Open Text Corp (OTEX) 2006 Q3 法說會逐字稿

Welcome to the FY 2006 Q3 financial results conference call. (OPERATOR INSTRUCTIONS).

I would like to remind everyone that this conference call is being recorded on Thursday, May 4, 2006 at 5 PM Eastern Time.

I will now turn the conference over to Mr. Greg Secord, Director, Investor Relations. Mr. Secord, please go ahead.

Good afternoon, and thank you for joining us. Today, we will be discussing our financial results for the third quarter of fiscal 2006 that were released earlier this afternoon. Joining me today are John Shackleton, our President and Chief Executive Officer, and Alan Hoverd, our Chief Financial 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. These oral statements contain forward-looking information. The actual results could differ materially from a conclusion, forecast or projection in the forward-looking information; certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors or assumptions that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information, and in the material factors or assumptions that were applied in drawing a conclusion, or making a forecast or projection as reflected in the forward-looking information, are contained in Open Text's Form 10-K for the fiscal year ended June 30, 2005, and Form 10-Q for the quarters ended September 30, 2005, and December 31, 2005, and in our press release issued earlier today.

Now I will turn the call over to Alan Hoverd, our CFO.

Thanks, Greg. Today we will be discussing the financial results for our third quarter of fiscal 2006, which ended March 31.

Total revenue for the quarter was $100,900,000, a decrease of 4% from 105.2 million in the same period last year. License revenue for the quarter totaled $28.4 million, down 14% from the same period last year. However, after adjusting for the impact of foreign exchange, revenue in the quarter was up 1% from the same period last year and license revenue was down 9%. Product license and product maintenance revenues accounted for 75% of all revenues, with the remaining 25% relating to our professional services offerings.

Open Text reported third-quarter adjusted net income of $13.7 million, or $0.27 per share on a diluted basis, compared to $10.7 million, or $0.21 per share on a diluted basis in the same period a year ago. This represents 28% growth year-over-year. For comparative purposes, adjusted net income increased 51% compared with Q3 last year when normalized for the impact of foreign exchange and income taxes.

Net income for the quarter in accordance with GAAP was $7.3 million, or $0.15 per share, compared to a net income of $5.3 million, or $0.10 per share in the same period a year ago. The share count for the quarter was approximately 50 million fully diluted shares.

Beginning July 1, 2005, Open Text adopted the Statement of Financial Accounting Standards 123(R), share-based payment, with respect to the expensing of share-based compensation. The GAAP net income reported today is inclusive of share-based compensation expense of $1 million net of tax, or approximately $0.02 per share on a diluted basis.

For GAAP presentation, effective this quarter, in accordance with FAS 86, we are reclassifying the amortization of acquired technology assets to cost of sales from operating expenses. With respect to adjusted earnings, the overall tax rate for the quarter was 28%, compared to a rate of 25% in the prior year. Year-to-date, the tax rate for adjusted earnings is 32%, compared to 20% in this same period last year. On a GAAP basis, the overall tax rate for the quarter was 26%. The variance in tax rates is mainly attributable to a different mix of GAAP income in the quarter, contrasted with the adjusted earnings by taxing jurisdiction.

Gross margin for the quarter was 69%, flat with the same period a year ago and down from 72% in the second quarter. The decrease reflects a shift in the mix of revenues, partially offset by improved services gross margins from 21% in the second quarter to 23% in the third quarter. The Company reported a 19% adjusted pre-tax operating income margin in the third quarter, up from 13% in the same period a year ago.

For comparative purposes to last year, operating cash flow in the quarter was approximately $33.4 million before the restructuring impact of $4.7 million, which reduced the overall operating cash flow to $28.7 million, as compared with the $29.9 million in the same quarter a year ago.

Turning now to the balance sheet, the cash position at quarter end was $114.2 million, an increase of approximately $27 million from the end of the second quarter. At quarter end, deferred revenue was $81.3 million, compared to $80 million in the same quarter last year, representing a 2% increase over a year ago. When adjusted for the impact of foreign exchange, deferred revenue was up 5% over the same quarter last year.

Accounts receivable at quarter end was $74.7 million, compared to $79 million in the same quarter last year, resulting in a DSO of 67 days, compared to 68 days in the same period a year ago.

In the third quarter we purchased approximately 35,000 IXOS shares, and continue to own 95% of the outstanding shares of IXOS.

Moving on to the specific guidance issued in our press release, for the fourth fiscal quarter ending June 30, 2006, the Company expects total revenues of 100 to $110 million, with adjusted EPS of $0.25 to $0.35 on a diluted basis. On a full-year basis, the Company expects total revenues of 404 to $414 million, with adjusted EPS of $0.96 to $1.06 on a diluted basis.

As evidenced by our actual results in this Q4 guidance, we are achieving our main objective for this fiscal year of improved profitability. This guidance assumes the current foreign exchange rates, as well as a tax rate in the low 30% range and 50 million shares outstanding.

On September 8, 2005, the Company announced a pre-tax restructuring charge of approximately 25 to $30 million. As of March 31, 2006, the Company has recorded a total restructuring charge of $26.3 million, inclusive of a $600,000 true-up credit during Q3. For Q4 we don't anticipate any [systemic] changes to these restructuring charges.

To update on anticipated savings from restructuring now that the quantum and timing of actions is finalized, we anticipate overall FY '06 savings in the range of $25 million from the Q4 FY '05 run rate. For FY 2007, we continue to project annualized savings in the $40 million range.

In the third quarter, we incurred a restructuring cash outlay of approximately $4.7 million, bringing the total restructuring cash outlay for the first three quarters of this fiscal year to $12.8 million. We expect to discharge an additional amount of approximately $4 million in the fourth quarter of this fiscal year. This will leave $8 million, or approximately 30% of the total cash outlay to be discharged beyond fiscal 2006.

As announced in our press release, after seven years as CFO of Open Text, I am moving to a new role within the Company. I am looking forward to my new challenge as Executive Vice President of Strategic Initiatives, reporting to John. I will be focusing on increasing efficiencies in our business operations. This role will allow me to leverage my extensive background in operations, as well as finance. I would like to take this opportunity to welcome Paul McFeeters to Open Text. Paul will be joining effective June 1, and we will work together to ensure a seamless transition. And last, I have really enjoyed interacting with the investment community and wish you all well in your future endeavors.

Now I would like to turn the call over to John.

Thank you, Alan. Good afternoon, everyone, and thank you for joining us. Before I begin my prepared comments, I would like to take a moment to thank Alan for his hard work and dedication to the finance operation of this company over the last seven years. I look forward to continuing to work on our relationship and helping Paul transition to CFO, and as you begin your new strategic role with Open Text.

In my prepared comments, I would like to update you on the customary metrics we provide on a quarterly basis, as well as on our strategic partnership and customer highlights.

I am pleased with the progress we've made towards our profitability goals. As I stated at the beginning of the fiscal year when I took over as CEO, our focus is on profitability. And while we are seeing license and revenue growth in key areas, it is tempered by the work that we have done to eliminate unprofitable areas. Growing our profits and building off on our historical model has been the overriding goal this fiscal year.

With respect to the metrics for the quarter, in the March quarter we generated 30% of license revenue from new customers and 70% from the installed base, which is in line with the past few quarters. The average transaction size was $225,000, in line with previous quarters. We had nine transactions over 500,000, compared to 12 in the second fiscal quarter. We had two transactions over $1 million, and that is unchanged from the third quarter a year ago. We added 101 new customers in the March quarter.

Our market space continues to be driven by compliance demands of our customers, whether it be the Patriot Act, SOX, BASEL II, FAA or FDA. This translates into products like records management, e-mail archiving, or Livelink risk management, which also [pulls] through the traditional solutions such as collaboration, workflow, document management, and Web content management. Our customers are looking for comprehensive ECM products that are highly scalable and easy to deploy.

We continue to characterize the competitive landscape as unchanged, and we have not seen much impact from pricing pressures.

We see revenue broken down by vertical as follows. 34% from high-tech manufacturing and telcos, 10% from government, 8% from financial services, 7% from energy, and 6% from life sciences.

On the product front (technical difficulty) for the third quarter, releases included Livelink Enterprise Server Version 9.6, new releases of Livelink Explorer and Records Management, as well as the new Enterprise Connect, which is the interface to SAP's Duet. In addition, we released application modules for contract management, case management, regulated documents for the energy vertical, and accounts payable for SAP.

While profitability was our first goal, our second goal this fiscal year was to grow our partner program and increase the percentage of revenue from our partners. In the third quarter our channel partners contributed or influenced over 15% of license revenue, compared to 12% in the March quarter last year.

During the quarter, Open Text was the guest keynote speaker and participated on a number of panels at both Microsoft and SAP conferences, as well as developing joint products and go-to-market strategies with SAP and Microsoft, in addition to other partners. We announced an expanded relationship with Atos Origin, and we have key SIs like Accenture, Deloitte, and BearingPoint coming up to speed with our new releases.

In addition to compliance, our customers are focused on leveraging existing IT investments as they solve their content management issues. Examples of significant wins this quarter include Unaxis, a leader in the production of thin film, vacuum and precision technology. Unaxis AG chose a complete Livelink ECM solution from Open Text that included SAP data archiving, e-mail management, extended workflow, and file system archiving functionalities. This solution will provide Unaxis with a single tool for collaboration, data archiving and workflow, among others.

Another customer was Metronet, in the engineering and construction sector. Metronet Rail purchased over 1.3 million [in] Open Text licenses to create a central enterprise-wide information system to provide secure capture and management of all unstructured information. As the rail industry is heavily regulated, the ECM solution is also meant to address the need for document control and regulatory compliance of Metronet.

T-Systems, one of our existing customers, a leading telecommunications service provider, purchased additional Open Text licenses worth more than 1.8 million to expand their existing ECM system. The extension is meant to provide T-Systems with an improved content lifecycle management, document management, and collaboration functionalities for over 45,000 users.

Geographically, Germany, Switzerland and the UK did well this quarter, with 49% of our revenues coming from Europe. 46% of our revenues came from North America and 5% from the Middle East and Asia.

Over the last 18 months, we have done a lot of work to strengthen the North American sales team, and this group year-to-date has grown license revenue by 20%. The professional services and customer service groups also managed to hit their revenue targets for the quarter.

Earlier today, Open Text hosted LiveLinkUp Europe in Cologne, Germany and in London. The meetings were well attended, with over 800 people attending the sessions. Also participating in the meeting was the head of Microsoft sales for Germany and the head of SAP Duet, formerly the Mendicino product, sales for Europe. They were on hand to explain how we complement their strategy and how we will be working together in the future.

In conclusion, while revenues came in at the low-end of our range, we have a positive outlook on the ECM market space, we are seeing profitable revenue growth in key areas, and I am happy with the profit and cash flow results we have reported today. We now have a solid base to profitably grow the revenue going forward. Our partners will continue to be an integral part of our go-to-market strategy, and we are making significant progress in this area.

That concludes our prepared comments. At this time I would like to open the lines for questions.

(OPERATOR INSTRUCTIONS). Paul Steep, Scotia Capital.

John, maybe you can just chat a little bit about the license sales. You have, obviously, seen some significant headwinds, and you did talk about pruning some unprofitable revenues. Maybe you can go over what more -- if there is more pruning to be done, or why the outlook is essentially down continued into Q4. And then maybe an update on where the global head of sales search is at?

On the pruning, yes, we are pretty much done, particularly in North America, where we have over the past 18 months done a lot of work in rebuilding that organization. So, going forward, we do see in fact building the whole sales organization.

In Europe, the key focus will be on Germany and the UK, and the teams there are well in place. So really the pruning have been more in the peripheral areas, particularly in Asia-Pac, Middle East, etcetera, where we are now working through our partners there.

On the issue of going forward, as I said, now we are at the point where we do believe we are now ready to grow revenues and we will see this going forward. And that will be the major focus.

On the looking, searching for a VP of sales, we have a number of strong candidates. We have over the past six months slightly changed our profile as we look, working much more closely with partners for someone with a lot of global partner experience. But also, we have a strong operations team in place today, so we are really taking our time, as this, obviously, is a very strategic hire for us.

The cost savings this year -- we have dropped from sort of 30 million to 25 for 2006. What sort of changed since we last talked in February that would alter the view for the current fiscal year?

It's mainly just the timing of the actions that we are taken. Because as you can see, the cost savings for 2007 are in line with what we have previously communicated. So it's just timing of getting through the program.

And then the margins on license sales, gross margins there were 86% this quarter. Why the hit, Alan?

We actually talked about this a bit last quarter. Last quarter it was 95%, and people were asking why it was so high last quarter. And really what it is, it's the mix of deals within the quarter. That line is mainly third-party royalties, third-party costs. So depending on the deals you do in a quarter, it does have some volatility to it. On a year-to-date basis, it is running at 91%, which is quite consistent with what we guide for that line. (multiple speakers) way to think about it.

Mike Abramsky, RBC Capital Markets.

John, could you talk about the trend a little bit in your achievement relative to your guidance? Q1 and Q2, it looks like you came in fairly close to the high-end of guidance. This quarter, you came in at the low-end of guidance. I realize Q1 is weak, but it seems your normal policy is to exclude unclosed deals at the low-end. So what perhaps might have occurred that changed for you at the time you gave your guidance, which was 32 days into the quarter? And how are your close rates doing on these larger deals, relative to the last couple of quarters?

So, one issue, Mike, was as we did the announcement, our guidance at the beginning of the quarter, we already had one of the large deals in. And as I had mentioned previously, we do tend to try and -- at the low-end, we wouldn't be looking at any large deals. In looking at why we didn't get to the high-end of the range, it was the slipping of a number of large deals.

Can you just give us some insight as to what is different about this quarter than the last two, where those slippages didn't occur?

What we saw this quarter was government spending being delayed, whereas last quarter -- I think as you see the end of the calendar year, you see a lot of government spending. That was probably the main difference.

And has that also played into the reason for your flat guidance for next quarter?

If we look at previously last year, we see guidance is in line with what we had planned for the year. And so, I believe last year we did something like 5% increase over Q3. And so we are looking at those ranges for this coming year -- for the coming quarter; sorry.

Okay, just a little bit more on this pruning unprofitable revenue. Is there -- we thought sort of post IXOS a lot of this was done. So, where is this, or where was this kind of still coming from, and how did this emerge?

Same thing as based on the restructuring plan, was basically certain areas, say, within Europe, but also areas in the Middle East, Far East, etcetera, where we saw there just was not profitable business. And so working with partners to take on some of those relationships with our customers.

Tom Liston, Versant Partners.

Just a follow-up to Paul's question on the Q4 guidance. If we were to assume that maintenance and services are relatively flat, the license -- the low-end of the guidance would assume that license goes to somewhere around 27 million, which is down about 10 million year-over-year. So, what events would have to occur and what product areas would have to fall short such that you'd hit that bottom-end of the guidance?

Again, Tom, it would be really -- as we do the conservative guidance, it would be to have no large deals in the quarter, which would be unusual. But we want to stay within the plan that we have done for this past year.

And on the deferred revenue and maintenance, could Alan first comment on any currency impacts year-over-year on both these items? Second, any further comments on renewals would be helpful. And third, some of the competitors and other software companies are talking about more pricing pressure, whether it be on a renewal or perhaps an upfront negotiation on a new large deal. Are you seeing any of that in the industry?

Let me comment on the numbers first. Year-over-year, in terms of the balance sheet deferred revenue, the number is up 2%. But if you adjust it for exchange, it's up 5%. Similarly, the revenue year-over-year -- the maintenance revenues, again, looking at the absolute numbers, it looks like it is up 1.5%. But again, if you adjust for exchange, it is actually up 7%. I will let John comment on the operational aspects of your question.

On the operations, we are seeing really two criteria -- actually, three. One is we have seen in the past couple of years where a number of companies have either merged or gone out of business, that obviously, the renewal rate has dropped for those companies. We have also seen that people are, as we all -- all IT spending is being supervised very carefully, so if seats are not being used, they are very critical of looking at how they can save their maintenance.

But the key issue that we have seen also is we see our customers where they are going in for enterprise-wide bundling, multiple purchases under one enterprise purchase, that also that does reduce maintenance a little bit as they do these global deals with us. So, that has affected it a little bit as well. But in general, it is around, I believe, 91, 92% renewal rates, which is maybe down 1% year-over-year.

And General Dynamics a few days ago announced a $9.6 million deal to implement Livelink for the U.S. Air Force. Can you quantify your contribution to that project and talk about when the revenue will be recognized?

Actually, as you may be aware, General Dynamics -- this was a General Dynamics press release; this was not a joint press release. And it was purely to identify that one of their internal groups had been awarded the budget to continue supporting the Livelink installation. And this had nothing to do -- they have been a longtime customer of ours, an ongoing customer of ours. But this was purely an internal project that they had won.

There's no additional licenses related to this?

No.

Scott Penner, TD Newcrest.

Alan, just first of all, on the restructuring charge, I think you had mentioned last quarter that there would be a stub of a 3 million charge this quarter. Given your comments about the shifting of the restructuring and the fact you're still expecting the same savings next year, is there a group of employees that you have decided not to terminate? Or what accounts for that difference?

Yes, there was some fine-tuning at the plants. So that was certainly an element of it. But also, what we are finding -- attrition -- in some areas, attrition takes care of the restructuring activities, so you don't take the restructuring charge, right? (indiscernible) you plan on letting a certain group of people go, or culling a certain group, and you get resignations. So therefore, you don't have to take a restructuring charge. So it is part of that. It is fine-tuning the program, basically. Those are the main two items, Scott.

With this sort of unplanned attrition -- is this out of norm for you?

Not really, no.

I also wanted to ask, John, just in general, you have seen some pretty good -- arguably, some pretty good results from FileNet, with mid-teens software growth year-over-year, and the documented business as well. It seems like you guys are going in a different direction, yet the competitive environment, as you say, hasn't really changed. How do we sort of view that?

I would say two things, Scott. If you looked at documents or FileNet, for example, where I think something like 75% of their revenues come from North America, if we look at North America, year-to-date they have grown about 20% on their licenses. So we are seeing the ECM market picking up nicely in North America. So, that is one piece; a lot of this is geographic, based on where the base is.

But the second point I would say is that our focus has been on restructuring and streamlining the organization. And we have given up on profitable revenue and focusing on our key areas, so that you would expect not to be growing at the rate that the competition has. But I would also believe, based on our customer base and based on our global reach, that we do not see us giving up market share. And when we compete, we are winning our fair share of this.

Also, with our partner relationships with Microsoft and SAP, we are -- you could argue that, yes, we are changing strategy. But for the long-term, we see this as the way to go. But meanwhile, our traditional business is -- it's where we are focusing, we are doing well.

And when you say you are shifting back to growth more, John, I think last quarter, you made the comment that you see kind of a market growth of 7 to 9%. When you talk about shifting to growth mode, is that the kind of numbers that we should be sort of expecting? And is that sort of number consistent with your current cost base?

That's right. In fact, in certain areas, its double digits; in other areas, it is a little less than that. But in general it is in that range. And we believe we have the sales team on board today to be able to generate that kind of growth.

Howard Lis, GMP Securities.

Can you comment, please, on the maintenance contract renewal rates you experienced this quarter, and compare that to last year's level, please?

I think I mentioned, Howard, that if we look in general, it is around 91, 92% of renewal, down about 1% of last year. And I said what that is contributing to is people buying global enterprise-wide licenses where they're merging multiple contracts into one, as well as where we are seeing a number of our companies that have been acquired and merged into one company.

And those percentages are based on the number of contracts or the dollar value of the maintenance contract?

It's the number of contracts.

And on a dollar basis, how would that look?

On a dollar basis, if you took -- for exchange, it is about a 7% increase.

Great. And then, as you look into next year, I know you have got the restructuring done, and your costs -- you said you're sort of satisfied with where they are at. Can you give us a sense of where you see the growth opportunities for new licenses, which have waned a bit here in this quarter, seemed weak? (indiscernible)

We see, as I said, strong in North America, strong in the UK, of our traditional base. We also see, with the work that we are doing with Microsoft and SAP and others, that we see a lot of interesting potential in this area as well. But we would -- if we just looked at our traditional base, I would see us looking at the kind of growth that the rest of the industry is seeing.

Where do you stand now on your stock buybacks?

We don't currently have one in place, but we can put one in place, should the Board choose to, within 48 hours.

So nothing came out of the most recent quarterly Board meeting to pursue that?

That's correct.

Richard Tse, National Bank Financial.

John, just a question on the timeline for recovery and license growth. I know you are not giving guidance, obviously, for next year. But what is your target to actually start -- for us to get to a point where we actually see license growing again?

I definitely think that we should start seeing it by Q1 of next year.

And the fact that you guys are sort of shifting towards more of a solution sell as opposed to an infrastructure sell, doesn't that mean that the number of potential seats you can sell is reduced as a result of that?

No. If you look at our existing base, the penetration of that base has got still lots of room to grow in those areas. As well as, obviously, in that base also, we can sell solution applications on top. But what we are seeing, particularly around e-mail archiving, records management, is tremendous opportunity.

Robert Schwartz, Jefferies & Company.

Your service margins were better this quarter, and I was wondering if you can help us understand why, and whether you expect that current margin is indicative of what we should see going forward.

That is the goal, Robert, is to -- in fact, I want to see them improving still a little bit further. As part of the focus on key areas, we have got out of doing work in lesser-profitable areas, particularly some government areas where the rates were fairly low, and yet the costs of both subcontracting and internal costs were quite high.

I was wondering how many salespeople you finished the quarter with versus what you started with, and what your plans are to hire going forward?

It has probably stayed around the same. It is around 140. And what -- we have had some, obviously -- as you do every quarter, you pick up and you hire some new, and you lose some. So, what we have today on board, we have enough to grow to the levels we want to grow for next year. And as we will be looking on a quarterly basis, as we see the pickup, particularly in areas with partners, we will continue to hire and grow based on the growth level. But today, we have the capacity to be able to hit the numbers that we are budgeting for for next year.

Do you think you have any other execution issues -- I don't know how you felt about execution this quarter -- but any other execution issues you need to address in the field?

In the key areas that we are focused on, I don't believe so. I'm very happy with what I am seeing in North America, the growth and the operations of the group, the programs that they are putting on. And Germany and UK is really doing well.

My last question really addresses Europe and maybe the IXOS products. I was wondering, outside of -- did Europe come in as you expected, better than you expected? And if you look at the IXOS products as a group, did they perform as you expected worldwide, or were you disappointed?

To answer both of those, Europe was about right where we expected, 98, 99%. On the IXOS products, pretty much we are seeing a lot of interest, obviously, in the e-mail archiving, records management, which is a blend of both products. But the rest, U.S. SAP did extremely well. We are very happy with that.

Duncan Stewart, Orion Securities.

I think this first question is probably for Alan. The issue with the cost of license revenues -- given that the last two quarters have seen sort of weaker-than-run-rate license revenues, does that -- is there any structural reason why that pushes the -- as you said, the flowthrough component of it up?

No, not really, Duncan.

Okay, so it -- I mean, listen, I am not trying to take two data points and make a draw line; I was just curious. I guess one of the things that sort of jumped out at me as I look at the statement of operations, I look at the sales and marketing costs. And I guess I find them -- that 24.7 -- I find them slightly higher than -- kind of if I take the various money you are expecting to save this year as a result of the restructuring, I am a little surprised sales and marketing isn't a little lower. Also, given that license was not that high this quarter, you would expect there to be fewer costs associated with that.

Really, Duncan, we are offering (indiscernible) our overall model for the year around planning in terms of where we want to invest our cash. So, we are tracking to that. We are investing to a certain extent in sales and marketing. And John has, I think, previously commented on what we have done in development. And we have a plan going forward while G&A is still running up around 11%. We do have plans to start to bring that number down back to historical norms as we go forward.

So, Duncan, two things. What I would say is that, as Alan mentioned, the streamlining was in development areas, but also, as we are looking now at G&A, to bring that number down. While we have reduced sales and support in unprofitable areas, we have tended to rehire in more profitable areas as we see the markets growing.

As a follow-up to that, you said that the number -- the headcount on sales was more or less the same, but as always, some people walked onstage, some people walked off. Was the turnover -- what would the turnover in the quarter have been on that base?

It was not out of the norm. Most of the changes we have done. And so it was, I would say, normal churn that you would see; in fact, not significant this quarter. The key issue that we are also seeing is is that, particularly in areas like the U.S., where we have really regrown the group, we are seeing, as people have been on board for now nine months to a year, that we are getting higher productivity out of them. And we will see that continue into next year.

In the press release you talk about license growth actually -- sorry, not license -- revenue for the whole quarter would have been up if you minimize the impact if you exclude foreign exchange. That is just talking about the Euro and U.S. dollars, right?

It's the Euro and Canadian against the U.S. dollar.

Euro and Canadian. But Canadian is not a significant effect at the revenue side?

Correct.

And finally, a fairly happy question. I was just down at NAB, National Association of Broadcasters show, and you guys with Artesia had an entire digital asset management section. And frankly, I was blown away. The product was just super, and really great traffic through the booth.

You talked about some of the parts of Open Text growing sort of faster than your sort of overall ECM space. Will digital asset management fall into that? Kind of what number -- there seems almost to be an inflection point here on the DAM side. Sort of I throw around numbers in my head of sort of 15 to 20% annual growth for at least a couple of years. Would you guys agree with that?

Actually, it is a very good point, Duncan. We see Artesia as one of -- we believe it's the best product in the world in this space. The growth to date -- we see it as a rising star. The growth to date has not been significant, but we do believe that it will be in the future.

Have you ever broken out -- well, since you bought them, I think it was a fair number of quarters ago -- roughly, kind of what percent of revenues is Artesia, or do you not give that?

We don't. It is not significant, actually. We do see this as great potential.

You know what? You are not alone. There were a lot of really happy people taking the booth tour.

We have some great customers using it, too.

Ed Maguire, Merrill Lynch.

Going beyond the search for a head of sales, could you comment just on where you are, how satisfied you are with the folks you have in key management roles, and any other positions that you are currently looking to fill or expand?

Yes, sure. If you look at the sales side, both Europe and North America, I believe we have a very strong team that can go against anybody. On the partner side we have invested significantly over the past 18 months. That is doing extremely well. I couldn't be happier with the work that they have done over the past year. The professional services side, strong management, both Europe and North America. So, I am very happy with what is going on there.

The issues we are working on, as Alan mentioned, we are trying to reduce G&A, streamlining some of the areas there. And what we are looking for as this worldwide VP of -- would really be to pull the go-to-market, the partner programs, which would be strong, as well as professional services expertise, to pull all these things together.

And Alan, in your new role, can you comment at least what may be different about your current role? I know you have been focused a lot on cost reductions, but are there any areas that you as still low-hanging fruit?

I am not sure I understand your question. Try again.

In your new role for strategic initiatives, you will be focused on additional cost reductions. And I am just wondering if you could provide just a little bit more color around areas where you feel like you are going to be spending a lot of time.

Sure. And these aren't necessarily the ones, but many things come to mind. We need to get to one ERP system in the Company; right now we have two. So, that is an obvious opportunity for us to move forward and save some money and get more productive. I spend lots of time on real estate now, and there's still, I think, opportunities there. Administrative processes. There's just a plethora of things where I can bring my financial, plus my previous operational experience, to bear, working with the executive team. So I am really looking forward to it.

Nate Swanson, ThinkEquity.

All of my questions have been answered.

David Wright, BMO Nesbitt Burns.

I wanted to come back to the Artesia question for a minute. If you describe it as your best product, but it doesn't have significant growth, and it is not a significant dollar value, maybe you are putting your best foot forward, but to have a booth at NAB, I would think, would be a significant cost. Are you investing properly there?

Sorry, David. When I said the best product, what I was really (multiple speakers)

In the category.

-- the best product within the digital asset management niche. And within that space, the market to date is a fairly new market. And while we see that we are leading in that market, we believe the potential is actually very strong. And so, that is an area that we are focusing on, and believe to have great growth. But today, it is not there.

Over what timeframe would you expect to start to see the growth? Is this a three to six-month cycle, or longer?

I would be disappointed if I don't see growth within the next six months to a year.

How does Duet change the opportunity for Open Text? You have, obviously, had a software product that reads information out of SAP in that. So how does it help you or challenge you?

Actually, it is going to help us. When I mentioned the linkups in Europe that were attended both by SAP and Microsoft, where Duet was the discussion, and where we can both enhance and extend that product, working together with SAP and with Microsoft -- many of our customers, as you know, are large SAP customers. And so, the response that we are seeing from our large customer base is very interested in this product. We see this as great potential growth for us in the coming year.

What does the product do that helps you?

So basically, if you could think of it where people who are used to working in Outlook, for example, could, with no expertise in SAP at all, could receive an e-mail in Outlook that might refer to some transaction in SAP, and can get that information and review it all on the desktop without knowing anything about SAP, as well as then coordinate that with other information, unstructured information from other sources.

So it is them accessing the SAP information; now they have data that they need to store somewhere, so then they --

Right. But for example, if you got an e-mail in Outlook talking about this transaction, the system would know which transaction you were looking for and bring that specific transaction to your desktop, not just bring me the customer file and let me browse through every transaction; it would pull it up automatically for you.

But Open Text's role is one that comes on after they have got this information, now what do they do with it.

For example, at this point, Duet really focuses in a number of key modules where we have extended those modules to include many more modules, as well as specific applications, for example, in discovery for legal departments, etcetera, around compliance; we can bring in other abilities, like contract management, etcetera, as well as just looking at an SAP transaction. So, we are extending the functionality as well. But we are working with SAP to be able to jointly sell these things.

Interesting. How would you characterize the selling environment? From recent conferences that I have been to in the content management field, it seems that there were a ton of people there; they were going into the various booths, including Open Text booths, and very interested in what the products are, yet the results today are kind of at the weak end. So what is it? Is it that people are interested, but they are still -- they don't have their checkbook out? What is the issue?

I would say two things. One is that -- one, as I said, we have been focused on restructuring and aligning our organization to profitability rather than growth. Now that we have done that, we will be looking at growth. We have seen in the past year where for IT organizations, other than compliance, where they have to buy because of government regulations, it has been very difficult for them to spend money. We are beginning to see -- and then I think that is why the interest, why you will see a lot of people -- we are beginning to see them getting ready and planning projects that they will start in the next few quarters. So, I believe some of the growth that you are beginning to see is there.

Blair Abernethy, Clarus Securities.

John, first on the R&D side of things, can you just give us some sense there of what your investment plans are? What product areas are you focusing on? And also, are you looking at rationalizing or sunsetting any of the products that you have acquired over the last couple of years?

Really, the key focus from an R&D standpoint, which I have been driving for about five years now, is working on vertical applications around things like Duet, so that we could build, say, for -- a Duet for the petrochemical industry, or for the financial services industry. So we have begun, and are building, in fact, at least a number of them this quarter, applications that would sit on top of Livelink or on top of Duet, or on top of an Oracle financial application. So, that has been a major focus that we have been working on for the past two years.

Having said that, we still do see the core issues around search, e-mail archiving, records management, document management, collaboration as being still heavily bought and needed by both our traditional existing customers as well as new customers. So, while I have forced development to build -- to start thinking about building application solutions, we continue to support the major products.

While some of our products are sunsetting, some of our older products, I don't believe there's anything that I can think of within the last two or three years that we have acquired that we'd be thinking of sunsetting. In fact, just like we are talking about with Artesia, we see this as tremendous growth potential in the future.

If you were to look at the R&D organization today, and you were to split the people between -- the development team between products and solutions, can you do it that way? Would you say it is 25% on solutions, 50 or 75% on products?

Actually, let me put it this way. If we say we've just got just over 400, 430 developers, I would say about half are working on the core product platform, if you will, and the rest are working either with partner integrations, like Duet, or on application solutions on top of that. So, a couple of hundred would be working around partner-related programs.

Great. And what's the leadership of the R&D organization look like today?

The leadership is -- what we have done is brought in leaders that are more knowledgeable in the applications area. We haven't had that expertise in the past. And in fact, it just so happens that one of our development managers, an ex-Oracle applications person, has moved from California to Waterloo to head up that group. But if we look at the core platform group, it's pretty much the managers that have been in place for a significant amount of time.

And this quarter, your R&D expenses are around 14% of your revenues. Was there any onetime items in there, or credits in there that sort of made that number artificially down? 14% seems like a fairly low number.

We try to keep it around 15%. It fluctuates. I think it was -- most of last year it was around 16, 17%. Some of it could be tied to salaries, that kind of thing. I can't think of any onetime instance that might have changed things.

There's no significant onetime credits in there.

Alan, just one last -- just one question. With Q4 coming up, have you guys looked at or revisited any of the restructuring costs or acquisition-related costs that have been out there now, since we are kind of entering our -- we'll be entering, I guess, our third year for a lot of these acquisitions? And any adjustments to that that you are expecting, or asset impairments that you might look to do to clean up, now that you are sort of at the end of the restructuring road?

Actually, we review those every quarter. So yes, that's something we have to do every quarter. So we certainly continue to do that.

And what is the cost for the balance of the IXOS at this point?

It would be about $13 million.

We will take one more question.

Lawrence Rhee, Genuity Capital Markets.

Just quickly with respect to the FX, could you just tell me what impact you are going to see from the appreciation of the Canadian dollar? And then maybe you can just help us with what percentage of your expenses would be spent in Canadian dollars?

Roughly speaking, Lawrence, 20% of our expenses are Canadian dollar-based. So, as the Canadian dollar goes up, it impacts us by that percentage. Does that give you what you need?

That's great. And one more thing. With respect to some of the delayed deals, John, that you mentioned, can you quantify the number of deals that were delayed this quarter? And with -- I guess we're one month past the quarter end; have any of those deals closed, and have you lost any of those deals to competitors?

As usual, a number of them did -- have already closed. We haven't seen any lost to competitors. In the government, it's really been an issue of everything is ready; approvals have been. It's just really when the funding comes available.

We're talking about $1 million plus deals that you were talking about?

Correct. They are all lined up to go. It's just literally when the funding gets approved to be release. But as I mentioned, there have been others that [slipped] that have been closed.

With that, that concludes our call for today. Thank you for participating and thank you for your questions. We look forward to talking to you next quarter.

Ladies and gentlemen, this concludes the conference call for today.