Open Text Corp (OTEX) 2007 Q1 法說會逐字稿

Welcome to the Open Text first quarter fiscal 2007 conference call. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Monday, November 6, 2006 at 5 PM Eastern Time. I will now turn the conference over to Greg Secord.

Good afternoon and thank you for joining us. Today we will be discussing our financial results for the first quarter of fiscal 2007 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 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 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, 2006, and in our press release that was issued earlier today.

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

Thank you, Greg. Good afternoon, everybody, and thank you for joining us. Today we are quickly going to talk about our Q1 results, then go into the progress we've made on the Hummingbird integration. So first I'll hand the call to Paul McFeeters for a detailed review of our Q1 results.

Thank you, John. Turning to the financial results for our first quarter of fiscal 2007, total revenue for the quarter was 101.2 million, an increase of 9% from 92.6 million in the same period last year. License revenue for the quarter was 28.8 million compared to 24.9 million last year, up year-over-year 16%, while maintenance revenue was up 3 million from last year at 45.3 million.

Gross margin for the first quarter before amortization of acquired technology was 71%, which is consistent with previous quarters. The pre-tax adjusted operating income margin in the first quarter was 19%, up from 10% last year.

We reported first-quarter adjusted net income of 12.2 million, or $0.24 per share on a diluted basis, compared to 6.3 million, or $0.13 per share on a diluted basis in the same period a year ago. This represents growth of 94% on a year-over-year basis.

With respect to these adjusted earnings, the overall tax rate for the quarter was 37%. This was slightly higher than expected due to a larger percentage of taxable income coming from higher-tax jurisdictions. With anticipated consolidation of entities within Open Text and Hummingbird, we plan to manage this rate lower. As I referenced last quarter, our cash taxes have been in the range of 10 to 15% annually.

Net income for the first quarter in accordance with GAAP was 7.3 million, or $0.15 per share, compared to a net loss of 12.9 million, or $0.27 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 first quarter includes share-based compensation expense net of tax of 1.1 million, or approximately $0.02 per share on a diluted basis, compared to 1.2 million, or approximately $0.03 per share last year.

Turning to the balance sheet, the cash position at quarter end was 111.2 million, compared to 107.4 million at the end of our last quarter. As of September 30th, deferred revenue was 75.3 million compared to 78.2 million as of June 30, 2006. Accounts receivable as of September 30th was 76.7 million, compared to 75 million as of June 30th, resulting in a DSO of 68 days, compared to 64 days at fiscal 2006 year end. In the first quarter, our cash flow from operations was 9.6 million compared to 0.3 million in the same period last year.

Now I'll hand the call back over to John.

Thank you, Paul. Looking at operations, we are very happy with the Q1 results. We generated 35% of license revenue from new customers and 65% from our installed base. The average transaction size was $260,000, up slightly from Q1 last year.

We added 119 new customers in the quarter, we had five transactions over $500,000, and three transactions over $1 million, compared to none in Q1 last year. Of the three deals over 1 million, two occurred in North America and the third came from Europe.

Our customers continue to look for comprehensive ECM solutions that are fast, easy to deploy, and highly scalable. Examples of significant wins in the quarter included the Federal Bureau of Investigation, which purchased 2.4 million of licenses to enable collaboration across the Agency in a secure environment in order to [prove] proficiency performance.

Another example is [Methanex], who entered into an agreement to implement our enterprise-wide document and records management solution. The project is enabling secure and efficient management of electronic content for administrative functions as well as manufacturing and marketing operations.

Geographically, Europe did very well with both the UK and Nordic regions having a very good quarter. But the rest of Europe and the U.S. also hit their targets. During the June quarter, 48% of our revenue was generated from North America, 47% of our revenue came from Europe, and 5% from the Middle East and Asia.

In the quarter we saw revenue broken down by vertical as 28% from high-tech manufacturing, 15% from government, 12% from energy, 8% from financial services, and 7% from life sciences. We believe the strength in manufacturing high-technology is a direct correlation with our growing relationship with SAP and the benefits of their install base.

From a sales operations standpoint, we closed the quarter with 148 quota-carrying sales reps, and we will update you on the combined sales force numbers when we report Q2.

With our partners we're on target for finishing the year at [about over] 20% of revenues. In the quarter we participated in several joint selling opportunities with Microsoft, and several of the deals that we closed were directly attributed to these efforts.

In conclusion, we are very happy with Q1 results. We saw significant growth while maintaining our profitability targets.

So now let's turn to the Hummingbird transaction. We're looking at synergies from our joint customer base, products, people and facilities. I'm happy to report that to date, we've found more synergies than expected as we focus on integrating Hummingbird operations as quickly and as smoothly as possible. I will go into some of the details and let Paul discuss the accounting treatments.

With our joint customer base, we now offer an expanded portfolio of solutions aimed at a wider range of vertical markets, including government, legal, financial services, energy, manufacturing, and media and entertainment.

We have strong government presence in the U.S. and Germany, while Hummingbird has strength in the UK, Canada and Australia. While Hummingbird has been strong in legal solutions, we also see taking these solutions into legal departments of Open Text corporate customers.

In a recent press release we outlined our WCM strategy, detailing the combination of RedDot's robust technology and state-of-the-art ease-of-use with Open Text's enterprise scalable tools and advanced ECM suite. RedDot software will now be integrated with the ECM functionality and Open Text Livelink ECM suite, including document management, records management, business process management, and collaboration. We believe we have created a best-of-breed Web content management offering for small, medium and enterprise customers.

RedDot brings us the capability to be competitive with both standalone WCM, but more importantly with ECM as an integral part of Livelink ECM 10. This brings opportunity for cross selling to the Open Text and RedDot customer base.

Our records management offerings continue to drive our strategic relationships and tight integration with Microsoft, Oracle and SAP. With these relationships, customers can use our records management solutions to apply retention policies across more content in a wide range of enterprise systems, including paper-based documents, e-mail, instant messaging, Microsoft share point repositories, and ERP applications.

Looking ahead to our LinkUp -- to LinkUp, our user conference in Phoenix, we have plans to announce Livelink ECM Version 10, our next major release, which will also be the foundation for the Hummingbird/Open Text integrated roadmap. We will deliver an initial product roadmap for the combined companies at the LinkUp in November, with a more detailed roadmap to follow in February at the Hummingbird user conference.

On the partner front, overall we continue to make significant progress with our global partner program, particularly with SAP, Oracle and Microsoft. Hummingbird had excellent relationships with Microsoft, and we have increased our involvement in the Microsoft joint selling process.

We had also said last year that we would be working closely with the Oracle team, and we expected in the future that they would sell products independently. Last week, as many of you know, Oracle announced they were buying Stellent, a smaller ECM player who historically have not been a competitor of Open Text. We view this as an infrastructure move by Oracle to enhance their functionality by adding Web content management to their Oracle database offering.

As we mentioned when we hosted our analyst day in July, the market is consolidating, and we saw more evidence of that in August with IBM acquiring FileNet. We view these announcements as positive for us as the largest independent vendor in the space. And in the market where size matters, we anticipate that more of the smaller ECM vendors will look to be acquired, and SI integrators will look to work with the large independent vendors.

Last week we announced that Gartner Group had positioned Open Text as the leader in their Magic Quadrant research for Enterprise Content Management. Even more significant was their ranking of the Open Text/Hummingbird combination as the dominant player in Europe based on software and maintenance revenues.

On the people front, with the addition of Hummingbird we'll continue to pursue our profit margin model, while aggressively going after market share. We have organized all sales, professional services and customer support under John Wilkerson, all research and development and product marketing under Kirk Roberts, and all back-office operations under Paul McFeeters.

To do this, we restructured the Company by rationalizing the sales and support organization, reviewing the product portfolio, streamlining the back-office administration, and minimizing our real estate costs. This has allowed us to reduce overall headcount by 15%. And as of today, we are approximately 60% complete, and expect to have the majority complete by the end of this quarter. We have identified 38 offices globally that will either be consolidated or closed as part of this exercise.

As I mentioned in July's investor briefing, there's usually some revenue falloff that occurs in acquisitions. And as the combined company integrates, begins to grow, we have examined all regions and products of Hummingbird. There are clearly geographies that will be better served by regional partners than by the existing direct sales force, which are not profitable.

In our press release on October 16, I told the market that we generally expected to see a reduction in an acquired company's revenue run rate in the 30% range. I would like to update my comments to say I continue to feel comfortable with this metric for ECM license revenue, but feel we will have a better retention of services and maintenance revenues going forward. This is encouraging and speaks to the level of customer care that both Hummingbird and Open Text have provided for their existing customers. So going forward, I would expect to see a 20% overall reduction on Hummingbird's revenue run rate.

I should also like to point out that the expected revenue reduction estimates do not take into account some of the accounting treatment for deferred revenue that Paul will detail in his comments today.

Turning to guidance, we decided to hold off providing specific revenue and earnings guidance this quarter while we scrub and evaluate the Hummingbird pipeline. We have new salespeople, new sales support staff, and we're still in the initial stages of training on our forecasting system. We need to be fully comfortable with the sales group before offering detailed guidance to the Street.

That being said, we are actively continuing the process of reviewing and qualifying, and making sure that the revenues fit within the Open Text forecasting model.

Overall, the Open Text pipeline for ECM solutions looks healthy, the industry analysts tell us that the ECM market should grow between 8 and 12%, and I have said previously that I felt we can grow with or ahead of the ECM market. There is no change to that prediction. But we will need at least one or two quarters of combined results before I am comfortable providing forward revenue and profitability targets to the Street.

I also want to emphasize that the acquired Hummingbird operation will be run to the existing Open Text operating model, with an expectation that we will get to 18% pre-tax operating profits by the end of our March quarter. While we will focus on doing this integration as smoothly as possible, we will not compromise from our continued commitment to provide strong operational profits and cash flow.

Now I'd like to hand the call back to Paul to talk about the accounting treatment for certain areas of the Hummingbird acquisition.

Thank you, John. We will not be commenting on Hummingbird's Q4 results, as we are still in the process of having those statements audited. Just a reminder, the acquisition was effective on October 2nd, so the performance of Hummingbird's previous quarter had no bearing on Open Text results we report here today.

In the second quarter, Open Text will incur a onetime charge in the range of 32 to 35 million. Of this, approximately 5 million will be classified as restructuring or special charges to the statement of income. The balance will be part of our acquisition costs that will be accrued for on the balance sheet. This is broken out as workforce reduction of approximately 24 to 26 million, and facilities and other costs of 8 to 9 million. We expect a restructuring cash outlay of approximately 25 to 27 million over the next two quarters.

These actions will result in savings of approximately 50 million for the current fiscal year. We project annualized savings from the restructuring to be in the 80 million range starting with fiscal 2008.

I would also like to briefly discuss the accounting treatment of Hummingbird's deferred maintenance revenue. As part of normal acquisition accounting, the deferred revenue liability is subject to a write-down, which will reduce the carrying value of the deferred revenue to the fair value of services that are required to be provided. This is a balance sheet entry, does not impact cash flow, but does impact topline revenue within the first year.

To help pay for the acquisition of Hummingbird, Open Text arranged for a seven-year term loan in the amount of 390 million. The rate was established at LIBOR plus 2.5%, which, based on today's rate, will be approximately 7.8 to 7.9%. 50% of the loan is hedged with [affording the] fixed-rate collar between 7.29% and 7.84%.

I would like to close with a reminder. We are hosting an analyst briefing on the afternoon of Tuesday November 14. 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 in the investor relations section of our Website. Please contact our investor relations department for more information.

Now I will turn the call back to our operator to take questions.

(OPERATOR INSTRUCTIONS). Tom Liston, Versant Partners.

Just on the deferred revenue question or comment, can you just give us some additional color on what you expect the write-down to look like, or at least a bit of a range on what you think the maintenance exits out of Hummingbird?

I will give you an attempt at that, just to keep in mind please that these are not the actual numbers, because we are still evaluating that. But let me give you a range. Potentially, say 20 to 25% -- now this again could be adjusted -- would be the reduction. So to give you some reference, if you took that percentage on the last reported deferred revenue -- now I'm just talking about maintenance deferred revenue -- for Hummingbird at the end of their Q3, that would work out to be about 15 million. That 15 million would be reduction of future recognized maintenance revenue over the next four quarters.

What I can't give you much guidance on at the moment is how that will come out each quarter. Because it does not come up pro rata, but it comes out in relation to the renewals of the deferred maintenance over the next, primarily, 12 months. But it somewhat extends beyond 12 months, a small portion, because they have maintenance contracts in a few cases beyond one year. So, that would give you kind of a general model of how it would work. We obviously will be more specific when we do our pro forma filing with the SEC on -- in the middle of December.

And remind us when Hummingbird's seasonally strong in terms of maintenance renewals?

I think they come in at the end of -- that will be our Q2 in December.

So, it's the same as ours, Tom; the end of December.

John or Paul, just to clarify on your Hummingbird revenue comments, I think the earlier comment was just talking about the ECM part. Can you talk about expectations of connectivity? Or [does] that new comment about 20% overall reduction just hold more or less across the board?

Thanks for asking for clarification. The 20% refers to overall across the board.

So, mainly on the license side. And you're saying that, obviously, services and maintenance will hold in hopefully a little better than that.

Correct.

Paul, on the expense side, just further clarification. On the 50 million in savings, is that from October 2nd to end of year, or is that some type of pro forma exiting the year?

That would be October 2nd, end of the year. So, that would be for the next nine months we expect the operating run rate to be 50 million; on an annualized basis, then it's the 80 million.

So if we added pro forma Hummingbird and Open Text as they sat on October 2nd, you expect to save 50 million from that run rate?

Essentially that would be correct.

And the 80 million is - sorry -- for over the course of the entire fiscal 2008? You're not expecting to be necessarily [lumpy] towards the back?

No. That should be fairly even in through that fiscal year.

Finally, just a comment, John, on the Stellent acquisition. You obviously said while you don't see them much, how do you think your partnership may or may not change as a result of that acquisition?

They will be joining us at the LinkUp. So if you're actually going to be there, we would love to have you chat with Oracle themselves. We have not seen much in the past. And from what we can see from the relationship and what we've heard from the relationship, we still see that we will have a strong strategic relationship with Oracle.

Paul Steep, Scotia Capital.

I guess just to finish on all the restructuring and integration issues, John, maybe you could talk a little bit about the breakdown, roughly, by staff areas to where you've sort of taken cost out. Is it more Hummingbird or Open Text, where the weighting is there? And sort of where, I guess, within the functional areas -- where you've leaned more towards.

It would be more on the Hummingbird side, although we have tried to take the best of both organizations. And on the -- what we tried to do, obviously, is keep the back office continuing, so we've done very little there. So, the most of it has been in the areas of -- again, areas of where we don't believe we'll be profitable, remote areas, focusing on the key markets that we want to focus in, as well as in those markets there were some duplications of things like marketing people, sales management, that kind of thing that we could take out. So, not so much in the back-office; more in the field, sales related.

Fair enough. In terms of non-core products, are there any products already that you've sort of decommissioned, or we've scaled back on, or that might be, I guess, sold off in part or whole to other firms?

On the selling off, not at this -- we have not seen any at this point that we would do that. On the decommissioning, we are very conscious of the customer base, as we have a long tradition of protecting the maintenance of investments of the customers. We don't see any decommissioning of any product at this time. We do see, which you will get to see at the analyst day, as well as at the analyst user conference for the Hummingbird groups, that we will have a good roadmap with some clear integration of products, and -- but, obviously, within mind of how we minimize the cost for customers to continue using our products.

I guess the next one was -- you came sort of somewhat out of the blue here tonight and talked a little bit about service and maintenance, and the revenues going better there going forward. What's, I guess, shown up in the first almost two months, not quite, since the deal closed that's changed?

We see -- from the customer standpoint we've reached out to a lot of the customers, and they feel very comfortable [of] what we're doing, the support that we'll provide to give them. And so we clearly see from the maintenance renewals that many of them are now comfortable that we will continue to support the product. As well as then in the professional services, the kind of pipeline and backlog for that and the ongoing need for them we believe that we'll justify, that there won't be as big a dip as we had initially thought there might be.

Last one. Paul, just a really small item here, housekeeping. You did have a reversal of restructuring item this quarter on the core Open Text. Can you just give us a heads up as to what sort of went on there?

It was primarily due to, in some cases, individuals who were originally on that restructuring charge, because of other individuals who left on their own accord, came off the original accrual. So, as a result of that, you would get some credit that was allocated for that individual.

Mike Abramsky, RBC Capital Markets.

Thanks very much. Could you just talk a little bit about customer attrition risk going forward? It would seem to me that it will likely be a bit of time before you can assess the full extent of that potential risk.

That's right. One of the things we -- in fact, probably the number-one priority are a number of customer-related programs that we're doing to ensure -- make sure that the customer is comfortable, not only about maintaining the existing product, but seeing the benefits of having a full suite of products in front of them. And so that probably is the largest sales focus, is getting to the customers and making sure that they are comfortable with that. So to me, that's the number-one priority.

What are your plans and timing for a product integration roadmap? And what are you communicating? What is the message you're delivering to Hummingbird customers at this time regarding support for their current software?

Two things. One is, there will be the initial release that will be unveiled at the user conference this coming month, or this month, and then the more detailed will be in, I believe it's February, at the user conference for Hummingbird. But the key focus we're giving to our customer base is that we will maintain all products that they have today. There is nothing that we've seen that we would not want to maintain, as well as we believe that the synergies between products will have customers wanting to do a lot of cross-acquisition of products within the suite.

The goal -- our goal is, really, from a user standpoint, is whatever user interface you're using, to continue using that so you don't have multiple training, but you will have access to added functionality of other products that they wouldn't have had access to before from both companies.

Last question. On your guided savings, I think earlier on your restructuring you were -- in the previous restructuring you had guided for some larger savings initially, and then I think the actual savings were a bit lower because you had to incorporate some additional costs that came up later, such as rehiring certain employees in some of the consolidated facilities, etcetera. How have you approached your assessment of what is, obviously, probably an upside surprise here on the expected consolidation savings in this case?

I'll just comment briefly. I don't think the Company was significantly behind its projected results; I think the Company guided 35 to 40 annualized savings, and I believe we came into 37, 38. I think that was (indiscernible)

I recall that -- I don't have the exact numbers in front of me, but I do recall that one quarter after the restructuring was in -- original restructuring, pre-Hummingbird, was announced, there was -- there was a number that was put out there that was lower than the number that was previously mentioned.

Don't believe so, Mike. As we got further into it, we were always within the range. I think we refined the range as we got into it. And even then we were kind of in the --

Might have been at the low end of the range.

We're in the low end of the range.

But I remember -- pardon me for beating a dead horse here, but I do remember that on that call, I think it was [Alan] made a comment that there was some additional cost that came in to resolve and consolidate some facilities that -- so, I guess I just wanted to understand the level of confidence you have on these savings, which are, obviously, very strong, that you're not going to see them be undermined by subsequent costs. For example, you just talked about supporting all the products. Are there cost implications to doing that that could arise as you continue to work your way, as you say, through the existing Hummingbird acquisition issues?

I think, Mike, I understand your question, certainly. Yes, we've taken that into account in giving you these numbers, that we would -- we fully expect to achieve these savings, understanding that some things change based on, as you point out, some of the experience last year. So, we took that into account in guiding you with these numbers today.

Peter Misek, Canaccord Capital.

Just a couple questions. I know you're not giving guidance, but maybe you can help us understand operating -- some operating items for '07 and '08. Just reiterating some of the statements you made, in terms of revenue decline, call it 20%, that's approximately 40 million off of Hummingbird; write-downs, we're looking at about 15 million. Can you just confirm that? That's about 55 million, plus you have -- sorry -- against that you have about 50 million of savings. So, '07 from an accretive dilutive perspective is kind of a wash. Where you really start to make money off this deal is in '08. Is that correct?

You do have the numbers correct, broadly, as we described them, although we certainly do look at the accounting entry as a bit of -- as just that, an accounting entry, versus the revenue discussion. And I think you would see probably more in Q4 performance coming out, but certainly for all of fiscal '08.

John, in terms of strategically, if the ECM market is growing 8%, you're now the biggest independent vendor, I would think that you're going to want to try and use that to gain market share. And I would think that internally you guys would be disappointed if you just grew at the market. What strategies are you going to use to sort of gain market share? It sounds like of the [independent vendor], you have actually a unique selling proposition. Have you outlined the -- I know you're going to market with Microsoft and with Oracle and with SAP. But sort of beyond those areas, how are you going to sort of (multiple speakers)

A couple of things. One is -- and it's a very good point. As you know, the majority of our large customers are usually Microsoft desktop, Oracle database and SAP, or in some cases Oracle ERP systems. The majority of these customers, large global customers, they appreciate us being the Switzerland of the group, and not looking to rely that much on any one vendor. And so this has been communicated to us on many occasions with our large customers.

The other point is the systems integrators are also very interested in working with us, as they see people like IBM, etcetera, global services being competition to them. So, we are -- we believe and we have seen to date a lot more of RFPs coming our way, a lot more interest from new customers coming our way. So, we do see this is an opportunity to take market share.

Barbara Coffey, Kaufman Bros.

Just a couple quick questions. I don't think I caught the percentage of business that came through partnerships this quarter. And then, it speaks to -- some of the restructuring speaks to your closing about 38 facilities. I do not cover Hummingbird. About how many facilities did they have?

On the partner program, it was about 11% for the quarter, which is roughly in line for the seasonality that we see. And we are also -- so we feel very comfortable that we will get to our 20% goal. On the facilities, I'll let Paul (multiple speakers)

The restructuring is about taking half of those facilities from what they were operating under before out.

So, are you saying that Hummingbird had --

About 68 facilities.

And then, on the partnership side, what was Hummingbird? Did they have a partnership profile as well?

Yes, they do. I believe their profile is around 30%; mainly more geographic, so not so much strategic large partners, but local partners. And we would continue in key areas to work with those partners.

Izet Elmazi, TD Newcrest.

It's Izet Elmazi on behalf of Scott Penner. Just a question on the competitive environment. In their last quarter, one of your competitors in the legal market said they continued to have some customers cross over to their product, and a number of employees as well. If you can just comment on that.

Yes. In fact, prior to us acquiring Hummingbird, there apparently had been some erosion in that space, mainly because they had been selling database and document management into that base, as opposed to Web content management. But more recently, within the legal space, Hummingbird had been building specific solutions, and regaining and reselling into some of those spaces, as well as they -- while they had not done it, we saw that we could also sell into our corporate legal offices of our existing customer base.

In addition to -- with the RedDot product, we would see that competition having a pretty tough time selling against the RedDot product. And so it will be a major focus for us to basically stop any inroads they might have been making.

Okay. If you could just comment on the support revenue for this quarter. It was a little lighter than we had expected. Your comments going forward seem very positive, and you've actually guided up on that. Was this quarter's pause just simply hesitant customers waiting for some more news on the roadmap?

There is a portion of what was previously grouped into customer service, which is really professional services work. So, we moved some of that. We put that into the category of professional services and changed the comparative figures this year. I think that's why the number itself is down. About 1.9 million was the amount that we changed, or reclassified.

Just to give you a little more clarity on that, so at the end -- over the past two years, our customer support organization that does all the maintenance and hotline support have put together a program where customers can not only have that hotline support, but get support on-site as well. And so, that business has been growing to a point where we felt that it really is a -- because it's a time and materials, that it's not really (indiscernible) ongoing annual maintenance, because you're just paying for the on-site support. So we've really, after the end of this -- the new year, put that into professional services number instead of lumping it in with the ongoing maintenance number. And as Paul said, that was about 1.9 million. So going forward in the maintenance stream, you should see the normal growth of maintenance, but you would also see that the PS number has increased slightly as well.

Lawrence Rhee, Genuity Capital Markets.

Just wanted to see if I can get some more clarity, John, around the notion of the decline. Your expectation of the decline in revenue is, I guess, now around the 20% range from Hummingbird. Could you just add some color? Is it more around some verticals that you're not interested in, or some products? Just if you can give us some more color around that.

Yes. It is mainly in the ECM space. It would be not so much in verticals, which we see as -- but in geographic areas where we believe there is less value, or an area where they had a lot of support infrastructure, sales infrastructure, but were not, and we don't believe anytime soon would generate revenues in those areas.

But I presume in addition -- I guess, on the outside, with the 20% decline expectation, you also expect some potential cross-sell opportunities with your existing solution base into the Hummingbird customer base, I presume.

That is correct. It's just a timing issue of as we do the integration, get stabilized; obviously, the key goal will be to do major cross selling. That's just a timing issue for the first few quarters.

Paul, just with respect to the accounting for the deferred rev on Hummingbird, just to clarify -- at the outset you're going to see a reduction in deferred revenue by about 15 million, and that's going to impact the income statement maintenance revenue as well?

That's correct. And again, just to be clear, the 15 million was an example. But if that were the case, yes; what you would find is that the maintenance revenue that you would otherwise have reported if it was not acquired will be reduced by 15 million, essentially based on the same ratio of renewals of maintenance over the next four quarters primarily -- a little bit beyond that.

So in effect we're going to see somewhat of a short period inflated growth rate next year as the 15 million comes onside?

That would be true in a comparative period-over-period basis in FY '08 (multiple speakers) first quarter FY '09 that would be true.

David Shore, Desjardins Securities.

A couple questions. John, just on the connectivity business. Have you given any further thought to -- you talked about operating that as a separate business. Are the plans to keep that or perhaps sell that?

The plan is to keep it at this time, and in fact to grow that business.

Just a housekeeping one. The IXOS -- what's left to buy, and how much would that cost?

I think we're at about 96% now, just slightly over. Paul, any thoughts what that would cost?

Approximately 10 million.

EUR10 million?

U.S.

$10 million.

Duncan Stewart, Orion Securities.

A quick kind of clarification up front, going from the 10-K. Any comment on the section 1b conversation with the SEC?

Just to give a little bit more information on that, primarily the staff's comments relate to the accounting treatment for legal costs incurred in connection with the acquisitions the Company completed in prior fiscal years. And they've inquired just in the nature of those costs, and whether they've been properly accounted for. Of course, we view them as being properly accounted for. And it's regarding the continuing valuation of the minority shares.

Right. But that's an ongoing conversation; it's not resolved?

It is not yet resolved, although we do hope to resolve it in the near future.

Next question. Given the restatement -- I don't want to call it a restatement; sorry -- the reclassification of some of your support revenue down into service, may I assume as we go through each quarter you will effectively change the Q2 '06 Q3 and Q4 numbers the same way you've changed the Q1?

We certainly will, Duncan. And you will see when we file we have changed the comparative FY '05 numbers.

Good. Because I was kind of wondering what happened about your service revenues, because it's exactly 1.9 off, so now I know why. The FBI, 2.4 million; that was all in license?

Yes.

And is that all in the quarter just reported, or is it spread out a bit?

That's [right just in] this quarter.

That's unusually lumpy for a single quarter, isn't it?

As you know, over the last two years we have been trying to chunk them down. So, that -- but the FBI has been a customer for a while (inaudible).

If I remember also, going from your August analyst day, the briefing -- sorry -- that was July, wasn't it? Sorry; the July analyst day. You talked about having 20% of revenues from partner sales -- sorry. I think at that time you talked about 30% target for partner sales by end of year. [Again], if I heard correctly, you said 20 on the call.

The goal is to have it at 30 within the two years, and by the end of this year we would be at 20.

Just to clarify, that would be at 20, you and Hummingbird together, or just kind of the Open Text ECM stuff?

That would probably be us together.

(indiscernible) they're already kind of higher at 30-ish, does that imply that sort of Open Text ECM will be kind of [sort of] 16, 17 on its own?

The goal would be -- again, as we put the two products together, it's going to be pretty difficult to figure out which is which.

I sympathize with that.

And as we put the two together, if we do see that it is increasing, obviously, we'll let you know.

This cost savings you give us here, 50 million in current fiscal year and 80 in '08, those are both headcount [RIF] as well as facility savings, correct? That's all in one? That's the whole package?

That's correct.

Steven Li, Raymond James.

John, on the connectivity side, are you seeing competitors trying to convert Hummingbird customers? And if so, how successful have they been?

No, we have not. It's been a very stable business. And as we said, we think that we're doing some few things that we can actually grow that business. So, we're not seeing competitors taking it away.

So you would be expecting some growth from connectivity this year?

We are looking into it. And we believe that while there might be an initial dip, that we could see it grow in the long term.

Just one more question. If you look at the Hummingbird ECM pipeline, any differences in terms of deal size? Is there a similar proportion of large deals, or is it more skewed to the mid-size deals? Thank you.

The pipeline is more small to medium-size deals, and that -- which is in line with the market that they went after.

Richard Tse, National Bank Financial.

Just one quick question here with respect to the cost savings. You said it's headcount facility. So, should we assume that all the 50 and 80 million are going to hit your adjusted operating EPS, or is there sort of an amortization of intangibles component here?

In that discussion there's no amortization of intangibles. And Richard, I'd just comment again that a small portion of that will actually be on the income statement. The majority of that will be part of the purchase accounting, basically against goodwill on the balance sheet.

Howard Lis, GMP Securities.

Most of my questions have been asked already. I just wanted to go back to the Stellent purchase by Oracle. Can you just comment further in terms of you sort of said they're not somebody you encounter, as they're much smaller. But does this not raise the specter that perhaps Oracle would be -- try to sort of bundle in what they've got, and potentially elbow their way into some of these deals that you're not finding Stellent in today?

Stellent was mainly in the local government areas, small local government areas, as well as their portfolio of products in the ECM space was not very broad. It's much narrower. So, they have much more point solutions. It would take Oracle a significant time to be able to build out that portfolio to be as comprehensive as anything that we've got, as well as, obviously, scalability issues, things like that. And in discussions with Oracle, we feel that's not their reason for doing this anyway, that they still see us with our ability to connect to their products as a strategic player and partner.

So what is your understanding of why they did it?

Our understanding is it would meet certain areas for them that would help them, particularly in the area of Web content management, as well as -- it's pure speculation as to what might be in their minds at this time. But again, they will be at our user conference. So if you're joining us, feel free to ask.

With respect to guidance, did you say it will be probably not until the Q3 results are out that you'll be providing guidance?

We want to take a look at this quarter, next quarter possibly. By the end of this coming quarter we'll have a better feel for how long is it going to take to get our arms around.

So it's either going to be at the end of when the next quarter is reported, or the quarter after that?

It could be. Yes.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions at this time. Please continue.

Thank you, everyone, for your questions. And just to wrap up on the quarter highlights, we were happy with the Q1 results, and our focus in 2007 will be on integrating Hummingbird and getting the combined organization on our operations model as quickly and as efficiently as possible. We're happy with the progress we've made so far. That concludes our call for today. Thank you.

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