Open Text Corp (OTEX) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Open Text third quarter 2007 results conference call. At this time, all participants are in the listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS).

I would like to remind everyone that this conference call is being recorded on Wednesday, May 2, 2007 at 5 PM Eastern time.

I will now turn the conference over to Greg Secord. Please go ahead, Sir.

Good afternoon and thank you for joining us. Today, we will be discussing our financial results for the third quarter of fiscal 2007 that we 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 are all statements that contain forward-looking information and 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 are assumptions that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors are assumptions that were applied in drawing the 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 issued earlier today.

Now I will turn the call over to Paul McFeeters.

Thank you, Greg. Good afternoon, everyone.

Turning to the financial results for our third quarter of fiscal 2007 total revenue for the quarter was $156.1 million, an increase of 55% from $100.9 million in the same period last year. License revenue for the quarter was $43 million compared to $28.4 million last year, up year-over-year 51%, while maintenance revenue in the quarter was $79.1 million, an increase of 66% compared to $47.6 million in the prior year. While Professional Services revenue increased to $34 million from $27 million last year, margins continue to be impacted by acquired and profitable contracts we are required to complete.

Gross margin for the second quarter before amortization of acquired technology was 72% which is up from 69% in the same period last year. The pre-tax adjusted operating income margin in the second quarter before net interest expense was 21% compared to 18% in the same quarter last year.

We reported second quarter adjusted net income of $17.5 million or $0.34 per share on a diluted basis compared to $15.7 million or $0.27 per share on a diluted basis in the same period a year ago. This represents growth of 28% on a year-over-year basis. The GAAP effective tax rate for the quarter was 32%. Our cash taxes will be in the range of 15 to 20% annually.

Net income for the second quarter in accordance with GAAP was $3.9 million or $0.08 per share compared to $7.3 million or $0.15 per share in the same period a year ago. The forward diluted share count for the quarter was approximately 51.1 million shares.

The GAAP net income for the second quarter also included share base compensation expense net of tax of $1.3 million or approximately $0.02 per share on a diluted basis compared to $1.1 million or approximately $0.02 per share last year.

As of March 31, 2007, deferred revenue was $142.8 million compared to $112.5 million as of December 31, 2006. Accounts Receivables as of March 31 was $113.7 million compared to $114.1 million as of December 31. Day sales outstanding were 66 as of March 31, 2007, compared to 67 days a year ago.

The cash position at quarter end was $159.7 million compared to $124.4 million at the end of the last quarter.

Net Cash Flow From Operations was $31.3 million; after cash paid for Open Text restructuring of $4.5 million and after net interest payment of $7.6 million. This compares to Cash Flow From Operations of $31.4 million in Q2 and $28.7 million in the same quarter last year.

In our press release issued earlier today, we outlined our intention to make an additional debt repayment of $30 million. Future lump sum debt repayments will be reviewed on a periodic basis. We also announced that we filed to renew our share buyback program on NASDAQ, giving us the future opportunity to repurchase up to 5% of the outstanding common shares for cancellation.

As we mentioned last quarter, as part of the purchase price accounting the deferred revenue liability acquired is subject to an adjustment which will reduce the opening value of the deferred revenue. This is a balance sheet entry that does not impact cash flow but does impact topline revenue, primarily through the first year of operations. The impact this quarter was $3.5 million which would've had an after-tax effect of $0.05 on Earnings Per Share.

Today we filed the fiscal year ended September 30 [hummingbird] audited financial statements on Form 8-K.

I would like to (inaudible) a reminder about participation at several investor events in the coming months including the Bear Stearns Investor Conference in New York on June 12 and the CSFB Software Conference in Boston on June 13. Full details of these and other investor events are available in the Investor Relations section of our website. Please contact our Investor Relations department for more information.

I will now turn the call over to John Shackleton.

Thank you, Paul. Good afternoon, everybody.

In February we hosted Summit 2007 which is the worldwide user conference for Hummingbird customers and partners. We had record attendance with over 700 people attending. Livelink Up Europe, the Open Text user conference, also took place on April 18 and 19 in London and Munich and was also had record attendance with over 900 attendees.

In the past few months, we have spoken to over 2000 customers and partners; and our impression is that they are extremely positive about the acquisition of Hummingbird and our product roadmap.

Turning to the quarter, we are happy with the Q3 results meaning both our revenue and margin expectations. Our focus on the bottom line is paying off; and I am pleased with the Cash Flow From Operations this quarter. From a revenue perspective North America was responsible for 48% of the revenue. Europe for 47%, with the remaining 5% in the Middle East and Asia. There were few surprises and everything is tracking to plan.

In the quarter, we generated 38% of licensed revenue from new customers and 62% from our installed base. The average transaction size was approximately $200,000, the same as last quarter.

We had 10 transactions over $500,000 and one transaction over $1 million. The transaction over $1 million was from a European bank and was a competitive win within the financial services vertical. Examples of customers purchasing in the quarter included Boeing, Northrop Grumman, (inaudible), Sun, Vodafone, (inaudible), MetLife, [Auchman] le Roche, GlaxoSmithKline, Bank of Montreal and Bank of America.

Other customers purchasing in the quarter included the UK's Forensic Science Services who plan to extend their use of Livelink to a wider portfolio of vital services to the criminal justice system.

A significant customer win in the quarter was the National Institute of Health who chose Open Text to manage large volumes of records and documents used to comply with regulatory and statutory requirements. The solution will be integrated with Microsoft SharePoint Server.

Also in the quarter the American Forces Information Services which is the principal information organization within the Department of Defense selected an Artesia solution from Open Text. The digital asset management solution will be used by the Defense Visual Information directorate.

Through our partnership with EDS, Open Text entered into a contract this quarter to provide Rolls-Royce with Open Text solutions that will enable lifecycle management of enterprise content.

In the quarter we saw revenue broken down by vertical as 31% from High-tech Manufacturing, 19% from Government, 11% from Financial Services, 9% from Pharmaceutical and Life Sciences, and 5% from Energy. We continue to see strength in areas like government and manufacturing.

From a sales operation standpoint we closed the quarter with a combined sales force of approximately 210 [quarter] carrying salespeople the same as last quarter. And we feel we have the right number.

We have the sales capacity to handle probably 30% more licenses with the existing sales infrastructure in place.

Turning to the Hummingbird integration, as I mentioned last quarter, we identified several geographies that would be better served by regional partners than by the existing direct sales and we have made progress in moving to a partner model and in completing the closing or consolidation of offices in most of these areas. Overall, I'm very pleased with the progress we have made with our customers and the synergies we are realizing from our products, people and facilities.

Looking at our product portfolio, as I mentioned, our customer base are pleased with our roadmap; in particular, our Hummingbird customers are enjoying the DMX. They will see significantly reduced migration costs that they would've had to incur with the Hummingbird products. In addition, DMX customers can now take advantage of the broader product set Open Text has to offer while continuing to maximize the values they have invested in the Hummingbird enterprise deployments.

Also this quarter Red Dot released the next version of its content management and delivery software, Red Dot CMS 7.5 and Red Dot Live Server 3.5, which features Livelink ECM integration and an improved solution for SAP integration.

Recently, Red Dot received a positive rating for its web content management and content delivery solutions in the Gartner market scope for Web Content Management 2007 report.

In a joint development with some micro systems, we announced the industry's most powerful e-mail management solution, capable of archiving and managing billions of e-mails per year. This software is part of the deepening relationship between Open Text and Sun and will be sold by both companies to large global organizations.

We also announced that Open Text is the first to receive record management certification with Microsoft Office SharePoint Server 2007 under the U.S. Department of Defense 5015.2 Certification Program. This solution is the first in a series of new capabilities and extensions Open Text will be rolling out for the new 2007 Microsoft Office System over the next few months.

We also announced that Forester Research named Open Text Livelink ECM records management solution as a leader in its Forester Wave publication.

On the acquisition front in the quarter, we announced the acquisition of Momentum Systems for $4 million. Momentum is a former Open Text global alliance partner and was privately held. It specializes in complex ECM solutions for the U.S. government agencies. Momentum has an experienced staff of about 50 people located primarily in the Washington, D.C. area.

On the partner front, we made good progress with our global partners particularly with SAP, Oracle and Microsoft. Open Text revenue from partners more than doubled from the same quarter last year and partner revenue for the combined company was approximately 37%. We continue to work closely with Oracle and we are seeing the pipeline build nicely with some early successes, particularly in the J.D. Edwards part of their business.

We also had significant presence last week at Safire SAP's Annual User Conference and we have further expanded our partnership with SAP, who are now reselling SAP Archiving by Open Text and SAP Document Access by Open Text. The solutions help customers reduce risks through long-term secured archiving, increased productivity of business processes, and ensure regulatory compliance.

On the outlook for the market, we are seeing no change in ECM and things are progressing, according to plan.

Regarding Q4 guidance we will not be providing specific revenue and earnings guidance, and although we have made significant headway, we are still actively reviewing and qualifying opportunities to make sure they fit within the Open Text forecasting model. Overall, there have been no surprises to our outlook. The consolidation of Hummingbird is going smoothly and we are almost finished with that integration.

We are on track to meet our profit goals and we will continue to focus on the bottom line for the remainder of this fiscal year.

Now I'd like to open the call for questions.

(OPERATOR INSTRUCTIONS).

Tom Liston of Versant Partners.

Just on the SAP announced this afternoon or I guess maybe it was this morning. Can you talk about the incentives that you are offering their sales force and how that has changed and as well I think there was a comment that SAP can now directly support the two products that are part of this announcement and had does that affect your mainstream?

Correct, Tom. Basically so they will be able to sell both products on a worldwide basis. They will be doing first level support of that product of their customers. And in general the -- it should not impact the maintenance stream. We see this as incremental revenue.

Okay and can you talk about in terms of their sales force, have they been -- I know they were familiar with the product but haven't been been fully trained in the product and, again, what incentives do they have that might have differed than the partnership before?

The group in North America has been able to sell actually in Canada and for the federal government have been able to sell this product. It is now open to all SAP on a global basis. We have been doing training. They will have compensation and quotas for these products.

And with your Oracle partnership, I think it was a couple of weeks ago that they had talked about the [Stellant] roadmap. In your conversation with Oracle has anything changed, if any, in terms of their plans with you vis a vis perhaps building out the Stellant assets that they have acquired?

The announcements they have announced recently are pretty much just the integration of the Stellant projects -- sorry, products -- to the middleware for the Oracle middleware. We are continuing to work with Oracle particularly in the areas of J.D. Edwards, Siebold, and Hummingbird -- sorry and whoever the HR group was. But we are still seen a lot of work of interfacing with those applications.

And Paul, just on the maintenance renewals, now that we have the combined company, where do you see sitting in terms of, obviously, it was a strong quarter in terms of renewals, but where does that sit as a percentage of the year? You know obviously (inaudible) be around 25%. Obviously it looks like it is ahead of that. With the combined company, where do you see that percentage being?

So, Tom, just for clarification you mean as a total -- total renewals for the year what does Q3 represent?

Yes.

It's more like the 35. In other words it's definitely skewed to December renewals. If I've answered your question.

That's perfect. And just the last question and I'll pass along. Just on the revenue mix, the target model obviously calls for the 30 to 35% product license this quarter was below that. When are you seeing it trend back toward the model? And the second part of that is the gross margin assumption the target model is obviously a fair bit above where Q3 hit. Again where do you see that, when do you see that coming towards the target model?

On the license, Tom, basically what we are seeing as we mentioned, we expected a 20% decline in the Hummingbird license mainly through disruption. And if you look at the seasonality it's pretty much on track with what we expected it to be on the license side.

And on the gross margin.

We did 76% so I think we are fairly close to the model on that. In fact, above the model on that basis. We talked about 70, 75% and we did 76% this quarter.

Mike Abramsky of RBC Capital Markets.

You've had about six months now post Hummingbird. Could you just discuss why a little bit more you're fussy on withholding guidance? You talked previously about wanting to scrub the pipeline, get better visibility, just give us a bit better understanding as to what is the issue here?

It's more, Mike, as you remember when we did [XR] as we went through particularly the first year we had a couple of surprises, as their seasonality was different from our seasonality. So we want to be cautious this time. We are not seeing many surprises and as what we've seen in the past two quarters as you've taken our information, consensus has been pretty close to our actual results. So we feel comfortable that there are no surprises at this point.

I guess like how material are some of these additional obligations, contract obligations, the kinds of things that could pop up? Are there just a bunch of small ones or are there still some large either contracts or relationships, etc.. that could potentially provide volatility to Hummingbird's performance?

I think it's a mixture. There are -- for example like in the UK, Australia, there are some contracts that we are working through that could again I don't believe material, but that we are being cautious on. I think the issue really is based on our past experience with IXOS,0 particularly with their having a much more European focus than we had had to that point. We just want to make sure that there are no surprises particularly as we go into the summer months.

And are these negotiations that you are working through or is this a due diligence?

No. It's really more of until we've seen a full year cycle of what their sales forecasting would be, that's what we are watching. Not any particular contract or due diligence within a contract. Really to make sure (multiple speakers)

So you're really trying to get a sense of the reliability of those sales teams associated with those regions in terms of the forecasting that they have in their pipeline?

That's correct.

And your confidence in their being able to deliver that?

Yes.

On the flip side of the partner issue is that of competition. Could you just give us a bit of an update or maybe an overview as to the state of competition from these same partners who, obviously, have done things in their space. I mean Oracle's clearly [done], but SharePoint obviously historically and even more recently particularly with their recent push is obviously very ECM-centric. So could you talk about the impacts that you are seeing there?

In fact, as we are seeing that SharePoint is in many departments in many of our customer bases as they have been using SharePoint over the past year or so as they now need to manage this is it's becoming substantial. They are -- we [aren't seeing more business with Microsoft in order to help manage SharePoint particularly around records management. So we are seeing that as a positive.

Oracle as I mentioned, also, while we have competed with -- we don't we rarely used to see Stellant. We have seen them a couple of times and have beaten them this past quarter, but also with Oracle working with the PeopleSoft and Siebold and J.D. Edwards, applications which Stellant is not able to do at this point, we are seeing a nice pipeline building with Oracle.

SAP, we saw one of the biggest transactions of the quarter was with them so the partnership we see is beginning to pay off already. We are also seeing Documentum and FileNet since their mergers have some disruption because of those mergers. And we are seeing some opportunities because of that.

In Europe is SAP still kind of a leading sales pipeline for IXOS-related archiving sales?

Correct. Particularly in areas we are not in like Spain, Italy, etc. They are building -- they've obviously got a strong sales force there.

Lastly, obviously you are moving to try to create and unify or at least provide integration path for the various products in your portfolio. But there are still products it seems from your announcements, Artesia, Red Dot, Connectivity that really have their own life, their own market opportunity.

What is your strategy in the longer term? Is it to integrate those, keep them separate and then going forward and when you think about acquisitions do you look to those as more fitting into an overall product strategy? Or are you more content to bring in products that can purely add to say more customer base? More selling, more growth, etc.?

The key issue if we talk about the architecture, Livelink 10, and we spent a tremendous amount of investment over the past three years being able to build and tightly integrate these products with a simple user interface that anybody who may have been using these products can access all the other suite as well.

Having said that, we also do see as you pointed out Red Dot sales to probably heads of marketing that deal with websites. As does the Artesia deal with both heads of marketing for the digital asset management. We see them selling interestingly on ramps that while we might meet a company and go into a company in their department then the cross-selling of further ECM products would be a natural follow on and vice versa.

Our existing customers that have Livelink and all the other products we are seeing an easy sell to sell Red Dot products into that and Artesia. So we continue to see this jewel penetration if you will of our customer base both from point solutions that fill a specific need, but also selling the enterprise suite that many of our large global customers are looking for.

Richard Tse of National Bank Financial.

Couple questions here. First on the cost side. There's sort of a noticeable decline in some of your cost lines like R&D and Sales and Marketing. So should we assume that we are at a level now that might be sustainable? Or how should we look at that, Paul?

I think you should do that. It is about that level that we expect to sustain going forward.

And then with respect to the seasonal lit between Q3 and Q4 and notwithstanding the fact that you are not giving guidance, (inaudible) just that you are on a historical path? Nothing has been a surprise so is it safe to assume that we are going to see that sequential lift as in previous years?

It probably is Richard. Yes.

On the cost side, Richard, you're asking still?

On the revenue side as well?

I think if you look historically over the past couple of years it would be safe to look at that.

Yes I guess my question probably revolves more around the license side of the business. Like, you've been through this aggression for some time. When do you think you are going to get a meaningful organic acceleration in licenses here?

As we mentioned before the focus this past year has been on the bottom line. We believe that going forward we certainly will keep pace with the market and we feel confident we can do that.

One final question here. What's your take today on further acquisitions here in the tryout, too much lockdown this market and make yourselves to go to guys. Is that in the cards now that you are whiling away past Hummingbird?

We are certainly doing tuck-unders as we did with momentum. We will continue to do that. We are -- we've clearly seen certainly a lot more where people are coming to us seeing us as the large independent vendor and so we are already beginning to see that now. But I do believe, as we all do, that consolidation will continue.

But from a Hummingbird standpoint we believe we're almost complete on that integration.

Scott Penner of TD Newcrest.

Paul, you just mentioned on the cost side that things are pretty much stable. Does that mean the cost base heading into Q4 is pretty much as it is right now?

That's correct.

And then just to extend that as you start thinking about growth next year, at market rate is this a cost structure that can support -- you know when you start talking about that 8 to 10% growth, is this a cost structure that you can support that on?

We believe that the capacity we have in the sales force today can certainly support that and more.

And then I wanted to ask, too, about the support revenue for the quarter versus Q2. It looks like if you were to adjust for the respective deferred write-offs in the quarter, that it didn't really climb. In fact it may have even declined sequentially. So I wanted to just understand what the dynamic is there?

It would be a little bit of timing on high volume of renewals in December. You know, we only recognize on confirmed quotes to invoice. There's usually a little bit of a lag there with some back accrual anticipated.

So there's nothing there -- that's what I'm trying to get at is there is really nothing to say that the products that you exited last year that those made in the contracts are now coming up for what turns out to be nonrenewal?

No. The renewal rates in the low 90s we still see constant.

And Paul as well if you can just talk me through what the deferred tax -- deferred tax reduction is on the casual statement?

We still make some adjustments in terms of the purchase price accounting so we do have an adjustment this quarter with respect to that.

Is that expected to continue, I guess?

No. I think you would find that we are stabilizing that now.

Howard Lis of JMP Securities.

Just want to go back to this whole discussion about guidance and try to better understand again why you are not providing at least a range. I mean the whole point of providing a range is there is obviously a lot of gray area in interpreting the quality and the probabilities and the sales pipeline. You've had as mentioned before six months worth of experience here. This I would say was -- Hummingbird, that is, was a much more, sort of consistent performer in terms of its results.

So, again, why is you are not providing guidance at least a range of a guidance and do you expect to do so at the end of the fiscal year? And when you do it at the end of the fiscal will it be on a quarterly or an annual basis? Thank you.

So again really the issue is we want to see -- based on the experience we have with IXOS, where we had a couple of surprises, we want to see a full year of integration to make sure that there are no surprises. As you said we -- with Hummingbird it is more closely to our model. We haven't seen any surprises; but we continue to be cautious and as we believe the information we have given you in the past has allowed consensus to be pretty close and, hopefully, we haven't given you any surprises.

So when do you expect to start providing guidance? You say after a full year. So that would be in another two quarters?

It could be in another two quarters. Once we feel comfortable.

Robert Schwartz of Jefferies & Company.

Microsoft Office SharePoint Server is widely viewed as starting to freeze the market. I'm wondering how you are seeing that? How you are combating it and what effect it is having on you and how you go to market against it?

Actually we go to market with Microsoft. In many cases, Microsoft doesn't have records management as well as there aren't many instances of SharePoint that you cannot manage those instances on an enterprise wide level. So that as many -- as more and more of these servers become available, the ability to aggregate and manage these on an enterprise level for Sarbanes-Oxley and other things is difficult to do.

So as people grow and use SharePoint we work with Microsoft to allow people to manage that efficiently, also from a scaling and extended functionality that we have that might -- that SharePoint doesn't have at this point in time. We allow large global customers to do that today rather than waiting that over a period of time. So we are actually seeing SharePoint as a positive driver for us not a "lock on the market".

As a positive driver maybe you could help us understand the metrics for this past quarter. How many deals were with Microsoft SharePoint? What percent of the revenue? Maybe some examples of some customers who are in SharePoint? You gave one. Could you give us some more?

We don't break it between the partners. We don't break them out, but we are seeing as we mentioned the overall growth in the partner program doubled from last year; and we are seeing that continue both with Microsoft but also with SAP and Oracle.

Were any of the 500K deals with SharePoint?

Yes.

And if we look at the margin on customer support, it came in around 84% similar to -- better than last quarter but less than I think we would have expected so much for improvement. Should we expect that for next quarter as well? That margin?

Again without giving guidance I think we will see either that or I think going forward a little bit better margin perhaps by a slight percent.

Because of scale?

Yes. Mainly scale.

David Wright of BMO Capital Markets.

I was looking for a comment on basically marketing and the average deal price. It seems over the years that the average deal size is not going to (inaudible) cutdown a little bit but I'm imagining that you are selling more components. So perhaps you could look into it for me and are you able -- is there a way that there are certain aspects of the deals that you are selling are in fact getting larger but other ones are shrinking so the average deal size is staying -- ?

Probably the easiest way to think of it, David, is in the connectivity business of Hummingbird there were a lot of very small transactions and that's really what's brought the average price down. If you look at the ECM piece of the business we actually see that that size is growing.

Have you got a number for us?

My guess is so if we looked at it before (inaudible) so the average transaction price now somewhere around 200,000. Before Hummingbird it was around 250. My guess is if you took that out it would be getting closer to 300.

And a clarification, I think you said partner revenue was about 30% -- 37% I think you had said. And is that of license sales or total revenue? How do you -- ?

That's licensed sales.

Great. That's what I thought. Thanks very much. My other questions were answered.

Gabriel Leung of Paradigm Capital.

Just got a couple of housekeeping questions for you, Paul. During the conference call you had talked about continuing to be involved in a couple of lower margin consulting mandates probably inherited from the Hummingbird side. Can you quantify that amount for us on the services line? And maybe your expectations of when some of these mandates might be completed?

I'm sorry. Again we won't be splitting that out. We won't be splitting that out for you but I would say that over the next two quarters to have the impact of a few percentage points.

Let me make a point. So if you look in Q2 we were about 14% margin. In Q3 we are now 17.5. I would say within the next two quarters we should be up over 20 and we are taking (inaudible). By then we should have cleaned up some of these issues with the Hummingbird Group.

Right and that's the function of getting rid of some of these (multiple speakers) contracts. Okay. And just lastly can you give us the headcount at the end of the quarter?

Headcount. We were just under 2800.

(OPERATOR INSTRUCTIONS). Brian Freed of Morgan Keegan.

Could you please throw some light on the impact of currency on revenue this quarter? I guess with the weakening dollar I just want to know how that played out.

The FX impact was less than 1% on total revenue.

Scott Penner of TD Newcrest.

Paul, what is the deferred revenue, support revenue write-off that you expect next quarter?

It will be $2.5 million.

John, I just wanted to come back to the DMX. Is this -- just remind me is this out in the market for Hummingbird for customers right now?

I know DMX will be so currently they have DM6 and the DMX will be the next version that will allow them to plug in to all the other -- other products that Open Text has but also allow them to migrate to all the function -- to move to the functionality, upgrade to the functionality without all the costly migration of upgrading workflows, etc., that it would have taken in the version 6.

And what is DMX expected to be generally available for -- ?

It should be generally available by the end of this year. So we would be looking at like November which is the user conference to be providing most of the functionality.

And isn't a no charge -- no charge transition for customers?

That's correct. It's just part of maintenance.

And how quickly do you expect that to have any meaningful takeout? Do you have a good read from a customer base? It always seemed like there was a real hodgepodge of versions of Hummingbird out there within their customers?

Well. there's a couple of things on that. One is, many of the customers that were asking for Version 6 is really for very specific functionality. We are -- we have pretty much provided that functionality. Stabilized that functionality and so they have got what they needed without actually moving to 6 in some cases. The key issue then is what the next version will give them is allow them to stay on that but also give them the rest of the product suite without doing any real migration of as I said changing custom code, changing workflows, etc. It should be just an upgrade.

Steve Coning of Jefferies & Co.

Just two quick ones. One on library services. Enterprise library services. Can you give us some color on how that's coming and where we might see some impact from that in the near future?

Secondly, just a question back to the SharePoint question. How long -- do you have a sense of how long it will take the market for customers to get their arms around what SharePoint isn't good at and what it is good at? Some of them are probably grappling with it now, but is that -- three months, six months for them to really understand SharePoint well?

Let me answer the first one first. Basically I would say that the large global customers, many of our customers, they pretty much understood what it can and cannot do. So they are already through that.

On the early question, the services in some cases, for example like the records management, the reason we were able to provide certification for SharePoint outlook and for SAP was using those library services there. The additional functionality like DMX will all be released, ready for our user conference in November.

Garrett Becker of Merrill Lynch.

This is actually Garrett for Ed Maguire. Just wondering, I may have missed this but could you talk a little bit about the environment for U.S. Federal spending?

This past quarter the U.S. Federal spending was very strong. Stronger than usual for this time of year. And we continue to see that being very positive. We are also seeing the Canadian government fairly strong as well as UK and German governments.

Any chance you can maybe give us a breakout of what that was?

Of the --

For USA?

Of the -- it would be hard to get -- what did I say government was? Percentage was? Most of the government that we saw was U.S. government this past quarter. So I would guess and it's purely guess, so I said government was about 19% of our total license revenue. And I would say probably 75% was U.S. government.

Maybe just going back again to the partner sales. You said 37% of licenses. Any idea -- is most of that partner influenced? Is any of that actually resold by partners?

It is becoming -- there is a little bit of resale in there. As we said with the new SAP agreement they are reselling so they had their first success this past quarter. So there is some in there and it's probably at this point, my guess is something like 30% would be resale. And the rest is highly influenced.

That is very helpful and I think that's all I have. Thanks.

David Wright of BMO Capital Markets.

On connectivity, now that you have had a chance to look at it a little bit. Any further thoughts on your plans in that area? And, also, could you comment at all on the business itself? It had been in a slight decay. If you are keeping it have you got any plans to grow that business?

That's right, David. So continued slight decay. We see this as a good business. We see the ability to cross sell into that business as well as we do see with the Vista opportunities that there is potential to. We believe we could certainly minimize that decay and it is obviously still a very profitable business. And we think we can do well with that business.

Mike Abramsky of RBC Capital Markets.

Just following the follow on bandwagon here, just following on Richard's question, but maybe just getting a little bit more specific on seasonality because I think you were talking about license. But on overall growth, your prior model -- the prior one you published was that Q4 kind of pre Hummingbird was generally up 10 to 15%. But the last two years it has been up 4. So how do we think about sort of proper seasonality for the combined company for Q4?

I'm looking at my advisors here. Because of not wanting to give guidance.

Yes I'm just trying to understand to the extent you can help us just understand how does the combined company behave seasonally? And to the extent that you are able to help us understand that?

My belief is it would be closer to the past two years from what we are seeing today.

We have no further questions at this time. Please continue.

Thank you, everyone, for your questions and just to wrap up on the quarter's highlights. We did meet our goals. Was very pleased with the strong cash flow from operations of $31.4 million. The Hummingbird integration, it continues to the accretive and we are tracking very close to plan. And our Partnership Program is proving effective from a strategic standpoint and supports our alignment with and the investments we are making with SAP, Oracle and Microsoft.

We will continue for the rest of this fiscal year to focus on the bottom line and I continue to see opportunities for improvement in this area.

That concludes our call for today. Thank you for your participation and questions.

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