Open Text Corp (OTEX) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Open Text Corporation fourth-quarter and fiscal year-end 2005 financial results 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. (OPERATOR INSTRUCTIONS). We would like to remind everyone that this conference call is being recorded on Thursday, September 8, 2005 at 5pm Eastern Time. And we will now turn the conference over to Greg Secord, Director of Investor Relations. Please go ahead, Mr. Secord.

Good afternoon, and thank you for joining us. Today, we will be discussing our financial results for the fourth quarter of fiscal 2005 that we released earlier this afternoon. Joining me today are Alan Hoverd, our Chief Financial Officer, and John Shackleton, our President and Chief Executive Officer. After our prepared comments, the operator will poll for questions.

During the course of this conference call, we may make projections or other forward-looking statements relating to the future performance of Open Text and its subsidiaries. Any references to the development of future product releases, profitability, revenue growth, the ability to secure or retain accounts, the expansion of distribution channels or partner programs, sales and marketing efforts, the continued success of the ECM market, the restructuring of the Company, future public filings, and our current and future product offerings constitute forward-looking information. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those anticipated by Open Text. Certain of these risks and uncertainties are described under the heading "Risk Factors" and elsewhere in the Open Text periodic reports filed with the Securities and Exchange Commission from time to time, including the report on form 10-K for the years ended June 30, 1996 through to 2004.

Now I will turn to call over to Alan Hoverd, our Chief Financial Officer.

Thanks, Greg. Open Text reported total revenue for the fourth quarter of $109.4 million compared to $105 million in the same quarter last year. License revenue for the fourth quarter totaled $37 million compared to $42.3 million in the same quarter last year. The revenue decline in the fourth quarter, when adjusted for acquisitions and foreign exchange, was 5%. Product license and product maintenance revenues accounted for 77% of all revenues, with the remaining 23% relating to our Professional Services offerings.

For the 2005 fiscal year, Open Text reported total revenue of $414.8 million compared to $291.1 million in the prior fiscal year. License revenue for fiscal year 2005 was $136.5 million, compared to $121.6 million in the prior year. The revenue decline in the fiscal year, when adjusted for acquisitions and foreign exchange was 4%.

Open Text reported fourth quarter adjusted net income of $9 million compared to $14.5 million in the same quarter last year. Adjusted earnings per share was $0.18 compared to $0.27 in the prior year. Net income for the fourth quarter in accordance with GAAP was $5 million compared to $9 million in the prior year, or $0.10 per diluted share compared to $0.16 in the same period a year ago. The fully diluted share count for the quarter was approximately 50 million shares.

Adjusted net income for the fiscal year was $39.1 million compared to $40.1 million in fiscal 2004. Adjusted diluted earnings per share for the fiscal year was $0.75 compared to $0.85 in the prior year. Net income for the fiscal year in accordance with GAAP was $20.4 million compared to $23.3 million in the prior year, or $0.39 per diluted share compared to $0.49 for the prior year. The overall tax rate for the fiscal year was 25%. The tax rate in the quarter was 22%.

With respect to profitability the 3% increase in G&A as a percentage of revenue was the major factor. This represents $0.18 of EPS. To a lesser extent, lower gross margins also had an impact. As a result, the Company reported an 11% pretax operating margin for the quarter, and 13% for the fiscal year.

In the fourth quarter, Open Text generated $9.6 million in operating cash flow. For the year, we generated $56.4 million in operating cash flow compared to $37.5 million in the prior fiscal year. During the fourth quarter, the Company repurchased approximately 1 million shares under its share buyback program at a total cost of approximately $16.1 million. For the fiscal year, the Company repurchased 3.6 million shares for a total of $63.9 million.

Turning now to the balance sheet, the cash position at quarter end was $82.3 million, or $1.64 per share on a fully diluted basis. Open Text has no debt.

DSO for the June quarter was 67 days, down from 71 days in the June quarter of last year. At quarter end, deferred revenue was $75.3 million compared to $63.6 million in the same period a year ago. Maintenance renewal rates continue to exceed 90%, reflective of continued high customer satisfaction with Open Text products.

On July 12, IXOS shares were delisted from the German Stock Exchange. At June 30, Open Text owned approximately 94% of the outstanding IXOS shares, and the domination agreement for IXOS has been officially registered, so we are progressing as expected on this front. With respect to Gauss, we are proceeding to squeeze out the remaining shareholders and passed a motion to do this during the August 25th Gauss annual general meeting.

I would now like to comment on the guidance issued earlier in our press release for the first quarter ending September 30, 2005. Given that a large percentage of our revenue is generated in Europe, the historical fluctuation of total revenue will continue as it did at the last fiscal year. That said, Open Text expects total revenue in the September quarter of 85 million to $95 million, with adjusted earnings per share of approximately $0.04 to $0.15. This guidance assumes a tax rate in the low 30% range and 50 million shares.

I would also like to take this opportunity to comment on the restructuring charge, the majority of which will be taken during Q1. In Q2, the only restructuring charges will relate to facilities which can only be recorded when the action is taken. We expect to take a charge of approximately 25 million to $30 million. Approximately 60% of this expense will be incurred as personnel-related costs, with the remaining 40% attributable to facilities. The majority of the cash outlay will take place by the end of the current fiscal year. These actions will result in approximately $30 million in savings this fiscal year, or $0.43 of EPS, 35% to be realized in the first half of the year and 65% in the second half of this year. Annualized savings going forward will be approximately $40 million per year.

And finally, the Company expects to file its Form 10-K for the year ended June 30, and receive its Sarbanes-Oxley 404 certification by the due date of September 13. With respect to Sarbanes-Oxley 404 certification, at this time, we are not aware of any material findings. However, in light of the continuing effort to finalize the audit of the financial statements and the Company's internal controls over financial reporting as required by SOX 404, the Company may not be able to file its Form 10-K in that timeframe. Now I will turn the call over to John.

Thank you, Alan. Good afternoon, everyone. Thank you for joining us.

In my prepared comments, I would like to update you on the customary metrics we provide on a quarterly basis, as well as on customer stories (ph). I would also like to update you on the restructuring, and conclude my comments in areas of focus for fiscal 2006.

On our July 11 conference call, we announced that our revenue and profit results would fall short of our internal and Street expectations. The reason for the shortfall in the fourth quarter was predominantly due to a longer sales cycle around large enterprise transactions that in turn fell out of the June quarter. As we saw in the March quarter, the reality is that our business model has changed as a result of these larger transactions that are taking longer to close. Furthermore, we also saw a slowdown in purchasing in Germany, Switzerland, France, and Japan.

For the quarter 43% of our revenue was from North America, 52 from Europe, and 5% from the Middle East and Asia. In the June quarter, we generated 33% from new customers and 67% from the installed base.

During the quarter Open Text had three transactions that were greater than $1 million. And the average deal size was approximately $260,000, consistent with prior quarters. For the fiscal year, we had 16 transactions that were greater than $1 million, and average deal size on an annual basis, also approximately $250,000. No single customer contributed more than 10% of total revenues in the fourth quarter.

In terms of our partner program, we have made strides with SAP, Deloitte Touche in North America, BearingPoint and Siemens SBS in Europe, and more recently with Microsoft on a global basis. Key highlights of our significant customer purchase for the June quarter include in North America, ConocoPhillips, who purchased the full suite of Livelink ECM products. ConocoPhillips' purchase was driven by a need to establish records of management on a global basis. Daiichi Pharmaceutical Corporation, a Japanese company with a North American base for clinical development of pharmaceuticals, also chose Livelink for their Enterprise document management as well as e-collaborations. This was a highly competitive win at Daiichi, who requested that the three finalists participate in a worldwide performance test. Open Text won based on a combination of strengths including ease-of-use, support of both Enterprise document management and collaboration on the same platform, and substantial reduction in total cost of ownership.

With respect to the U.S. federal government, Open Text's government practice has a number of classified agencies and programs currently using our software. And while we are not allowed to mention them by name, the Company is experiencing growth in this area. In the June quarter, we sold a secure collaboration suite to a federal government agency that includes the entire suite and some additional security modules. We expect more growth in the intelligence sector over the next several quarters.

And lastly, in Austria, we won a large deal with the Austrian government for Livelink Enterprise Archiving. This was a highly competitive win, as it was a public tender for the business resulting in three vendors in the final bake-off. In the end, Livelink was chosen for its solution strength and total cost of ownership. The Austrian government is looking to archive all documents and records, whether they be in SAP, Exchange, Lotus Notes or e-government applications. This is a multisite deployment that will require 100% availability.

Also on July 11, I announced that we would be restructuring the worldwide organization to focus on increased profitability as we wait for the ECM space to grow at the rates we anticipated. As we said then, as we are well positioned for growth; however, like the rest of the ECM market, we have not seen the growth as we expected. The majority of the companywide restructuring has been completed. The remainder mainly revolves around reducing or eliminating facilities. The primary reason for the restructuring is to streamline the Company to focus on profits, and as Alan indicated in his prepared comments, approximately 60% of the restructuring is related to people and 40% related to facilities.

Prior to the restructuring, Open Text employed approximately 2,200 people worldwide. And about 15% of that total have now been terminated as a result of the restructuring. In terms of office locations, we have closed down or plan to close 27 offices, and we have also plans to restructure or reduce space in a number of offices in line with our streamlining of the organization, particularly around the development and customer support areas. We have also relocated key people in development and customer service to maximize efficiency. The combination of a decreased employee and facility base should result in annual savings of approximately 40 million, and position the Company for increased profitability as we wait for the ECM space to show stronger growth.

Regarding predictability, Open Text has had a long history of meeting or exceeding guidance to the Street prior to FY 2005. We have had a highly visible revenue pipeline, our maintenance contracts are for 12 months, and as Alan stated, we have over 90% renewals. Our professional services group typically has at least a 90-day backlog that provides us with visibility into that revenue line and we typically generate 50 to 60% of the license revenue from our installed base. So in fiscal 2005, it was the net new license revenue that was the source of uncertainty.

From an operational standpoint, I have made changes to our pipeline and forecasting methods. The sales management team has implemented a new pipeline management system, and we are giving closer scrutiny to every deal over 250,000 versus the prior practice of looking at deals over 750,000 on a weekly basis. Until we feel more comfortable with the new market dynamics, I have taken a much more aggressive and conservative approach to forecasting and guidance on the number that sales provides to me.

I would also like to talk a little bit about our product development efforts. Fiscal year 2005 was a significant year for the Company. We successfully integrated the IXOS archiving products with the Open Text Livelink records management and collaboration products. We now have solutions on the market to archive and provide record management for content from SAP, Lotus Notes, SharePoint and Outlook. We integrated the IXOS Web content management products with the Open Text Web content management products, and we continue to successfully sell our business solutions for the pharmaceutical, financial services, federal government, and energy sectors.

Our core message to our customers has not changed. We are still experts at using the ECM to support business needs, and we still have the most comprehensive suite of ECM technology and solutions. Going forward, we will work more closely with our customer-strategic vendors to ensure that they maximize their investment in our products.

The near-term focus is about increasing profitability, which we are addressing by streamlining our organization with our recent restructuring. The long term is about adopting to long-term changes in the ECM marketplace by broadening our integration and relationships with other vendors in the ecosystem.

I want to conclude my comments by reflecting on the FY 2005. While our revenue did not meet our expectations, our competitors' revenues did not grow very much either. We have successfully completed, and we now have the largest and most comprehensive independent ECM vendor. And in summary, we're looking at 2006, we will be focusing on increasing our profits and marketing archiving records management as the on-ramp to ECM sales and expanding our partnership program on a worldwide basis.

That concludes my prepared remarks, and at this time, would like to open the lines for questions.

(OPERATOR INSTRUCTIONS). Tom Liston, Versant Partners.

There is still one big question out there that does need to be clarified. And if you could, tell us what, if any, communication you have had with the SEC Division of Enforcement within the past year or so?

Yes, we do get inquiries from time to time, Tom, from various regulatory agencies, be it the SEC, the OSC, the Baffin (ph) in Germany. I know we obviously cooperate fully with those inquiries. If there were some sort of formal investigation, we would certainly press release that information to the Street.

And related, but not direct, can you comment on what are the main issues that might be outstanding that would cause you that you would not meet your -- sorry (ph), 10-Q filing deadline?

Sorry; what was the question?

What issues are potentially outstanding that there was some uncertainty if you would meet the deadline or not?

Oh, it is just simply the amount of effort and complexity involved in getting all the work done for the 404 filing, Tom, and the breadth and complexity of Open Text's operations. But as I said in my prepared comments, we are fairly optimistic that we will make the deadline.

Paul Steep, Scotia Capital.

John, maybe you could talk a little bit about the restructuring relating to headcount, specifically the reductions that you have impacted on the Company in terms of the staff -- which departments have been impacted, and more importantly, which geographies you have shifted people towards?

Yes, basically, what we've looked at is over the past seven years or so, as we have done acquisitions, and now over the past year, it has become clear that there -- as we focus on the ECM market, that certain organizations that we had were no longer part of our strategic organization. And so what we've been looking is to really consolidate development, consolidate customer support, and consolidate marketing into key areas like Waterloo, Chicago, and in Munich. So some of the more remote areas that we didn't -- no longer need or were not as longer strategic, we have either dramatically reduced or shut those organizations down.

And just related to that, can you talk a little bit about which product areas? Is the education market, I guess, the focus in terms of new development? Or what other products might be -- we're going to see less of going forward?

The key -- from a product standpoint, the key that we are seeing is the major demand is around the e-mail archiving records management area. That is really what we see as the on ramp to the whole ECM suite. So mainly because of compliance, we are seeing a major need for these areas, but a major piece of that is actually education, so the ability to be able to identify areas that need compliance, training on that compliance, certification on that compliance. So we are seeing education as a piece of that.

We are also seeing, for example, as the next step -- as people have gone down this path of now doing the e-mail archiving, that Web content management and the management of all their Web content is the next issue that they are then looking at, so that then, they are coming to us to look for help in that area. So while the focus will be on the e-mail archiving records management, we don't really see any other products that we're totally deemphasizing.

Mike Abramsky, RBC Capital Markets.

Thanks, John. John, can you perhaps give us some insight as to whether you think that this restructuring is going to sort of be it, or do you think that there is a chance for additional restructuring or perhaps some shedding of some product lines or additional divisions?

This is probably our second-largest -- our second restructuring in five years. And we believe this is it. It really was a streamlining and looking at taking a look at more of an efficient organizing, so that rather than having eight or nine different development centers, bringing them into three key areas so that we had critical mass that we could focus and be more efficient in those areas. So while it is not really a deemphasizing of product lines, it is more of a centralizing of the management team, as well as centralizing of the product developments. So going forward, while there will be obviously always ongoing tweaks, I don't see any further large restructuring going on in the foreseeable future.

Okay, does that -- are you suggesting there also will be some fairly high-level departures as part of the restructuring (technical difficulty) management here?

There will certainly be a refocus of some of the management team as we look at this whole new market space, and more emphasis in certain areas than there have been in the past.

And because the restructuring is -- there is a piece split significantly with an R&D focus, you have got -- part of the feedback from the channel that we have had is that there is -- you do have now a complete suite, but there is perhaps still some work to be done on integrating that suite and doing it in a way that reduces the integration, perhaps on the implementation side of some of these deals. And I'm just wondering how you're going to manage -- keeping this kind of integration on track, while at the same time processing this restructuring?

Right. With the restructuring, we are still looking at about 15% of our total revenues in R&D. And so there is still a significant amount to be done. What we are seeing in the focus as we look at the e-mail archiving records management area, the integration that we are looking at is slightly different, in that it is more interfacing to things like Microsoft Outlook, SharePoint, SAP, etc., so that the integrations are more focused onto other vendors than really looking internally. The integration that we're looking internally has pretty much been done to most points.

Okay. And just lastly, I think that given the consensus EPS on the Street and your reported EPS -- maybe this is more a question for you, Alan -- can you give us some insight into the larger SG&A charge and what is perhaps (ph) sustainable? Is that perhaps related to, for example, your SOX compliance? Or is it something else?

Absolutely -- you're right on. It was -- as you know, it's gone from 8 to 11% this year, which is around $12 million or $0.18 of EPS -- particularly large in the Q4 quarter, because the work involved with SOX compliance certainly picks up in the Q4 quarter. So it results in a very large SG&A charge for Q4. Going forward, we're looking to reduce G&A by about 1% of revenue in the '06 fiscal year, Mike.

Howard Lis, GMP Securities.

Just a few more questions on the restructuring. Can you quantify for us the actual cash amount of restructuring that will be incurred in total -- how much will be in Q1, and how much will be this fiscal year? That is my first question.

As I mentioned in my prepared comments, the bulk of the cash outlay will in fact happen in fiscal '06. And again, roughly speaking -- this isn't perfect, but roughly speaking, 35 to 40% will be in the first half of the year, and 60% in the second half of the year.

Sorry, but is the cash amount equivalent to the actual charge, or is there a difference there?

No, the restructuring is pretty much all cash items.

They are all cash items -- okay, great. And in terms of your buyback, you were active last quarter. Have you continued to be active, or do you plan to be active over the next quarter or so?

Our current buyback has expired now, so at the appropriate time we will advise the Street when and if we put a new buyback in place.

Scott Penner, TD Newcrest.

John, can you just update us on the timing, and what are the major product releases that you're looking for, and whether this timing is impacted at all by the restructuring?

No, actually, most of the major releases -- as you know, we usually try to do that to keep in line with our user conference in December, November/December. And we are still on track for those major releases at that time. The second release would be for the European user conference in April. And from our initial look at the whole roadmap, we don't see any major impacts at this time.

Okay then, Alan, if I could ask -- you mentioned the ownership level of IXOS. Could you just give us what the remaining cash commitment is to buy in the outstanding stakes in both IXOS and Gauss?

You know what, I don't have that at my fingertips. So I'm not going to -- I can't comment at this time. I just don't have that in front of me. I just (indiscernible)

We could probably get that for you, Scott.

Okay. And then John, just back to you -- when you really step back, you're restructuring a business which still did 15% EBITDA in the past year -- you know, equal with the highest of your peers. What do you really think that on a normalized basis, given the revenue outlook that you may have internally, what do you think the margin levels for the Company should be?

Basically, I would like to see us quickly return to our historic levels of around 18%. And that is if we're growing at the rates that we have been able to grow over the past few years. If we see that the growth is flat, my belief is that the margin should be higher, more in the 20% range.

Richard Tse, National Bank Financial.

Just a quick question here. What are you doing in terms of driving revenue instead of sort of cutting your costs to get to profitability? Because when we look at the competitors in the market, you make a point that they have all sort of had lagging growth in revenue, but not all of them have. So are you just focusing on the cost here? What are you doing to kind of get the revenue back to where it was? It looks like you're blaming it on the market. But is there something internally that is wrong that needs to be fixed there?

So actually, if you look back last year, what we said as we acquired IXOS was that we would really take the two companies, and as we merged the two companies together, focusing on stabilizing the integration of those two companies, not worry so much about growth. At the same time, we have in this past year also done a significant amount of really retooling the North American sales force. We have also from a -- looking at our customer base, looking at what their needs are, really focused in on a whole program, particularly around e-mail archiving records management that is focusing on what the customer needs are.

And so we see that this program is beginning to pay off. We are also seeing that the ramping up of the North American sales force -- we have all the people in place. We have the sales management in place. So we feel very comfortable that while we are certainly looking at profitability, we are already positioned for when the market does turn around that we will be able to take advantage of that.

And as I said, we are certainly seeing the pipeline building. We are seeing these larger deals that are taking longer. So we feel very comfortable that when the market turns, we can grow with it -- we can certainly keep pace with the market. And we are not seeing anybody take market share away from us. When we compete, we usually win.

Okay, and I guess one final question here. If you look at the current quarter, you're arguably kind of well through it now. And we know that deals typically take -- close in the last couple of weeks here. But do you have a sense or a gauge of where we stand now relative to the prior quarter?

We certainly -- given what we are showing as what we're giving as guidance, feel very comfortable with that guidance. We are seeing the pipeline building nicely for the year as well.

Robert Schwartz, Jefferies & Co.

Yes, this is sort of tags onto the end of your last answer, which is sort of pipeline building. Your guidance basically is up year-to-year from September. And you said that this quarter was down organically about 5%. We do have Vista and Artesia to work in there, but I wonder why you think -- what gives you -- what is working, I guess, that leads you to believe that guidance should be up year on year, given the quarter that was just posted?

Basically, what we're seeing is, as I mentioned, in North America we have seen that we have got the people in place. We have seen the pipeline building there. They had a strong Q4. And so -- and we are seeing that pick up nicely. And basically from what we can see in the pipeline today, we feel comfortable on what we are forecasting.

What I have heard on the call I think was a comment was that -- expect G&A going forward to be down about 1% as a percentage of revenue going forward. But it's up quite substantially year-to-year -- I mean, almost double what it was in fiscal '04, and maybe even more than that. And I'm wondering why it's at a permanently higher level, and why it shouldn't be coming down more than you guided to than say the 1%?

Let me comment on that, Robert. Prior to '05, G&A ran at 8% on a full-year basis. This past year, it ran at 11% of revenues on a full-year basis. There was certainly a higher rate than that in the Q4. So we would expect the 11% to come down to about 10% on a full-year basis in '06. Why would it not come down more? Because there is a significant ongoing cost associated with complying with things like Sarbanes-Oxley.

And just to sort of round out the operating expense guidance, because there are some moving pieces here, how should we think about R&D going forward? And in terms of sales and marketing as a percentage of revenue, anything you can help us with that?

Yes, so the R&D should be around 15%. And sales and marketing would pretty much stay around where it has been for this past year. (multiple speakers) We have most of the team in place so it should be pretty constant from here on out.

Peter Misek, Canaccord Capital.

First question is on your comments, John, you talked about that the ECM business appears to be slowing down. And yet, you bought a fair number of assets over the last couple of years that are sitting on your books at certain levels. I was curious to see that your restructuring charge did not include a fairly significant write-off of intangibles. And I know it's a non-cash item, but just a question around that?

Yes, as I was mentioning earlier, while we do see -- we believe that the ECM market has tremendous potential. And just about every -- in fact, I cannot think of an acquisition that we have not acquired where the product or the skillsets of the people we will be using to fill out this ECM Suite going forward. For example, things like Eloquent, while in itself was not generating a tremendous amount of revenue, but the skills and the functionality of that product embedded in the ECM Suite is a tremendous advantage for us, and is a major piece of a lot of the selling that we're doing.

In terms of actual product offerings going forward, there was a bit of buzz a couple of weeks ago that you may or may not be disposing of some assets such as Corechange. Did you dispose of any assets in the last quarter that you felt were underperforming that you no longer need?

No, we have not. And in fact, Corechange -- again, we see this for business solutions and interfacing to other portals like SAP, Oracle, etc., is a value to us.

Just a question for you, Alan. On the provision for recovery of restructuring that is in your supplemental information, where is that in the income statement? Because I see that you show it in the supplemental information and in your cash flow statement. But in the income statement, the recovery of restructuring -- is that in the gross profit calculation? Or is it in SG&A or somewhere else?

Well, it's I believe on a separate line on the P&L. That relates to a prior quarter, as well.

Oh, there it is -- yes. Okay.

David Wright, BMO Nesbitt Burns.

I'll just ask questions around your G&A expense again. Did I hear you say that Sarbanes-Oxley was a $12 million expense this year?

Yes. What I said was that G&A is up 3% this year in terms of 3% of revenue, which is roughly $12 million or $0.18. And the vast amount of that increase is with respect to incremental costs associated with Sarbanes-Oxley, yes.

And in the quarter -- so it went up almost $5 million. Were there any particular onetime items in the quarter?

No, other than to say just as you get close to the year-end, the amount of Sarbanes-Oxley work intensifies and increases.

Okay. So should we see a sequential decline? I know you planned for an annual decline. But should there be a quarterly sequential decline?

You should see a sequential decline. An awful lot of work has been happening obviously in Q1, as well. So it will continue to be somewhat higher than Q1. But then you'll see a sequential design (sic). So I mean if I were going to sort of characterize what the trend should be for Sarbanes-Oxley costs, you have probably got -- your Q4 and your Q1 are probably the highest quarters, and less so in Q2 and Q3.

Okay. And then looking at the revenues, John, in licensed versus services, is the service number in the latest quarter -- is that something fairly flat? I mean last year, you had a sequential decline there. Are you continuing to expect that?

On the service line, it is relative -- we're trying to actually keep it relatively flat. We have been doing some strategic work where we have had to get subs to come in which have hurt our margins. But obviously, there's a lot of follow-on license that go with it, so we have been doing that. But as we go forward into this new year, I would see it growing -- the TS (ph) will be up slightly in growth but the margins will improve. And I want to see getting back to our traditional areas of margin in the low 20s.

Nate Swanson, ThinkEquity.

I was wondering if you could comment -- of the deals that slipped out of the June quarter, how many of those have closed thus far?

We're trying to not get back into the treadmill of that. Some of them, a couple of them have. And the others, we certainly have not lost. They just are taking longer to close.

Okay, can you comment on where your quota sales headcount was at the end of the June quarter, and where you expect that to kind of bottom out after all the restructuring (multiple speakers)?

Yes, it was around 150. And as I said that, it should be staying at around that number approximately. A lot of the restructuring we have been doing as we have been hiring more salespeople, we might have taken out areas that were not so productive. But the total should remain around the same -- about 150.

David Shore, Desjardins Securities.

Most of my questions have been answered. But could you just break down the revenue by geography again for the quarter?

Geography-wise was, if I recall -- let me just pull it up here. Alan, do you have that? If I remember, it was about 52%.

Just while we are looking that up, let me answer the earlier questions that I did not have the number at my fingertips. I think it was Scott that asked -- in terms of the remaining cost to acquire the remaining Gauss and IXOS shares, to go to 100% for both those companies would cost us about another $17 million in terms of actually acquiring the shares.

I'm sorry, David, to get back to your question, it was 43% of revenue from North America, 52% from Europe, and 5% from the Middle East. And then it was 33% new customers, 67% existing customer base.

Okay. With the restructuring, you said the sales quota headcount is going to stay about flat. Has there been any changes to the senior sales staff?

(multiple speakers) There have been some. What we have been doing is certainly in North America, we now have -- we were short a couple of sales management managers. We now have those managers in place. And from the key senior team, there have not been any changes.

Okay. And then finally, any comment on particular verticals that were strong in the quarter?

Actually, particularly strong was the petrochemical as you'd imagine was very strong. And then the other thing we have seen again -- the UK, which has been strong all year, had another great quarter, but as did North America (multiple speakers) for the first time all year.

Andrey Glukhov, Southwest Securities.

Yes, this is Greg Rudy (ph) sitting in for Andrey. In terms of your guidance, what have you baked in there for the rest of the quarter in terms of large transactions?

Actually, we haven't. What we basically were saying is that going forward, anything over $1 million I will not put in the forecast until it has actually been closed. And then we’d put it in.

Okay, and what is your foreign exchange assumption for the guidance?

It's I think what it currently is today -- around $1.23, something like that.

Paul Steep, Scotia Capital.

Just a quick clarification, John, on an earlier comment -- have all 330 staff that are going to be exiting been informed, and when are they going to be leaving the organization?

Most of it has already been done, Paul. There are a few that are finishing off work that have been informed -- just finishing off some things for us, and would probably be certainly by the end of Q2 I believe would be done. But the majority is already done.

Brian Freed, Morgan Keegan.

Could you comment on the number of $1 million transactions you closed quarter to date?

In this quarter?

Yes.

I'm not sure exactly. No, currently, I can't.

Ed Maguire, Merrill Lynch.

One question I have is around stock compensation expense. And could you talk about what your stock comp expense would look like -- I guess you will be filing your K shortly. But what it is going to look like for '06 and going forward, and just your philosophy in terms of option grants versus restricted stock?

Well, in terms of the financial impact, it's roughly -- and I say roughly -- somewhere in the neighborhood of 1.5 million U.S. a quarter before tax impact for tax shielding.

Okay.

Yes, and on the -- going forward, we have been talking to a number of companies about what they are doing and how they are handling it. And we still have not come to any decision. But it has not been a major impact for us over this past year. We have not been giving out that much in the way of options anyway.

I noticed there are one or two other companies that had June fiscal years are already giving guidance for what their GAAP expense is going to include. I just want to make sure -- do you guys need to report the stock compensation expense as part of your GAAP earnings in fiscal year '06?

That is correct. As you know, we've been disclosing this for some time (multiple speakers) in our quarterly and annual filings. But yes, starting with Q1, we have to record it in our financial results as well.

Okay, and just a question for John. Just broader -- you had made the comment that the whole ECM market seems to have underperformed a lot of the original expectations. And as you look across deals that may have slipped that you had expected to win, and some of the dynamics that are going on across your competitors, I mean, what could it be? What are the factors? Is it that the larger vendors may be playing a bigger role that wasn't anticipated before? Or are some of the drivers more service oriented rather than software oriented? Just some quick, high-level thoughts on that?

Yes, (multiple speakers) the interesting thing is that the three deals -- the big deals that we closed in Q4 were all brand-new. And they were all around e-mail archiving or records management as the major driver, even though they were buying the full ECM Suite.

We are still seeing -- a key issue is that I think I mentioned before where a lot of customers as they realize the implications are -- particularly around the whole business processes around compliance, where the impact that it has on an organization and the things they have to think about from a business process area, are slowing deals down. As you mentioned, we are seeing more IS organizations involved in some of these deals as well. So we are working closely with people like SBS, IBM, Global Services, those kind of folks as well. But again, they are also helping out on these business processes. That is what we are seeing is delaying some of these big deals.

Ralph Garcea, Credit Suisse First Boston.

Just following on on the big deals again, can you mention who the competitors were, and why you did win on those three? What were the main factors hopefully other than price?

Yes, on -- I think something like -- there was either Documentum; Hummingbird we saw, which we have not seen in a long time. FileNet was in one. And I believe Microsoft was in another. And the key issue was scalability and total cost of ownership were the -- particularly around the e-mail archiving product.

And did all of them require sort of a global pilot to show the scalability in that?

In two out of the three, they did, yes.

So would that be one of the reasons, I guess, you're seeing delays in the deals, as you have to roll these out?

Actually, no. It is more, as I said, on the issues of having to get other functions involved in the process. So whether it be around compliance, where you might have -- general counsel has to get involved as well as certain business heads -- it is not just an IT decision anymore.

And just lastly, given the cost savings you are going to have with the restructuring in that, would you feel comfortable with sort of north of 50 million in cash flow in fiscal '06?

Yes, well, we have not given specific guidance. But that is fairly rational, given what we delivered this year.

Steven Li, Raymond James.

Just a couple of questions. John, when you talk about reverting back to EBIT margins, historical EBIT margins, are you also expecting gross margins to revert back to 75%?

We're looking at gross margins. It will go up a little bit, certainly, this year -- a couple of percentage points. And so we should be getting close to it historically on that one as well.

Okay, and can you also tell me how much revenues came from Germany in Q4?

From Germany specifically?

I would refer you to our 10-K filing, which should be out shortly. It gives you segmented data, country data. So that will clarify that for you.

Paul Lechem, CIBC World Markets.

John, you have mentioned a couple of times in the last couple of quarters that you are seeing deals get bigger. That is one of the reasons why you're seeing these delays. But the numbers don't really seemed to bear it out. You are saying the average deal size is roughly the same; only three transactions this quarter greater than 1 million. When do we actually see the numbers start to support your thesis, and when does it sort of reach sort of a stable situation where the larger deals, even though they are delayed, you start to come back into sort of a more stable pattern?

Well, that is the $64,000 question. And that's why I have been cautiously saying until I can see this thing stabilizing that we will only be giving guidance on a quarterly basis. If we look at the pipelines, we can see these deals in there. There are -- well, some of these have been 1 million, 2 million. We are beginning to see deals much larger than that, but until they become -- there is a lot more in the pipeline, and a lot more predictable, it is anybody's guess.

Okay. I mean, you have been talking about it for maybe two or three quarters now, so (multiple speakers)

Yes, well, actually, really, Q3 was when we started to see the change. If you look back from up to December, we were pretty much -- well, Q1 was weak. Q2, we blew it away. For the total year-to-date, we were right on track. So it was really in Q3 that we started to see this difference. And as I said Q1, we feel that there is a good strong pipeline, and that the pipeline is building. But until we have seen some of these bigger deals stabilize and be predictable, it is going to be hard to say.

And does the competitive dynamic change with these larger deals versus your traditional set of competitors?

I think as we kind of inferred with Ed was we are seeing because of these deals that there are more systems integrators involved potentially. There might be a strategic vendor like SAP or Microsoft involved that we have to integrate more closely, and that kind of thing.

Okay. And my last question -- from the restructuring, on an apples-to-apples basis, is there any revenue impact from the number of people you let go? Most of them sound like they are not directly related to the customer (multiple speakers) sales part of it. But what would you say (multiple speakers) --?

Just typically, in any kind of restructuring, there is usually some kind of fallout. And we have tried to anticipate that. And as we said that from a headcount standpoint, it pretty much is. From quarter carrying headcount, we have got the same as we had in Q4. There have been some changes to it, but we think we have anticipated whatever loss there will be, that we have taken that into consideration on the numbers that we have given you.

Well, thank you, everybody. That concludes our remarks. And we look to be again having the next call will be -- Greg, what is the date? We will be getting back to with the date in the near future.

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