Open Text Corp (OTEX) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Open Text Corporation Q4 fiscal 2006 conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Thursday, August 31st, 2006, at 5.00 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 fourth quarter and year end of fiscal 2006 that were released earlier this afternoon. Joining me today are John Shackleton, our President and Chief Executive Officer; and Paul McFeeters, 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 may 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 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 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 30th, 2005, December 31st, 2005, and March 31st, 2006, as well as in our press release issued earlier today.

Now I will turn the call over to John Shackleton.

Good afternoon, everybody, and thank you for joining us. Before we review the financials, I would like to reiterate what I said last September, that our focus for 2006 would be on profitability. We have completed our restructuring and have achieved our goal of a 18% pre-tax adjusted profit margins. Beginning this quarter, our focus is now on increasing market share, and with the addition of John Wilkerson as head of global sales and services, we are now ready to move forward.

When we hosted our analyst day in July, we mentioned that the market is consolidating, and we saw more evidence of that in August with the announcement between IBM and FileNet. We view this announcement as positive for us as the largest independent vendor in the space.

As many of you know, we appointed Paul McFeeters, who joined us on June 1st, as CFO. It gives me quite great pleasure to welcome Paul and to have him review our fourth-quarter and fiscal financial year results. Paul?

Thank you, John. As most of know, I have been with Open Text for three months now. It has certainly been an interesting period, and I'm really very pleased to be part of the Company at such an exciting time. I've had the pleasure of meeting some of you at our analyst meeting in Waterloo a few weeks ago. I look forward to spending time with each of you going forward.

Turning to the financial results for our fourth quarter of fiscal 2006, total revenue for the quarter was $105.2 million, a decrease of 4% from $109.4 million in the same period last year. License revenue for the quarter was $32 million compared to $37 million last year, while maintenance revenue was up $2 million from last year at $48.7 million.

Gross margin for the fourth quarter before amortization of acquired technology was 70%, which is consistent with previous quarters. We reported fourth quarter adjusted net income of $15.4 million or $0.31 per share on a diluted basis compared to $9 million or $0.18 per share on a diluted basis in the same period a year ago. This represents growth of 71% on a year-over-year basis.

The pre-tax adjusted operating income margin in the fourth quarter was 20%, up from 11% last year, which reflects the savings that came from our restructuring activities. With respect to these adjusted earnings, the overall tax rate for the quarter was 26%, the same rate as last year.

Net income for the fourth quarter in accordance with GAAP was $7.8 million or $0.16 per share compared to a net income of $5 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.

The GAAP net income for the fourth quarter included share-based compensation expense of $1.2 million net of tax or approximately $0.02 per share on a diluted basis. Our overall GAAP tax rate for the quarter was 29% compared to 22% in the prior year.

Turning now to our fiscal 2006 results, total annual revenue was $409 million, down 1% from $404.8 million in fiscal 2005. License revenue for the fiscal year was $122 million compared to $136.5 million last year, while maintenance revenue was up $10.2 million from the last year at $489.4 million.

Product license and product maintenance revenues accounted for 76% of annual revenues. The remaining 24% are relating to our professional services. Gross margin for the fiscal year before amortization of acquired technology was 70%, unchanged from fiscal 2005.

Adjusted net income for fiscal 2006 was $50.8 million or $1.01 per share on a diluted basis compared to $39.1 million or $0.75 per share on a diluted basis in fiscal 2005, which is a 30% growth year over year. This also represents an 18% pre-tax operating income margin for fiscal 2006, which is up from 13% from last year. Our overall fiscal 2006 tax rate for adjusted earnings was 31% compared to 27% in the prior year.

On a GAAP basis, we reported net income for the year of $5 million or $0.10 per share compared to a net income of $20.4 million or $0.39 per share in fiscal 2005. For this fiscal year, our total share-based compensation expense was $4.6 million net of tax or approximately $0.09 per share on a diluted basis. The fiscal year tax on a GAAP basis were 42% compared to 25% in fiscal 2005.

Turning now to the balance sheet, the cash position at year end was $107.4 million compared to $80 million at the end of fiscal 2005. As of June 30th, deferred revenue was $78.2 million compared to $75.3 million at the end of last year. Accounts receivable at June 30th was $75 million compared to $81.9 million at June 30th, '05, resulting in a DSO of 64 days compared to 67 days last year end.

In the fourth quarter our cash flow from operations was $15.4 million compared to $10.5 million in the same period last year. For the fiscal year, we reported cash flow from operations of $60.8 million. This was up from $57.3 million in fiscal 2005. In the quarter we also purchased 765,000 shares of Hummingbird, as outlined in our takeover bid circular. The cost of these share purchases reduced our cash balance by approximately $21 million.

In the fourth quarter, Open Text incurred a restructuring cash outlay of approximately $2.6 million, bringing the total restructuring cash outlay for this fiscal year to $15.5 million, which will leave $6.8 million or approximately 30% of the total cash outlay to be discharged beyond fiscal 2006. We continue to project annualized savings from the restructuring to be in the $38 million to $40 million range as compared to our effective cost run rate at Q4 2005.

Just a couple of items I would like to expand on. First, our GAAP tax rate -- the increase in our GAAP tax rate is attributed to a couple of main items. First, the losses resulting from restructuring charges incurred in the year for which the benefit has not been realized. Also, there are a number of taxable subsidiaries where the income is sheltered by loss carryforwards, although losses being used are acquired losses and, under GAAP, the benefit is recorded to goodwill instead of the P&L. Our approximate cash tax rate for FY 2006, based on worldwide income, is 12%, which is consistent with the prior year.

Another area I want to address is our professional services margin. Excluding reimbursable costs and the associated revenue, our margin was 18% for the quarter and 20% for fiscal 2006 compared to 17% and 19% for the respective periods last year. Although margins have increased slightly, this is still at the low end of our target margin model, and there are opportunities to improve this margin in the next twelve months, especially outside of North America.

Moving on to the specific guidance stated in our press release, for the quarter ending September 30th, 2006, the Company expects total revenues of $93 million to $101 million with adjusted EPS of $0.17 to $0.27 on a diluted basis. This guidance assumes the current foreign exchange rates, as well as an adjusted tax rate, in the low 30% range and 50 million shares outstanding.

I would like to close with a reminder. We are hosting an analyst meeting on the afternoon of Tuesday, November 14th. The briefing will be held during LiveLinkUp, our user conference in Phoenix, Arizona. Full details including dial-in numbers to listen to the presentations as well as complete downloads of all accompanying presentation material will be made available on the investor relations of our website. Please contact our investor relations department for more information.

Now I will turn the call back to John.

Thank you, Paul. As I said in my opening remarks, our focus throughout 2006 was to increase our adjusted profit margin. To do this, we restructured the Company by rationalizing the product portfolio, streamlining the back office administration and maximizing our real estate investments.

In sales, we focused on our three major markets of North America, UK and Germany. We're particularly happy with the 14% year-on-year growth in revenue that we saw in North America. We have also made significant progress with our global partner program, particularly with SAP, Oracle and Microsoft.

In reviewing our sales and operating metrics for the fourth quarter, we generated 36% of license revenue from new customers and 64% from our install base. The average transaction size was $230,000, down slightly from previous quarters. We had seven transactions over $500,000 compared with seven in the third fiscal quarter, and we had two transactions over $1 million. We added 137 new customers in June quarter compared to 101 in the March quarter.

Our marketing space continues to be driven by compliance, whether it be the Patriot Act, SOX, Basle II or FDA. This translates into products like records management, e-mail archiving or Livelink Risk Management, all pulled through our traditional solutions, such as collaboration, workflow, document management and Web content management. Our customers are looking for comprehensive ECM products that are fast and easy to deploy and highly scalable.

Examples of significant wins in the quarter include the ministry of transportation for Québec, who have purchased additional licenses to expand their document and records management system enterprise-wide for over 5,000 employees. The U.S. Defense Contract Audit Agency recently purchased 3500 seats of Livelink ECM to expand their current enterprise-wide electronic records management capabilities. Capital One has extended and expanded on their contract with Open Text. The project is aimed to improve usability and performance of their document management system.

A leading transatlantic aerospace equipment and system provider, Smith Aerospace, purchased Livelink ECM Suite for SAP document imaging and Livelink ECM BPM Server. The solution will streamline approval process for incoming invoices with the accounts payable department of Smith's and minimize the associated costs.

Geographically, North America did very well, Germany had a good quarter and the UK and Nordic were slightly below expectations. During the June quarter, 48% of our revenue was generated from North America, 46% of our revenue from Europe and 6% from the Middle East and Asia.

We see revenue broken down by vertical as 24% for high-tech manufacturing, 15% from government, 14% from financial services, 13% from energy and 10% from life sciences. We made great strides with our global partner program in 2006. In the fourth quarter, our channel partners contributed or influenced 17% of license revenue compared to 15% in the March quarter. During the quarter, we received Microsoft's Global ISV of the Year award, and we also jointly released a white paper, entitled "Microsoft and Open Text, a New Age in Managing Unstructured Content."

With Oracle, we will launch a program at Oracle World in October, which will include joint selling of Oracle and Open Text products. And with SAP later this year, we expect DoD 5015 certification for records management, which is part of the SAP and Open Text global initiative.

One point I would like to make out with regard to our product program is that, due to the tight integration work we have done with the Open Text and IXOS products over the past year, we were able to obtain these high-level strategic relationships with SAP and Microsoft.

On the product front in the fourth quarter, we released a number of new applications -- our Customer Information Management, the first application in bringing unstructured SAP content into the Microsoft desktop using our new enterprise connect technology.

Looking ahead to this fall, we have plans to announce Livelink ECM version 10, our next major release, which you will hear more about as we get closer to our LinkUp user group meeting in Phoenix in November.

Looking forward to fiscal 2007, we're positive on the outlook for Enterprise Content Management, and with John Wilkerson heading up our global sales, we're now ready to grow market share. We will continue to forecast and provide guidance one quarter at a time as we feel that is the best way to reflect the business as we see it.

With respect to the pending acquisition of Hummingbird, it is premature for me to make extensive forward-looking comments at this time regarding future operations of the combined companies. We're excited about the prospects of growing the largest independent ECM Company and increasing marketshare in key areas such as legal and government sectors. The shareholder vote is scheduled for Friday, September 15, and if successful, we look forward to combining operations at the beginning of October. Again, we're not in a position to provide detailed forward-looking assumptions on revenue, margins, operations, financing or restructuring until after the vote passes. So we will hold off on providing that information until October.

In conclusion, in fiscal 2006, we decreased expenses, increased profits and grew our partner program. We have the executive team in place and are well-positioned to move forward. Our focus in 2007 will be on growing market share. That concludes our prepared comments at this time. I would like to reopen the lines for questions.

(OPERATOR INSTRUCTIONS). Tom Liston of Versant Partners.

In the June quarter, several of the ECM vendors had a fairly solid quarter, particularly on the license front, guys like FileNet and Interwoven had nice year-over-year license growth, in contrast to your license growth. Can you comment on the delta between you and some of the other industry players out there?

I think the key issue is, as I said, we did focus on profitability, which meant giving up some revenue in certain areas. But in fact, in the areas like North America, we saw our revenue growth, license growth growing in line with the competitors.

Can you more specifically talk about what product groups that was driving gains in the teens versus what product groups are certainly lagging that?

Yes. Actually, records management, particularly around compliance and whether it be records management for e-mail archiving or records management around collaboration, were the key areas.

What would be weak in the quarter year over year?

Weak in the quarter year over year? Some of the older products that we have in the mix. But in general the key growth ones would have been anything to do with records management.

You commented on the partnerships; obviously there was some traction in the quarter. Can you comment on your expectations for both Microsoft this coming year? And I know it's early days for Oracle, but can you comment on what your expectations are for that?

I think you're going to see some announcements with SAP and Microsoft in the near future. As I mentioned in this past, we have grown 17%. I would see, certainly within the next two quarters, I expect to see that percentage going up over 20%.

On the [ProServe], Paul commented how it was weak. But what specifically are you doing to address that number (multiple speakers) the margins?

Yes, it's a couple of areas. It's Germany, particularly, where as we're working with some of the government contracts -- in fact, our North American group is very strong, growing and keeping the margins. So we will be focusing particularly in Europe to look at how we can improve these margins.

Scott Penner, TD Newcrest.

I just wanted to ask about what is in the initial reaction of your customers to the Hummingbird did that you have on the table? And I guess, depending on your answer, is there any sort of volatility, deal volatility, that you have factored into Q1?

The partners particularly seem very interested and think that it is synergistic. Most of our customers have not had much comment one way or the other, from what we can see. I don't see volatility, certainly to date. But as we get closer, you might see volatility, but we haven't seen this to date.

To clarify Tom's question, I think you just said that you expected the next two quarters, the percentage of revenue from channel partners to go up over 20%. Is that right?

That's correct.

What is the timing for the 30% number?

The hope, obviously, is within, certainly, the next four or five quarters.

Paul Steep, Scotia Capital.

John, maybe you can talk a little bit, I know you don't specifically give license guidance, but if we sort of layer on what you have implied in the guidance based on the mix from last year, in the last couple of quarters, it looks like a pretty healthy bounce-back in licenses. I guess I'm curious as to what is in the pipeline or what gives you guys the confidence to put out sort of rough numbers in that range. Or is it not license and maybe something else that's going to hold the growth up here?

I believe it will be license, and we do see the pipeline. As I mentioned, as we have now completed the restructuring, we are seeing the pipeline strengthening in the key markets that we want to be in.

Related to that, what sales changes or sales structure changes has John Wilkerson sort of made to-date or that you have made in conjunction with John in the early days here?

The key with John was not only will he have sales, but he will also have professional services and customer support. So all revenue generation functions, customer facing functions, he will be in charge of. So we hope to see some synergies between these groups. But also I think you're going to see more partner involvement, more working jointly with partners, as well as more solutions. We're beginning to see much more solution selling, particularly in verticals.

On the partner side, since we are implying that you are going to ramp up in that area, does that imply added cost in the sales and marketing? Because traditionally you have had a fairly lean organization. Or is it simply reallocation of -- maybe it's more to Paul or both of you?

Actually, Paul, over the past two years we have been ramping up the partner program. I think there is over 100 people this past year have been working on partner programs. I would see it continuing, but it's more reallocation than any additional expense.

Richard Tse of National Bank Financial.

What were the maintenance renewal rates this quarter?

It's pretty much in line, around 92%.

You know, you have kind of conceded the infrastructure war to guys like Oracle and Microsoft. What are your big customers like Siemens and Motorola saying about maybe considering their basic content services? Is there a risk here that they may get off maintenance and go to the competitor here?

From what we have seen, particularly with those major clients, while we're cooperating with Microsoft and Microsoft agrees that when you are looking at the enterprise scaling of these kind of clients, that it will be a long while before Microsoft can scale to those kind of sizes.

Just on your financials, there was this other expense here for, I think, 1.59. I'm not sure, you didn't really detail in the notes what that's all about. Can Paul comment on that?

We do have some charges that have gone through. We had a small write down of an intangible asset, which is the bulk of that.

Blair Abernethy of Clarus Securities.

Could you just walk through, you talked a little bit about IXOS, but I just wanted to get a sense of what the ownership stake is today and how much more cash is required to close off that acquisition.

IXOS -- we are still just over 95% of our position. Right now, of course, the matter is still before the courts, but the general offer range right now would be in the range of about $12 million in additional costs to purchase the remaining shares.

Okay, about $12 million. In your R&D line this quarter, was there any investment tax credits in there at all? Or is this sort of a run rate that we should be looking at for R&D going forward?

We do net our investment tax rates in the R&D line, so you would have about $1 million in there.

$1 million this quarter?

That's right. You should expect to see it in that 15% range.

What was the head count and the breakout of head count in the quarter?

Head count was something close to 1900.

The breakdown for that is essentially we have about 500 in software, 400 in sales, 500 in customer support and about 300 in G&A.

How many quota-carrying reps?

About 140.

Howard Lis of GMP Securities.

Just with respect to the restructuring you have undertaken internally, what are the cash costs remaining in fiscal '07?

Well, cash costs remaining overall will be just over $6 million. Most of it will be through fiscal 2007. Some will extend into past that as a result of the facilities costs.

With respect to the pending acquisition of Hummingbird, have you started or when would you start evaluating what kind of operational synergies you can get at?

We'll actually give you an update on that in October.

I know, but when would you actually start embarking on that process to figure out the savings?

As we said, we will give you that one in October. It's too early to say yet.

Steve [Konig] of Jefferies & Company.

On your guidance, as you move forward here, as you are reporting your revenues, not your guidance, will you be giving us an organic calculation with and without Hummingbird?

We will have to take a look at that. As we have talked about in the past, it quickly gets very difficult to do as you merge products together as to say which one would be from one company, which one from another. We probably can, in the early quarter, though.

Okay. I assume, since you're not yet providing the Hummingbird guidance, for the purpose of standardization, you would like the analysts and the consensus numbers to reflect Open Text selling at this point?

That is correct.

Are you able to say in the quarter just past and in the guidance how much benefit from foreign exchange?

This past quarter was minimal, I believe.

Quarter over quarter was really flat on that. More significant year over year.

How about in the guidance?

In the guidance, we're forecasting existing FX rates; we are not predicting variability in FX rates.

Are you able to say on a year-over-year basis whether it's a -- I assume it's a tailwind for you?

On a year-over-year basis, revenue was negatively affected by $10 million, and costs were benefited by $3.6 million. So it was an overall negative effect, taking FX into account. In fact, year-over-year revenue would have grown 1% versus the stated reduction of 1%.

That's for the fiscal year, correct?

For the fiscal year, that's correct.

Lastly, are you seeing any change in the competitive environment due to the IBM and FileNet scenario?

We have seen positive feedback from potential partners that we have not worked this closely with before, as well as, as we saw when IBM acquired Lotus in the past, that you typically tend to see less of them outside of the IBM environment.

Ed Maguire of Merrill Lynch.

Could you talk about the go-to-market model for, in particular, the Microsoft and the Oracle relationships? Are you co-selling in a way that directly generates license sales for your partners? Are you working with Microsoft and Oracle to target their existing base? Ultimately, how much of a conversion process is there? I guess, as Richard had alluded earlier, in converting potential customers who might be running Livelink to either Oracle or Microsoft infrastructure?

Let me take the Oracle first. Obviously, with products like the PeopleSoft, Siebel, J.D. Edwards, et cetera, we would be working closely with the Oracle team. We would hope in the future that they could sell those products independently, without a lot of help from us. But we will be doing, initially, certainly, both joint training and joint selling in key accounts.

On the Microsoft side, usually in our very big accounts, again, we are doing much more of a joint selling process.

From the comments you mentioned about how much conversion is it for our customers, it's actually pretty transparent that we can access share point and outlook, et cetera, without a customer having to worry about that and still give them the scalability of the Livelink repositories in the background.

On Asia-Pacific, that's an area that you are not really focusing on right now. Kind of looking forward maybe post merger, at least strategically, how do you think about regions outside of the U.S., UK and Germany as far as areas you guys want to be putting emphasis on?

Post merger, I would think that Australia would certainly be somewhere that we would see significant opportunities. But I still see tremendous opportunities at a much lower level of investment in the U.S. and Germany and the UK.

For Paul, just on stock option plans over the next quarter or so, do you plan to issue options? Should we expect dilution at approximately the same rate we have seen over the last couple of quarters?

I don't think that I can really give that predictability. We have issued -- the stock comp, as I mentioned this year is 5.1. But it certainly always depends on who is [hiring], what level. So it just really would be speculative for me to conjecture that.

I think if you took a year run rate, we wouldn't see any abnormalities.

Duncan Stewart of Orion Securities.

Great job on the cost control, by the way. Starting on that, when we take a look at the cash costs of I think it was 6.8 still to come in '07 and '08, that really was more the accounting of cuts that have already been made. We're not expecting to see a whole lot more in reduction of actual spending on SG&A and so forth, right?

I think most of the cost cuts -- what you saw in FY '06, you could expect another about $[15] million of run rate, [that's of] the savings have already occurred in run rate into FY '07.

So, in other words, if I take the exit rate on the year and adjust for seasonality, we are most of the way there?

Yes, we are most of the way there. We just have a small amount left to complete, and we have really basically sunset on this RIF exercise.

In terms of seasonality, speaking of which, now that North America -- you are seeing a lot of strength in North America relative to what you're seeing in Europe. Does that actually have any impact on the seasonality we would normally see, especially in the summer quarter, Q1?

I wouldn't see any different seasonality than we had last year, where you've usually got -- if you look at North America, it drops about 8% here, whereas in Europe it seems to get slower every year.

Speaking of that North American strength, I think you said you were up -- was it 14% in North America, actually, year over year?

That's correct.

You probably don't track it exactly this way, but could you give me some sort of sense of what would license be, of that? In other words, in North America, license actually would have been up year over year?

That's right, it would be 11% year over year.

Just on North American license? Wow, that's quite strong. Okay, let's take a look at, I think, a question that was asked earlier. Implicit in your guidance, and I know you don't give license guidance quarter by quarter. Nonetheless, if you kind of assume service and support, where they kind of, if you will, ought to be, given seasonality and sort of normal run rates, it actually suggests that you will be positive on license growth in Q1.

Nonetheless, at a substantially lower level than, for example, FileNet or Interwoven were, is it that you are still in the process of seeing various things moving around and that you actually believe that if your real organic license growth rate as you go through the year is unlikely to stay stuck at that sort of 3 or 4 or 5% number?

Actually, I think the growth in the markets that we want to be in will certainly, I would think, be at or ahead of market, as we've given up market in unprofitable areas; that has been the issue. So what we see in the key markets that we want to be in, we are not losing market share to anyone.

What I am saying is that effect, as that goes on, should get stronger during the year?

Absolutely.

Okay, just checking. Acquisition-related costs -- in the three months ended in '06, so in the quarter of minus $3.2 million? Are those IXOS-related costs? Or are there other -- because you're now working sort of on another acquisition. So, of the $3.2 in the cash-flow statement?

It would be still IXOS. And as you point out, [there are also] some now forward costs toward Hummingbird.

But small, I'm assuming?

Yes, small relative to that number, yes.

I believe that's my last question. Thank you very much.

David Wright of BMO Capital Markets.

You gave us a breakout of your vertical industries. Going forward, where do you see the greatest opportunity to grow in those vertical industries?

Probably government.

Yes?

Yes.

Just because of Hummingbird's relationships there?

No, actually, also, we're just seeing government in general, both the federal and state and local, we're seeing spend in key areas -- UK, Germany a little bit.

Is there another one that stands out as a great opportunity? I mean this financial one that opened up a little bit because of FileNet, or is it just going to be as competitive as ever?

What we see FileNet is in their traditional customer base and a lot of the revenues they are generating is from having their customers upgrade to their latest version. That's a lot of their revenue. When it comes to competing with new customers, we rarely see them.

So no particular change there?

No, but we would see financial services probably coming up second in growth to government.

I think in your opening comments, if I heard it right, you said that you particularly had an opportunity outside North America to lower your cost base. Did I hear that right? If so, what are you thinking about there?

That was related to professional services?

You may have been speaking about professional services; I don't --

We really -- we believe that we can improve the margins on professional services, particularly in Europe.

Okay, so, and how do you plan to do that?

There are a number of strategies that we have to do that.

Is that with working with partners, or --?

Exactly. There's a number of things. One of them would be working with partners. We see that as a major area.

Obviously, you have identified the opportunity to improve your margins. Have you already set out on a plan, or is that plan just being put in place now?

It really is being put in place now.

In the latest quarter the G&A expenses were a little bit higher than I modeled. So Paul, I'm just wondering, were there any one-time items in this quarter that might have boosted that and then it falls back next quarter? Or maybe there's costs that I wasn't planning on?

I think if I can just answer more on an annual basis, we were down year over year about $1 million. Then this year, we have another $1.5 million, $1.4 million in stock comp. At the year end, I think there was an extra charge for accretion, which would not be representative on a quarterly basis. That was about $1.3 million. So I think you can continue to go back to more of an annual trend, trending downwards as well.

To backpedal, maybe a discussion more about the large deal size. I think you said you had two over $1 million. What would it have been a year ago? And I think you said you had seven over $500,000 and what would that have been a year ago? Maybe you could talk about the environment.

I believe the year ago would have been three over $1 million as opposed to the two. And if I recall, on the 500 -- I will doublecheck, but I had a feeling it was seven, the same. I could be wrong.

So what is the environment like? Are there large deal opportunities? It doesn't look like it's growing that much? Do you feel like it's coming back, or is this kind of the environment that we're in now for the foreseeable future?

We have actually been intentionally trying to chunk the large deals and break them up into smaller pieces or to do it on a kind of a yearly subscription type basis. So we are intentionally trying to break them up.

So we shouldn't particularly notice growth in that number for some time?

Right.

Lawrence Rhee of Genuity Capital Markets.

Just one question. With respect to your increased emphasis on partner-related revenue as you move up past the 20% to the 30% mark I guess over the [about next] four quarters, could we expect to see the commissions portion of sales and marketing come down as a percentage of revenue?

Certainly, over time, I would see that. Maybe not in this coming year, but certainly over time, we would see that as our partners become familiar with using our products and needing less help and support. That's the goal.

Would that explain some of the potential decline or kind of the negative growth rates in license revenues over the past few quarters, because of the increased emphasis on partner-related revenue?

No, not really. It really is in focusing on key territories and giving up revenue in what we consider unprofitable areas.

Barbara Coffey of Kaufman Brothers.

When you look at shifting from this sort of 15%-17% level of partnership sales to a more 20%-plus, how does that alter how you take a look at your pipeline information and ability to look forward? Also, how do you make sure that you are close to enough to the accounts so that, if there are expanding -- opportunities to expand the Open Text platform in those organizations, you're there to do so?

Good question. Probably two areas. One is, for example, with someone like SAP that we have been working closely with for a long time, we do have a joint account planning, and the visibility into the pipeline is quite good. As we begin to work with Oracle, we are doing joint planning. But I could see, down the road, as they become more self-sufficient, that it would be difficult to have as good of visibility into that pipeline. But we believe, given the size of their sales force, that is not particularly a bad thing. But obviously, we will be looking at ways of how we can look into that pipeline.

And the next pace of, how do you make sure that the end accounts see Open Text as distinct a little bit from SAP and Oracle, and you remain sort of on their radar screen to expand potential, be able to upsell?

So in the SAP and the large Oracle, the Fortune 1000 types, we obviously do have a presence, have had a presence in there for a long time. With our relationship, it doesn't assume that we will back out of those relationships. But as we see some of the areas for Oracle, J.D. Edwards, et cetera, where we see it as the more mid market, we would not be in those accounts. We see this as an incremental market channel.

Scott Penner of TD Newcrest.

Last year, the margins on the services side actually in Q4 of '05 to Q1 of '06 dipped at that time, surprisingly, down to about 12% from 16%. Should we look for the same kind of seasonal effects or whatever call you in Q1?

Well I think Q1 does represent, in Europe, in particular, a fairly high season vacation. So I think you would see -- I don't expect you would see that level. But I think you would see a bit of a dip trend. As John mentioned before, some of the initiatives we are taking are now somewhat prospective. So I can't predict the exact one, but I would say that it would not be any higher, I don't think, than what you're seeing in Q4.

Actually, interestingly, there were an unusual number of holidays in Europe this past Q4, something like nine, that had a major impact on the potential billable days. There are, in fact, more billable days in Q1. So it's just a question of keeping people off the beach and getting them into work.

On the Hummingbird integration, presumably, John Wilkerson is going to be a key point man, should the deal go through on the integration. I wanted to ask the question, should we be concerned or why should we not be concerned that a guy that is two months into the job is now going to play a pivotal role in possibly a big integration?

Obviously, as a senior executive, he would be involved. But the number one focus that John has, certainly, for the next six months will been on the German, UK and U.S. sales force.

So he is not necessarily going to be the chief architect of any integration?

Correct.

Duncan Stewart of Orion Securities.

In the whole shift from Open Text moving sort of away from the basic infrastructure stuff that Microsoft and so forth are going to be doing a little bit more of into those higher value-added applications, are these the sort of things that we're going to see coming as part of I think it's Livelink 10 is the next release?

That's right. Livelink 10 -- a lot of the functionality around that will be the ability to connect or interact with various platforms from other vendors.

Those apps are not going to be separate from Livelink 10; a lot of them are going to be part of it?

Exactly.

Guidance range -- obviously, it's slightly tighter than the $10 million range you had last quarter. Then again, at an $8 million range, you guys are two months of the way through a three-month quarter. Why isn't it maybe even slightly narrower still, or is it the usual thing of linearity in the summer, not much happened in July and August? So you have still got a fair bit of variability in September?

We just feel it's a reasonable range, given the uncertainties of the market.

Blair Abernethy of Clarus Securities.

Can you give us an update on your progress with Deloitte in the Sarbanes-Oxley space?

Yes. We do continue to work with Deloitte on earnings and with Sarbanes-Oxley. We do have some products coming out in that area, and we see that continue to grow.

Did you have any wins there this quarter?

We may or may not; it's not a statistic I've looked at.

Do you have a sense of how big the pipeline is, how many opportunities you might see there in the next three months, six months?

We see this as almost like a three levels of growth, and when people have first got SOX compliance, it has been often very manual, very labor-intensive. Then, as they go through the second and third years, they then start looking to automate the processes. And that, and in fact, the third is, then, when they are really using these things effectively to do business productivity, et cetera. What we're seeing is the majority are in the second phase, where they are gearing up to use automated tools to help them do this thing.

What is the pricing look like on your Sarbanes-Oxley solution?

From a license standpoint, probably around a quarter of $1 million.

$250,000?

Yes.

All in, what would the deal size be?

It's, I would say, $500,000 to $750,000, depending on the size of the Company. There is, though, also the opportunity for, then, obviously, up-selling into those additional products, things like e-mail archiving, records management, those kind of things.

Do you have some reference accounts at this stage that you can point to for people looking at the solution?

Again, I could certainly get them. I don't have them off the tip of my -- fingertips. But yes, we will take a look at that.

In terms of your sales, you're license sales right now, what percentage of the deals are sort of traditional product sales, adding Livelink seats, adding modules, that kind of thing, versus a one-off solution sale targeted at a specific business problem?

On the upgrading sales, it is around 60%. On the new sales, we're seeing much more new solution sales being driven by a specific solution as opposed to somebody buying infrastructure.

So on a new sale or a new customer, is it more than -- is it sort of 50-50, product versus solution? Or what would be the split you're seeing today?

On the new sales, when we say solution, it could be a product solution that would need minimal -- it would be more of a configuration rather than customized code for that customer. So there's still not a lot of P.S. needed in some of these customer solutions.

Steve Konig of Jefferies & Company.

I just wanted to build on the question earlier about the Hummingbird integration and contrast that with IXOS. I guess the question here is that IXOS was accompanied by a couple of rounds of restructuring or negative license growth, organically. Now that you are turning your focus to growing your licenses after improving your profitability, how can we be comfortable that the Hummingbird integration is going to accommodate the process of license growth as opposed to having to acquire more cost-cutting, et cetera?

I would say two things without really going into the Hummingbird. But if you remember, with IXOS, it was really at two stages, where first we had to integrate products, their e-mail archiving, their SAP archiving. There was a significant amount of engineering that needed to be done during that first year to do that. It was in the second year, then, that we did the rationalization and restructuring.

With Hummingbird, we actually see no integration of product, if you will. There's a lot of overlap, but what we do see is really gaining market share in key solutions that they have, obviously, particularly in areas like legal and in areas of government, things like that. So we see those as synergies. There's not a lot of overlap in those areas.

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

So I would like to thank everyone for the questions. Just to wrap up on the year's highlights, we increased our profits, as we intended to do. We have added our key executives to our team, and we are making progress on our partner program. Actually, we will have some joint strategic announcements coming up in the following weeks from our partner program. So, with that, I would like to conclude today's call. Thank you for participating and thank you for your questions.

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