Open Text Corp (OTEX) 2007 Q4 法說會逐字稿

Good evening, ladies and gentlemen, and thank you for standing by. Welcome to the Open Text fourth quarter and year end 2007 financial results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for questions. If anyone has any difficulties hearing the conference (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Thursday, August 30, 2007 at 5 PM Eastern Time.

I will now turn the conference over to Greg Secord, Director of Investor Relations. 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 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 the future performance of Open Text and its subsidiaries. These are all statements containing 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 Form 10-K for the fiscal year ended June 30, 2006 and in our press release that was issued earlier today.

Now I will turn the call over to John Shackleton.

Good afternoon, everyone, and thank you for joining us. Before we review the quarter financials, I'd like to reiterate what I said last October. I said our focus for 2007 would be to be a continued commitment to strong operating profits while we concentrated on integrating Hummingbird. I'm pleased to say that we completed the Hummingbird integration and we've achieved our profit goal of 22% pretax adjusted profit margins and we've ended the year with a strong quarter. Our focus for FY '08 will be to grow license revenue and continue to improve our profit margins.

Now I'll turn the call over to Paul to review the financials.

Thank you John. Turning to the financial results for our fourth quarter of fiscal 2007. Total revenue for the quarter was $175.2 million, up 67% from $105.2 million in the same period last year. License revenue for the quarter was $59.2 million, up 85% compared to the $32 million we reported last year, while maintenance revenue was up $35 million for the quarter at $82.2 million. Professional services revenue increased 30% in the quarter to $33.8 million. Of particular note was the 38% license revenue increase over last quarter. The 38% growth rate is one of the highest growth rates in the history of Open Text.

Gross margin for the fourth quarter before amortization of acquired technology was 73% compared with 72 and 71% in previous quarters. We reported a fourth quarter adjusted net income of $26.6 million or $0.52 per share on a diluted basis compared to $15.4 million or $0.31 per share on a diluted basis in the same period a year ago. This represents growth of 68% in adjusted EPS on a year-over-year basis.

The pretax adjusted operating margin before interest expense in stock comp was 25% in the fourth quarter, up from 19% last year which is on model for the third quarter in a row. Professional service margins continue to be impacted by acquired unprofitable contracts which we are required to complete. We expect the remainder of these contracts to be completed over the next three quarters. With respect to adjusted earnings, the overall tax rate for the quarter is 32%. Our actual cash tax rate continues to be in the range of 15 to 20%. Net income for the fourth quarter in accordance with GAAP was $8.2 million or $0.16 per share compared to a net income of $7.8 million or $0.16 per share in the same period a year ago. The GAAP net income for the fourth quarter also includes share based compensation expense, net of tax of $1.5 million or approximately $0.03 per share on a diluted basis compared to $1.3 million or approximately $0.03 per share last year. The share count for the quarter was approximately 51.6 million fully diluted shares.

As of June 30, 2007, deferred revenue was $143.1 million compared to $74.7 million as of March 31, 2006. Accounts receivable as of June 30 was $128.8 million compared to $75 million as of June 30, 2006. Day sales outstanding were 66 days as of June 30 compared to 64 days a year ago. The cash position at quarter end was 150 million compared to 159.7 million at the end of our previous quarter. Net cash flow from operations was $28.5 million after cash paid for Open Text restructuring at $2.1 million and after net interest payment of 5.6. This compares to cash flow from operations of $15.4 million in the same quarter last year.

The Company plans to make an additional debt repayment of $30 million. This will reduce our debt from $390 million at the time of the Hummingbird acquisition to approximately $327 million this quarter. We're pleased with our accelerated repayment of the debt ahead of schedule. Planning for future lump sum debt repayments, we'll continue to review it on a periodic basis.

As I've mentioned over the past few quarters, as part of purchase price accounting for Hummingbird, the deferred revenue liability acquired is subject to an adjustment which will reduce the open value of deferred revenue. This is a balance sheet entry and does not impact cash flow but it does impact the topline revenue, primarily through the first year of operations. The impact this quarter was $2.5 million, which would have had an after-tax effect of $0.03 on EPS. For the fiscal year, the impact was $11.1 million, which would have an after-tax effect of $0.15 on EPS.

Turning now to our fiscal 2007 results. Total annual revenue was $595.7 million, up 45% to $409.6 million in fiscal 2006. License revenue for the fiscal year was $182.5 million compared to $122.5 million last year while maintenance revenue was $287.6 million compared to $183.9 million last year.

In the fiscal year, product license and product maintenance revenues accounted for 79% of annual revenues; the remaining 21% relating to our professional services. Gross margin for the fiscal year before amortization of acquired technology was 72% compared to 70% in the prior year. Adjusted net income for the fiscal year 2007 was $74.3 million or $1.46 per share on a diluted basis compared to $50.8 million or $1.01 per share on a diluted basis for fiscal 2006, growing at 45% year-over-year. This also represents a [22%] pretax operating margin before interest in stock compensation for fiscal 2007, which is up from 18% last year.

Our overall fiscal 2007 tax rate projected earnings is 32% compared to 31% in the prior year. On a GAAP basis, we've reported net income for the year of $21.7 million or $0.43 per share fully diluted compared to a net income of $5 million or $0.10 per share in fiscal 2006.

Net cash flow from operations for the fiscal year was $110.9 million after cash paid for Open Text restructuring of $10.7 million and after net interest payment of $20.3 million. This compares the cash flow from operations of $60.8 million in fiscal 2006.

In prior quarter calls, we have discussed an expected run rate savings from the restructuring activities that occurred post the Hummingbird acquisitions. We achieved our goal of saving $50 million this year and I reconfirm annual savings in the $80 million range based on our combined cost base pre-merger.

While on the subject of cost savings, I think it's important that we revisit the Open Text business model. Clearly we've exceeded our profitability targets for a few quarters now and it's time to update our revenue mix and operating margin model. The result is an improvement in gross and operating margins by a couple of points. We are pleased to provide the following guidance.

Our business model targets pretax adjusted operating margin will be 20 to 25%, up from 15 to 20%. A copy of this updated business model will be made available on our website as part of the current investor presentation.

I would also like to comment on the foreign exchange movements in currencies that have occurred over the past few months, specifically the increase in the value of the Canadian dollar. Due to our global operations mix, the Company has maintained somewhat of a natural currency hedge against our cost base. The bottom-line impact of currency fluctuations in the quarter was less than 1%.

I'd like to close with a reminder -- we are hosting an analyst briefing on the afternoon of Tuesday, October 23. The briefing will be held during LiveLinkUp, our user conference at Orlando, Florida. For details including dialing numbers to listen to presentations as well as complete downloads of all the accompanying presentation materials will be made available in the Investor Relations section of our website. Please contact our Investor Relations department for more information.

Now I'll turn the call back to John.

Thank you, Paul. We're very pleased with the results for the quarter and the fiscal year. We exceeded both our revenue and margin expectations this quarter. As I said in my opening remarks, our focus throughout the fiscal year was to complete the integration of Hummingbird and increase our profit margins. Our restructuring included rationalization of our product portfolios, streamlining the back office and real estate costs, and combining the field force to meet our operating model. I'm pleased with our achievements in all these areas.

In the fourth quarter, we were particularly happy with the 17% year-on-year growth in revenue that we saw in Europe. We generated 37% of license revenue from new customers and 63% from our install base. The average transaction size was approximately $220,000. We had 11 transactions over $500,000; three transactions over $1 million, and one transaction over $2 million. The transaction over $2 million was from the US and was a competitive win in the oil and gas vertical.

Geographically, North America was responsible for approximately 47% of revenues for the quarter; Europe for 47%, with the remaining 6% in the Middle East and Asia. Examples of customers purchasing our products in this quarter included Marathon Oil who selected Livelink EMC to service the foundation for Marathon's Enterprise Content Records Management program. We changed to identify, capture, preserve and classify records from a across the Marathon enterprise. Marathon's selection of Open Text as Marathon's ECM standard includes plans to integrate Microsoft SharePoint with Livelink as an end user interface strategy.

Another customer was Lloyd's Register, a not-for-profit risk management organization responsible for safety and quality audits. They have extended their Open Text ECM solution across our entire organization, making it their standard ECM solution for business improvement, contributing to faster enhanced customer service.

Oregon Department of Justice purchased Open Text ECM solutions including eDOCS to improve their record retention practice, support their implementation of data security classifications and provide e-mail management. It's critical for the Department that solution seamlessly integrates with our existing legal [macro] management system.

UK Highways Agency also purchased Livelink ECM solutions to support changes essential to meet government modernization and the highway agency business objectives. TRW also bought Open Text ECM solutions for data archiving, document management solutions for SAP to optimize their operational efficiency.

In the quarter we saw revenue broken down by vertical as 19% for high-tech manufacturing, 12% for government, 14% for financial services, 6% for farmer and life sciences and 9% for energy. From a sales operation's standpoint we closed the quarter with a combined sales force of approximately 250 quota carrying sales execs. We feel that we have the right number of reps in place and have the skills and sales capacity to handle 30% more business with the existing sales infrastructure. We will continue to invest in our sales and marketing efforts.

On the partner front, we're seeing exciting opportunities. Areas like archiving, records management and compliance continue to drive business through partners like SAP, Accenture, Oracle, and Microsoft. Revenue from partners was approximately 30%, which was up 14% in absolute dollars from last quarter and several of our biggest transactions were partner influenced.

As you recall, last quarter we announced that SAP is reselling Open Text branded archiving and document access products. This will continue to be a significant strategy for us in FY '08 as we enter new markets with SAP. Building on our strong relationship with Microsoft this quarter, we announced two new product offerings. We announced the first commercially available office business application built upon 2007 Microsoft Office. Our Livelink ECM customer information management gives users of Microsoft applications a complete view of all information associated with the customer, whether that content [lives in] SAP, Microsoft Office, SharePoint or other content repositories.

The second offering combines Open Text specialized legal industry expertise in lifecycle management and proactive compliance with the collaboration and document management capabilities of Microsoft Office SharePoint server 2007. This solution will enable attorneys and staff to work in their familiar MS environment while still leveraging the advantages of Open Text's lifecycle management software.

Most recently we announced the release of Livelink ECM, eDOCS version 5.2, which will allow Hummingbird customers to deploy on Windows Vista and leverage the new capabilities of Microsoft Office 2007. We continue to meet delivery milestones towards the release of DNX, the upcoming major release that represents the true convergence of Open Text and Hummingbird technologies. This will be demonstrated Open Text LiveLinkUp in Orlando at our user conference in October.

As I mentioned earlier, we are for the most part complete with the Hummingbird transaction integration. And I'm very pleased with the progress that we've made with our customers and the synergies we're realizing from our products, people and facilities. I have stated on a previous call that we expected a drop of 20% in the run rate of Hummingbird's license revenues, which was consistent with results we've seen to date coming in at an average 23% decline to date.

On the competitive front, we find that size really does matter with our customers. We continue to win against the competition especially in areas like Web content management where our RedDot product is having significant wins against the competition. On the outlook for the market, we are seeing new opportunity for growth in ECM, particularly around the records management and compliance as well as increased demand for SharePoint and SAP integrations.

The industry analysts are telling us that ECM is growing in the 8 to 12% range, and as we look at fiscal 2008, I see license revenue growing in line with the market. And as Paul outlined earlier, I expect to continue increasing our profitability.

Our revenue seasonality remains unchanged and we feel comfortable with the current street consensus. I'd like to remind everyone of our Global User Conference LiveLinkUp 2007 to be held in Orlando, Florida on October 23 to 25. This year we are expecting record attendance of more than 1,600 customers and partners. In addition to DMX, we'll be unveiling Livelink ECM 10. And as Paul mentioned, we'll be hosting an analyst briefing at the conference on October 23.

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

(OPERATOR INSTRUCTIONS) Scott Penner (technical difficulty). Please go ahead.

(technical difficulty) Can you hear me, John?

Sorry, could you repeat the question again? We couldn't hear.

I was just asking if you could hear me. There was a lot of noise on the line. Just -- I was curious, you mentioned the -- now position yourself for growth in (technical difficulty) 2008. What elements of the business, being it either the direct side or with the partnerships do you really feel is going to contribute? I guess what elements of that give you the kind of visibility to [welcome it] and give the kind of forecast you're giving?

Right. I think particularly the SAP relationships, that we're working with them and the integration with SAP, as well as we're seeing many -- as we finish the Hummingbird product, the DMX, we see now that we can then go back and sell into that back customer base. So we see for the past year we've really been cleaning up that version and now we're ready to be able to sell into that base. So both pondering with SAP as well as working more closely with the Hummingbird base would be the key growth areas.

And just remind me, what is the time line for delivery of DMX right now?

It's currently complete -- it will be completed by the end of this quarter. It will be released at our LinkUp in October.

Okay. I'm assuming that the Marathon oil may be the big deal that you're talking about, but even if it isn't, could you just kind of talk about the nature of the competitive win, what elements gave you the advantage?

There were a couple of things. As usual we usually went for total cost of ownership but also it was the full suite that they were looking for. They were looking for Web Content Management, document management, records management, as well as the ability to interface with things like SharePoint as well as with SAP.

Okay. And was this a -- was that a direct contact for your direct force? Or did it have anything to do with the Microsoft joint relationship?

It was Microsoft and our direct force. It was joint selling together.

Okay. Just a couple of housekeeping -- Paul, is the IXOS now completely closed out?

No, we still have a [load] -- just under 5% remaining shares to acquire.

Okay. (technical difficulty) There was a charge of 7.7 million on the income statement. What does that relate to?

Part of it relates to containing Open Text restructuring. And another part relates to closed property not used in our current operations, where we took an additional accrual, [it's your] best estimate of the amount of obligation remaining on that property for the next three years.

What should we expect, I guess, on the future restructuring cost heading into '08? Is there anything substantial that's on the horizon?

No. No. You should see virtually no restructuring costs in terms of the financial statements. We still have some cash flow obligations -- cash obligations from restructuring properties primarily and still some employee cash payment obligations. As far as the P&L, as I indicated, you should see virtually zero going through FY '08 with the slight exception of Q1.

Okay. I'll turn it over, thanks.

Paul Steep, Scotia Capital.

John, maybe just talk a little bit in terms of customer attention on the Hummingbird side, particularly what the pipeline sort of looks like heading towards DMX? Where you expect that to sort of drive numbers into [F] '08?

Really what we've been doing over the past year is, if you may recall back in November, we had a user conference with the Hummingbird user base, very well attended both in the US and in London. And basically what we've talked to them about is how we will fix the product so that there will be much more of an update rather than a significant migration that they would have had to do if we kept the product as is. What we've found is since that time the customer base was extremely receptive to that. We've seen our maintenance of the customer base continue to renew at over 90% range, and they're looking forward to this new release. We've had many of them, of the large customers working with us on this release to make sure that this is what they were looking for.

So we see the decline that we talked about in the license, we see that picking up over the next 18 months and recouping some of that back. While -- although in some of the areas that we felt were unprofitable areas obviously we won't be reentering those areas. But we feel very comfortable that we will protect most of that base.

Great. And then the second one I have is, usually this is the time of the year you take a run at any organizational changes designed to sort of drive better performance out of the organization. Have you done anything to help sort of boost the numbers or get the sales force and the rest of the operations lined up for [F] '08?

Good question, Paul. What we did was is we did the integration of Hummingbird. We took that opportunity as we are now much larger in scale to actually both reorganize Hummingbird as well as Open Text. So we've been doing this since November. And both the fields force and the whole go-to-market, product marketing, et cetera, have very much been lined up. We did our kickoff meetings in July of all this new organization and things are going very well.

Great. Thanks, guys.

Mike Abramsky, RBC Capital Markets.

Last time you had guided for the 20% attrition. I just want to make sure, does that imply that your organic growth since you're reaffirming that that's now where you're at on Hummingbird, your organic growth excluding Hummingbird would be in excess of 10%?

It was slightly less than that, Mike.

Slightly less than that?

Yes. If you took FX and other things -- but slight -- but pretty much in line with the market, we think.

Okay. And what would you -- how would you convey the sustainability of your growth going forward and your view that you're going to grow at the market rate? What is the risk to that and what is the upside?

So, the key to us is the reason we believe it is certainly with the Hummingbird product, now we can resell and sell additional seats into that base as well as sell additional products into that base. So that's a market that we haven't been selling into the last six, seven months. So that's one. Also we believe the partnership with SAP, the initial results that we're seeing are very positive. They've done significant training of their sales force that have a quota to sell these products. So we see that very positive as well.

As well as what we're seeing of our traditional Open Text customer base, that they are building additional ECM applications and in many cases going to enterprise-wide applications. So we see the market as very positive. And we certainly feel comfortable growing in line with that market.

What's driving the migration to the enterprise? And are they typically going to look at changing pricing or going to RP in those situations? Or what's the environment like when you do that?

In so the main driver is still e-mail archiving, records managements, compliance, and most of these are our traditional customers where it's really just buying into their existing contracts.

The -- maybe this is a little bit of a speculative question but are you finding that at your current valuation you're having to consider potential overtures from others out there to see further consolidation in the market? What's your view on becoming part of that?

We haven't -- basically, obviously as you've seen, the market continues to consolidate. There are -- the smaller point solution companies are continuing to consolidate. We believe we're at a size that regardless of what the market is doing, we can grow dramatically. And we have a very strong suite of products that we can compete very well in this market with the big players as well.

I assume that the slightly impacted PS margins this quarter was related to your improved partner leverage? Or was that related to historically what you've done is bring in some contractors to sort of help close deals that perhaps increases your costs?

Actually, Mike, it was more related to cleaning up some of the Hummingbird fixed bit projects or product issues that we were helping clients resolve.

Okay. And great quarter. Thanks very much.

Ed Maguire, Merrill Lynch.

Yes, good afternoon. I was wondering if you could comment on how the contribution of the relationship with SAP this quarter, I mean, how did that factor into any of the large deals you might have done?

There were a number of large deals that they did have effect on, Ed, that -- so as I said, we trained, we did the training probably early spring and we are seeing that training pay off with them on a global basis.

Okay. Did you have any special incentives to the sales force for the fourth quarter, any expense out there?

There might -- there was one spiff I'd know of for one of the smaller Hummingbird groups, but for the general populace, no.

Okay. And just finally --

As you know, Q4 is strong anyway so that they usually don't need spiff for Q4.

Right. And could you comment just generally on what you may be seeing in terms of the US market, particularly the financial services market, whether there has been any concern among your customers about fallout from the recent liquidity issues?

Interestingly enough I was surprised that the financial services market this quarter was a significant jump. And we are seeing, particularly around e-mail archiving records management, that they are again for compliance reasons, we're seeing probably financial services being the hottest sector, certainly the past two quarters.

Lawrence Rhee, Blackmont Capital.

Just with respect to R&D, I guess it stayed flat on a gross level sequentially. Is this something that you expect going forward? Or is this, I guess, part of the benefits that you're seeing from the [changes] from Hummingbird?

I expect it to stay in that range, Lawrence, around the 14, 16%. We are both maintaining products. We are doing some initiatives offshoring in India, but as well as building new products. So I'd expect it to stay around that range.

And just with respect to that one announcement that [B. Braun] announced a couple of weeks ago, is this announcement that was part of the Q4 results this quarter or is this something that's going to be recognized in Q1?

That was a previous -- I believe it was a previous -- I think it was Q3. So the announcement came out but it was a previous deal, I believe it was Q3.

Okay, great. Thanks, guys.

Richard Tse, National Bank Financial.

Just wondering if you could elaborate a bit more on the Microsoft partnership? They've seen the 35% year-over-year growth in share points. Just wanted to get a feel for how you guys are benefiting from that, given your partnership there?

Yes. So we are seeing in fact the share point as you're suggesting is helping us expand the market because as people are using it on a departmental level, they realize that they need help in managing the repositories. Also to be able to then add application solutions that we've done in for the legal space but also adding with that all the archiving, records management, e-mail management with the SharePoint. So we're seeing a lot of pull-through because of SharePoint.

Okay. And to clarify another point, now, you guys gave a split here for licenses, 37% from new, 63% from the installed base. And you talked about Hummingbird this quarter. Are we sort of to make the conclusion here that Hummingbird was on the huge contributor end, with DMX coming out it's going to sort of cause another incremental uplift here?

No, it's basically to plan, Richard. As we said, we expected the decline set to be of Hummingbird to be in that 22 -- 20 to 22% range, which it has been. As we then release the product, we do see that will help contribute to the growth that we see which we believe will be in range with the market.

Okay. And one final question on the G&A, Paul. It looked like it spiked up here a bit to like 18.5 million. Is that -- what sort of would explain that? And is that sort of going to come down to sort of these normalized levels around 16 million?

Yes, it will come down. There are some Q4 costs in there but in our model we've been showing 9 to 11 and I'm going to tighten it up to 9 to 10 as part of our margin improvement. So yes, you'll see it come back down to its normal levels, Richard.

Okay, great. Thank you.

Robert Schwartz, Jefferies.

I'd like to -- so maybe you could add a little bit more clarification on SAP relationship. I'm wondering what kind of quota they carry and could their Q4 benefit your Q1, given that they're -- you're on different fiscal years and given the size of the quota?

We -- to be honest I don't actually know what their quota is. It's -- I can certainly find out for you. But what we're seeing is, is that they do see this as a significant incremental revenues for them. They're very -- and as I said both in North America and Europe, we've seen a lot of activity and interest with their sales force. I believe there's something like 400 quota carrying salespeople within the SAP group. And so far we've seen significant pipeline interest.

And I just want to be clear, the large deal in the quarter, that was with Microsoft as a partner or SAP?

It was with Microsoft.

Okay. And could you maybe give us some -- a little color on Oracle? It was thrown in the list of partners but I didn't know if you've closed any business this quarter with them.

Right. We did close business with them. As you know we have products that relate to do their PeopleSoft, their Siebel and J.D. Edwards product. We're a little further behind with that partner relationship but we do expect to see that grow in the coming year.

And last question. Is there anything about the seasonality of Hummingbird in this product release that would sort of -- you reaffirmed the seasonality in the past. I'm wondering what did you take into account concerning Hummingbird for this Q1 and the release of the product? How did you think about that?

Good question, Robert. What we've done is take a look at the whole seasonality for the last three years for both companies. And we believe it is similar seasonality to what we've seen over the past three years for Open Text. And that is, if you look at Q4 to Q1 has been down 25 to 30 -- in the 25 to 30% range. Q1 to Q2 is up 10 to 15%; Q2 to Q3 is typically flat to down 5%; and Q3 to Q4 is up 20 to 25%. That's the seasonality model that we're seeing.

That's very helpful. Thank you so much.

David Wright, BMO Capital Markets.

Just following along on that, was that seasonality for total revenues or for your license revenues?

That's total revenues.

Total revenues. Thank you. Could you summarize for us what products would have been available this quarter that weren't available in past quarters? Is there anything new? I know you launched a new connectivity product in the quarter. Was there anything else that --?

It was released late in the product. If the question is really did anything have influence on the Q4 numbers [for] new products, not really. No.

Okay. So nothing really new on the product front?

No.

Were there many new salespeople? I guess the other way to ask it is last quarter, how many salespeople did you have?

Around 250?

Just around 250. Right. And that was up a little bit. Yes. We had about 210 the quarter before and we are -- we've been aggressively hiring new people as we look now for growth.

Okay. Then when I kind of dissect through the Hummingbird numbers and your own numbers, so Hummingbird had a couple of weak quarters in your own sort of license sales and now this strong one. I guess what I'm trying to figure out is, was it just catch-up because you were coming to your own fiscal year end and deals that didn't come in, in the December or March quarter came in now? Or do you think that the market is a little bit stronger today than what it was in the last couple of quarters?

It's probably a little bit of both. I would think that there was some slippages but there usually are. And we are seeing a healthy market.

Okay. And the large deal size, now just to confirm you said that there were 3 over 1 million. That number doesn't include the 1 over 2 million?

That does include the 1.

Oh, it does include the one over. Okay. And the 11 over 500,000, does that include the ones over 1 million?

Yes, it does.

Okay. So it's really 7 over 500,000.

Correct, that's right.

So you're doing a lot of -- the large deal contract number isn't growing that much over the years.

No.

What is growing I guess is the midmarket and the kind of average and below average size deals? Is that correct?

What we've also done, David, is we intentionally tried to chunk the big deals so we don't have these large affecting contracts that impact us. We try to break them up and we've been doing that now for probably close to three years. And so [odds are going to] be every 90 days there will be another piece or every six months there will be another piece to the agreement.

Right. So it gives you kind of renewable revenue?

Right.

Very good. Okay, thank you very much.

Brian Freed, Morgan Keegan.

Hi guys, thanks for taking my call. I'd like a little more clarification. You mentioned that you were generally comfortable with consensus but I think you just mentioned in terms of seasonality, normal seasonality, for the first quarter is down pretty significantly on a sequential basis. Were those comments specific to the full year or were you comfortable with quarterly breakout of consensus as well?

In general, the consensus we've seen for the past year have been pretty much in line with where we felt comfortable.

Okay. And then secondly, on the SAP business, can you talk a little bit more about how that's structured? And is it a revenue sharing agreement? And do you believe that the benefit in terms of more revenue from SAP would offset any potential risks to your business?

Correct. In fact, it is a revenue sharing agreement and the agreement now is on a global basis. And so we believe that while there might be a couple of areas that we would have good coverage, in general we just don't have the sales force that they have as well as the influence in these large companies. So we feel very comfortable that certainly over the long-term that this will be very beneficial for both of us.

And did you extend the -- did it extend to a global basis recently? Or has it always been a --

That was the announcement in Q3. We had a relationship with them in Canada and -- for the US Federal Government. This is now all on a global basis.

Okay. All right. Thank you very much.

(OPERATOR INSTRUCTIONS) Gabrielle Leung, Paradigm Capital.

I just had a question on the competitive front. You talked a little bit about how you're stacking up against some of the smaller ECM (inaudible) ECM players. How about the FileNet IBM entity? Specifically are you hearing any rumblings within their existing customer base that might be favorable for you down the road? And concurrently on head-to-head RFPs, how are you stacking up against those guys? And in situations where you're winning, what's the customer saying? Why are they going with you guys over them?

There's a variety of things. So we are seeing more coming to our way both from customers who may not be an IBM shop -- Exit, for example -- or customers that are looking at alternatives at this point, using this as an opportunity to look at other alternatives. We are seeing as well as the cost issues that is an issue for them. The competitive ratios we've seen between those two having proved for us over the last two quarters. And we're basically seeing also partners who may see IBM particularly as a systems integrator threat compared to competition. We've seen more business coming our way through the partner channels as well.

Okay. And just for Paul. What's your best guess of the remaining sort of cash restructuring obligations remaining over the near term anyways?

Well, for fiscal '08, you'll probably see another cash outflow between probably [7 and -- 7 to $9 million].

Scott Penner, TD Newcrest.

Thanks. Just curious, you mentioned you're going to repay another 30 million of the debt in this quarter. What's your feeling on the proper balance I guess with the share repurchases as well? Given the cash that you're putting out, it would seem like a pretty good deal to be buying back shares at this price.

Basically, Scott, we look at really three issues for the use of our cash is, do we acquire small tuck-under acquisitions that might help us in a regional and in a technology? Do we look at re-buying back our stock? Or do we look at paying down our debt? And in this particular case, it's the Board and the management team's basically decision to pay down the debt. But every quarter we look at those three alternatives.

Robert Schwartz, Jefferies.

Yes. I just want to be crisp on a couple of things about the guidance. You said you were comfortable with the seasonality that's out there and the consensus for Q1. And then you mentioned that typically you're down, I think you said 25 to 30% Q4 to Q1. Consensus has you down 10%. How do I reconcile those two things?

I think if you looked -- if I looked at the [mean] for what the consensus had, it was in that range that we would have at 25, 30%.

25 to 30% of total revenue?

Well, really license revenue.

Okay. That's what I need to know. So it's really around -- the numbers you gave are really around licenses?

Right.

Okay. That's helpful. Thank you.

Blair Abernethy, Westwind Partners.

Just a couple things. Paul, do you have the headcount numbers in the quarter?

I do. Just by major groups?

Yes.

Well, the total headcount is 2,700; 42% are in sales and services, 20 in support; 25 -- or 18 in support, 25% in R&D and 15 in G&A.

Okay, great. I wonder if you can elaborate a bit more on the comment around outsourcing some of your R&D to India and whether -- is it just R&D? What have you done there to date? And is there some work you can do there on the services side as well?

So what we've done to date is basically around R&D. And it's a typical -- we're doing initial pilot project to make sure that everything goes well. We've been doing this for close to nine months now. It has gone well. We're very pleased with the results mainly around documentation, maintenance of software, those kind of things. So we've learned from other people. We have people on board now. We've done this numerous times and so we're doing the typical ramp up of that, seeing how it goes. So far it's gone very well. It's fairly small. It's a relatively small project.

A small project at this point. Okay.

It's something like 60 people, if I recall.

Okay. And just another -- turning over to pricing or the pricing environment. Can you comment on what you're seeing out there in terms of licensed pricing?

Right. The pricing has stayed pretty constant. We sell as a solution the suite and we're not seeing a lot of pricing pressure.

And on maintenance renewals?

Same thing, on maintenance renewals that have stayed constant around or just over 90% range, 92 plus. And no pricing pressures.

Okay, great. Thanks very much.

David Wright, BMO Capital Markets.

A follow up on the restructuring. Paul, you mentioned that there would be an outflow in fiscal '08 of 7 to 9 million. And you also said that we might see a small charge in Q1. Are those numbers the same thing? Are we looking for another $7 million charge in Q1?

Oh, no, no. Second question for clarity. I mean we have continued cash payments. And it's usually as a result of previous short-terms on facilities which of course just follow the normal lease payments. And that's why we tend to have a continuing cash outflow. As far as the P&L side, it will be minimal because we have a 12 month restructuring window. It would just be a small piece for Open Text. So I didn't want to say it would be absolutely zero but it will be approaching zero in Q1 and I would say after that you won't see any. So a Cash flow in [different parts].

Okay. So approaching zero, does that mean it's a couple of million dollars or not even close?

At most, at most.

Okay. Thank you very much.

Thank you, David. And we'll take one last question if there is one in the queue?

Your last question comes from Ralph Garcea, Baywood Securities. Please go ahead.

Thanks for taking the question, guys. You've talked about partnerships on the software side with SAP and Microsoft. Services, it looks like you did a few deals with Logic and I think the CGI business is still healthy. You haven't mentioned storage, though. Can you sort of elaborate on -- did you get any pull from the storage guys this quarter and how are your relationships there?

Not so much this quarter, Ralph, but we have good relationships with all of the storage vendors -- Hitachi, HP, Sun and EMC. In fact, EMC is one of our strong storage partners.

So was it just particular for the storage industry itself in the June quarter? Or how does the pipeline look, I guess, for your first half of the year calendar, second half of this year?

As we said, the key drivers are e-mail archiving, records management, that usually does involve storage. But I would say compared with some of the things we're doing at SAP, that would be -- is stronger pipeline.

Okay. Thank you.

Thank you, Ralph. Well, thank you, everybody, for your questions. I'd like to wrap up with the quarter highlights. As we mentioned, the Hummingbird integration met our expectations and profitability is in line with our model. In addition, we made significant progress with our global partners, particularly with SAP, Microsoft and Accenture. And looking at fiscal 2008, our focus will be on growing license revenue while continuing to improve our profitability.

That concludes our call for today. Thank you.

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