectivity space, it seems like a lot of the deals are quite low on the ASP side.

I think there has been over the last year still connectivity deals up around there, $10 million market.

Okay. I guess last question is, first of all no comment on -- obviously you guys connectivity remaining piece of the business and is an important cash generator and with the rollup stuff that WRQs doing, you guys don't have interest in anything like that. That 's correct right?

I mean we always look at everything for the best of the company. We have nothing at this point to say about moving in that direction.

Okay. On the acquisition side, you guys had talked about on previous calls making acquisition of something in the $80 million range revenue wise. How's that -- can you give us some update on it?

It might be hard for you to believe because we have been saying this for quite a while but we spend a significant portion of our time here, a number of people actually just looking at acquisitions and working on acquisitions. I repeat again we are very cautious with acquisitions. We are looking for something that makes sense for us moving forward, and we remain actively, shall we say looking at various opportunities. I am still hopeful that within this calendar year there will be some acquisition and as far as magnitude I don't necessarily think it has to be a large one or a small one, it is possible to be a couple of small ones or just something that makes sense for us. We remain again cautious on the way we look at acquisitions, we do them because they make sense moving forward for the company and not just for short-term again.

Paul Lechem, CIBC World Markets.

Just basically go back to the restructuring again and understanding the timing opportunity. You mentioned it is in relation to some acquisitions over that from some of the acquisitions you did, but looking back it seems that the acquisitions were done in mid '03, so it's a couple of years later. Why do you take so long to get around to doing this kind of round of restructuring?

Paul, when we were -- I think I've answered this question perhaps last time as well, that when we do the acquisition sometimes they are not -- when you do combine them, but at the same time you have to run the stuff in parallel until certain period of time everything is okay, and it takes somewhat a period of time, not relating to all the acquisitions I am saying but may be couple of them, when you really merge all the operations together, merge all the people together and at some point of time you need to align your cost with the total revenue, and that's why it has taken us a bit of a time to get to that restructuring stage in Q1.

Okay, so does this mean that some of the acquisitions have not performed to expectations?

No, it has got nothing to do with that, obviously we are trying to get a better mileage out of combining the 2 entities rather than running them separately. And another fact, which I should mention, is that when they are earn outs in certain acquisitions it is not very easy to combine them, although you may combine certain operations there, but you cannot combine the total entity fully into our own Company.

Are all those earn outs are now paid?

No, one of them is still yet to be paid yet.

Which acquisition is that related to?

Valid.

Okay, and for the remainder of this, I mean obviously you can't say definitively, but at this point in time for the remainder of this fiscal year are there any other restructuring funds in places?

Paul, again I can't say definitely though we continue to look at it, it is possible that as we go over the business model and see where we are going that it's possible we can add some into the restructuring, but I can't give you a definitive answer at this point.

Okay, just turn back to the revenues outlook here. For the last couple of quarters, the content management business appeared to be in growing in the low double-digits on an organic basis. This quarter now your going for mix seems to indicate that it is now expected to grow in the low single-digits. So, I am just wondering is that just your caution coming through here or has something fundamentally changed in the growth rate of that business?

No, I don't think anything has fundamentally changed. I mean, we are always cautious but I think also we are faced with the fact that, as I've said many times before, that the economy is still not great it's -- I haven't seen any kind of fundamental change in the economy where I can say, yes, there is a light at the end of the tunnel, things are finally getting better. I think that a number of people in this space have probably not had results that they would have liked to have had. And I think part of that is just reflective on some companies just holding back on spending the money, not simply because we are losing the deal or somebody else is winning the deal. So, I think we are -- we want to see what happens moving forward with the size of the deals we are getting involved in, the number of deals that we are getting involved in, and what's actually happening with us vis-a-vis competitors.

And last question just in relation to your spending, it seems like R&D was up in Q2 versus the Q1, is anything going on there, was that related to the product release of Enterprise 2005?

No, it's just primarily inflation cost and increase in salaries and benefits to the people, there is no other fundamental change over there.

We should see the current level continue through Q3 and Q4?

Pretty much, that's right.

David Shore, Desjardins Securities.

What tax rate are you assuming for the Q3 guidance?

Sorry David, I couldn't hear your question.

What tax rate are you assuming for Q3?

Q3 is 35%; I mean this hasn't changed from what we had indicated earlier.

And then just on pricing, excluding the legal requirements with whatever Interwoven might be doing there but generally excluding that area, what's your price environment like on the fusion side?

I don't think anything has changed much, certainly if you are excluding legal, I haven't seen any drastic changes. I think that

probably Documentum is not as tight in holding prices, as it was, let's say a while ago. I think it's just a part of a much bigger entity now, but I don't think there has been anything that's been so genetic that we have noticed differences. In that many deals, let's put it that way.

Okay. Thanks for answering my questions, and thank you.

Steven Li, Raymond James.

Hi, it's for Steven Li. Inder, the gross margins came in better than we had expected, was that because that there were just margins were coming up and as well, do you expect them to be in 87% to 88% range?

Well, this is pretty much the same kind of margin rates we're talking about, and the fact is, sometimes it goes up and down. At times when we don't have enough professional services people, you go and outsource that to -- or though you give it to the partners and all that. But sometime it happens that you have to sub-contract our professional services work, so matter of that keeps going up or down, but it doesn't vary very much between, I'd say 87%, 88% or so.

All right. And then, I got a quick question on the cost structure. OpEx this quarter is roughly 43 million, how should we think about it for the rest of the year?

As we just mentioned earlier, I think somebody else asked for the guidance for Q4 as well, we would only be in a position to give the guidance after Q3 is over, for topline as well as the bottom line.

All right. Thanks.

Rob Moses, RGM

Just two quick questions. One on -- if we're to assume that revenue is say roughly flat in the third quarter and potentially that carries for the next couple of quarters, will there be a point where you will need to pull back on R&D and SG&A -- the percentage levels I think that in quite some time, because to benchmark those numbers, and should we see those come down if we get into a period where it seems like it's going to be a longer-term issue as opposed to short term?

It's possible, but again, I'm not necessarily thinking that moving forward revenues are going to be flat. And again, we remain optimistic on the ECM side, where the going at the strategy is taking place we're going to avoid. It may not be happening as fast we want, but again, a large of that is, still I think, due to the economy affecting ECM sales. We continue to monitor R&D and marketing in every other department, and we shall continue to do so moving forward, and if necessary, at some point we just figure out that we have to make some adjustments, we will.

The second question just on cash restructuring. I didn't hear your comments under on the first half. In terms of -- did you say $10 million, or what was the number that you're thinking kind of cash restructuring in the first half that influence the cash flow statement?

Roughly about -- what I said is, the total amount is about 10 million plus, and out of that roughly about 3 million is still in the accrued liability state.

Okay. So, you were influenced -- your cash flow from operations influenced by about 7 million bugs, is that correct?

Right.

Okay. Thank you.

Gabriel , Paradigm Capital.

Thanks. Barry, just wondering if you can provide us some qualitative comments on what the demand environment is looking like in Europe? And second question was, if you are expecting some other reasons, senior headcount reductions to causing disruptions in your operations are in the sales cycle. Thanks a lot.

Okay. I'll answer the second one first. We don't see any disruptions in any of the changes we've made in our staffing over the last while, usually that are planned out ahead of time, whatever changes we're going to make to avoid disruptions? As far as Europe, I think Europe remains strong. Europe, it's pretty aggressive. Europe is continuously going after large deals, and I am quite happy with the percentage of Europe as to total revenue.

Gabriel, one other fact I'd like to mention here is that, because of the short fall in Connectivity that has got nothing to do with lay-offs or restructuring at all, because we did not lay-off or restructure that part of business at all yet. So, it has got nothing to do with that end.

Thank you.

[OPERATOR INSTRUCTIONS]. Scott Penner, TD Newcrest.

Thanks. Just a -- Barry, just a confirm. Did you say that you think that the Connectivity business should again be around 70 million this year or is that not more of a normalized statement that you were filling out?

I think it's normalized statement. I think the Connectivity business should stabilize itself. I don't see any reason why it shouldn't stabilize where it was, let us put it that way.

Okay. And on the deal that you mentioned with the , how was that actually priced. Is this an existing customer that wanted the application or it was just somebody that was pitched on the Deal Management and wanted them?

I think it was, again I am not a 100% sure but I think it was pitched on field management.

Okay. And both the Content Drive and the Outlook Client has features of Hummingbird 2005, are they priced separately?

No they are not, they are part of the platform.

Okay. So they are included as maintenance for existing customers is that?

Correct. If you are paid up on maintenance and you actually moved to Hummingbird enterprise in 2005, you will get that correct. Content Drive is totally within the guts of the system, there is no way you take it out. And the Outlook line is a way of tying all of our technologies together, which we think is radically different in the way it has actually presented the data. So virtually if you have got any piece of Hummingbird enterprise under maintenance, you will get that component and you will have the ability to use them with whatever components you do have.

Okay. So the revenue opportunity there as you mentioned to David is on the kind of a larger new customer to form?

Correct. It is not a new product, its an upgrade and within the existing frame market.

Okay. Thanks a lot.

Thank you.

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

Thank you. Well, thanks everybody for joining us this evening. Again we are happy with the way our strategy is moving forward. These are the ECM space and where we see us going with our newer verticals and solutions and hopefully we get to get on the top next time, I am optimistic that we will have better results to discuss. Thank you very much.

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