Open Text Corp (OTEX) 2008 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Open Text Q1 Fiscal 2008 Financial Results Conference Call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Thursday, November 1st, 2007, at 5:00 p.m. Eastern. I will now turn the conference over to Mr. Greg Secord. Please go ahead sir.

Good afternoon and thank you for joining us. Today we will be discussing our financial results for the first quarter of fiscal 2008 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 contained 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 the 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 30th, 2007, and in our press release that was issued earlier today.

Now I will turn the call over to John Shackleton.

Thank you Greg. Good afternoon everybody and thank you for joining us. Today we're going to talk about our Q1 results, update you on our partner strategy, discuss some significant customer wins, and review some of the highlights for the quarter. But first I'll hand the call to Paul for a detailed review of our Q1 results.

Thank you John. Turning to the financial results for our first quarter of fiscal 2008, total revenue for the quarter was $164 million, up 62% from $101.2 million in the same period last year. License revenue for the quarter was $44.3 million, up 54% compared to the $28.8 million we reported last year. While maintenance revenue was up $38 million for the quarter at $86.3 million. Professional services revenue in the quarter was $33.4 million compared to $24 million last year. We reported first quarter adjusted net income of $22.1 million or $0.43 per share on a diluted basis compared to $12.2 million or $0.24 per share on a diluted basis from the same period a year ago. This represents growth of 81% on a year-over-year basis.

Gross margin for the first quarter before amortization of acquired technology, 73% which is up from 71% in the first quarter of fiscal 2007. Professional services' margins have improved at 18% and were higher than expected as we did not experience the normal seasonality in Europe. Pretax adjusted operating income margin before interest expense 24.1% in the first quarter up from 18.7% last year.

With respect to our adjusted earnings, the overall tax rate for the quarter is 30%. Actual cash taxes payable continued to be in the 15 to 20% range. And income for the first quarter in accordance with GAAP was $7.8 million or $0.15 per share compared to a net income of $7.3 million or $0.15 per share in the same period a year ago.

And our GAAP results for Q1 '08. For amortization of intangibles was $10 million higher than last year. This is a non-cash charge. The share count for the quarter was approximately 51.6 million fully diluted shares. As of September 30th, 2007, deferred revenue was $141.3 million compared to $143.1 million as of June 30th. Accounts receivable as of September 30th was $117 million compared to $76.7 million in the prior year. Days sales outstanding was 64 days as of September 30th, 2007, compared to 68 days in the prior year.

The cash position at quarter end was $150.3 million, essentially the same as our previous quarter. Net cash flow from operations was $32.2 million after cash paid for Open Text restructuring of $1.2 million and after net interest payment of $7.3 million. This compares to cash flow from operations of $9.6 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 $296 million this quarter. We're pleased with our accelerated repayment of the debt ahead of schedule and plans for future lump sum debt repayments will continue to be reviewed on a periodic basis. In the quarter, we did not make any share repurchases under our share buyback program.

As I have mentioned over the last few quarters, part of the purchase price accounting for Hummingbird and the deferred revenue liability acquired, subject to an adjustment which will reduce the opening value of the deferred revenue. The balance sheet entry that does not impact cash flow, it does impact top line revenue, primarily through the first year of operations. The impact this quarter was $1.3 million, which would have had an after-tax effect of $0.02 on our earnings per share.

You may recall that last quarter we updated our pretax adjusted operating margin model. You'll feel confident in our plans to spend in the 14 to 16% range for development, 24 to 26% range for sales and marketing and 9 to 10% for G&A. This should drive the business model that targets pretax adjusted operating margin of 20 to 25%. A copy of this updated business model is available on our website as part of the investor PowerPoint presentation.

I'd also like to comment on the foreign exchange movements in currency 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's maintained somewhat of a natural currency hedge against our cost base. The bottom line impact of currency fluctuations in this quarter was less than $0.01 a share.

This is the fourth quarter of operations since the acquisition of Hummingbird. As you also know, we financed the acquisition with cash and debt so did not dilute the existing shareholder base. To date, including the $30 million repayment just announced, we will have accelerated repayment of debt by $90 million funded out of current cash flow from operations. So we maintained our share base, EPS is a true comparison year over year and we are very pleased EPS of $0.42 being 80% higher than one year ago.

Now I'll turn the call back to John.

Thank you Paul. We're very pleased with our results. We exceeded both our revenue and margin expectations this quarter and I'm also pleased with the cash flow from operations. Our focus on leveraging channel partner relationships continue to pay off and I'm confident in the pipeline going forward.

As Paul mentioned, revenue in the first quarter was $164 million. North America was responsible for approximately 48% of revenues, Europe 47% with the remaining 5% from Asia PAC. We were happy with our sales performance in Europe, particularly given the historical seasonality challenges in the September quarter.

Overall, Q1 was in line with our seasonal expectations for revenue, profitability, and cash flow. We generated $44.3 million in license revenue, of which 37% came from new customers and 63% came from our install base. The average transaction size was approximately $230,000 consistent with prior quarters. We had five transactions over $500,000 and an additional three transactions over $1 million. Two occurred in Switzerland and the third came from North America. We saw revenue broken down by vertical as 24% from high tech manufacturing, 15% from government, 11% from energy, and 7% from financial services.

Examples of customers purchasing our products this quarter include DBVA, a multinational financial services group, a long-standing Open Text customer. They extended their Open Text solution with Livelink document management and collaboration, giving access to more than 100,000 employees throughout their corporate intranet. Fund Chemical Corporation also extended their Open Text solution to include Livelink ECM document archiving and also purchased Livelink ECM vendor invoice management to optimize their vendor invoice processes. The City of Atlanta, Department of Watershed Management, purchased Livelink ECM content management and Livelink ECM email management to assist initiatives addressing the city's water treatment and waste water reclamation. Another customer that bought in the quarter was the UK's Nuclear Decommissioning Authority, a non-departmental government body that works to deliver safe, sustainable and publicly acceptable solutions to the challenge of nuclear cleanup and waste management. They've implemented Open Text's Livelink ECM content management lifecycle to improve efficiencies in information management and regulatory compliance. The implementation will also include Livelink SharePoint integration. In the quarter, the Travel Channel purchased the entire Artesia Digital Asset Management suite solutions to facilitate the production of their programming content as well as accelerate the deployment of their promotional materials into new channels.

From a sales operation 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 sales capacity to handle 30% more business with the existing sales infrastructure but we will continue to invest in sales and marketing.

Last week we hosted our LiveLinkUp 2007, our 14th annual global user conference. The conference addressed the future of ECM software and its growing importance in the information strategies of the world's largest organizations. This was another extremely successful conference with approximately 1,500 attendees and over 250 partner representatives in attendance. We also had keynote addresses from our strategic partners, Accenture, SAP, and Microsoft.

We took the opportunity to recognize several customer achievements at the conference. The finalists on our website published some of them include Genzyme, T-Systems, the European Court of Human Rights, and the U.S. Air Force. At the conference, we delivered on our DMX strategy, allowing Hummingbird customers access to archiving, records management, SharePoint, EPM, without costly migration. We also delivered on Livelink ECM 10 providing a rich user interface as well as the ability to incorporate content from different systems, helping organizations gain more value from their existing IT infrastructure. We expect to start seeing the impacts of these releases in Q3 and Q4 as we start reselling into the Hummingbird customer base. On the partner front, areas like archiving, records management, and compliance continue to drive business through partners like SAP, Accenture, Oracle and Microsoft. Revenues from partners was approximately 34% and several of our biggest transactions were partner-influenced. We continue to see growth in our partner channel and we're now targeting a goal of reaching 40% partner license revenue in the coming 18 months.

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 FY8 as we enter new markets with SAP.

Building on our strong relationship with Microsoft this quarter, we are pleased to announce the opening of a new office in Microsoft's Partner Solutions Center in Redmond as part of our continued development of content management applications that extend Microsoft technology.

And finally on the ECM market front, we're pleased to announce that in the quarter the industry analysts from Gartner positioned Open Text in the leader's quadrant for enterprise content management and in its latest Magic Quadrant reported citing ECM vision as best in class.

We continue to see Open Text growing with the market. The industry analysts are telling us that the ECM licenses should grow in the 8 to 13% range annually and we're comfortable with this estimate.

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

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Scott Penner of TD Newcrest. Please go ahead.

Thanks. John now that you've owned Hummingbird for the full year, you've obviously made the decision to continue to refrain from providing guidance. Maybe you could just give us some of the considerations that went into that decision?

Well I think first of all what we're seeing a trend in the industry is that many companies now are not giving guidance. And we believe given the models that we're providing, we feel very comfortable with the numbers that you're coming up with.

Okay and just on that last quarter you gave some ranges per quarter I guess on sequential growth and if I have it right the Q2 was normally up 10 to 15% on the license side. Is that still -- have a range that you're comfortable with?

Exactly, we're comfortable with that range.

Okay and it's also normally a very good quarter for services sequentially. Maybe you could just give us some color on the growth that you're expecting in the services business and then any update on I guess dealing with some of the problem contracts that you've mentioned over the past couple of quarters.

Actually two things. We were actually surprised that Q1 for us was unusually strong in services given the usually the European slowdown this time of year. And so it was unusually high for this quarter. We think next quarter should be in line working through some of the problem accounts that we inherited, we pretty much feel comfortable that this should be completed by the end of this quarter.

Okay.

We feel comfortable that now that we've attained the revenue margins that we had with Open Text, we've now got Hummingbird to that level and I would still see some improvement from both groups as we go forward.

Great. And then it's lastly on the verticals, there's obviously a lot of press about weakness in the financial services spending. Maybe you could just give us an update from your perspective and your business whether you're seeing any of that and what the strong verticals looks like from a pipeline standpoint?

It's interesting Scott. We're seeing the financial is probably the fastest growing where we're seeing a lot of interest around compliance, email archiving, records management, that kind of thing. And so we're seeing good business in that area. Government we see beginning to grow back again but also strong obviously in energy.

Great. Thank you.

Thank you Scott.

Your next question comes from Paul Steep of Scotia Capital. Please go ahead.

Great. John, maybe you can just help me reconcile something. I'm just working through on sort of the license growth on a year-on-year basis, on an organic basis. I get sort of a -11% number when you pull back in the Hummingbird. I'm just trying to understand obviously there's some product line in there that is having a little difficulty or a little weakness and a number of the changes you've made have addressed that hopefully. What's sort of the moving parts in here that are changing maybe in this quarter? Just for us to help think about it.

Yes, so I think the key issue Paul is the license number actually was right pretty much where we expected it, maybe even a little higher. The key issue obviously was the fixing the DM5 as well as DM6 and now as we've released these new products as well as some of the new Open Text products we do believe we can now go back, certainly January timeframe start going back into the Hummingbird account base and grow that base. So we feel as I'd mentioned last year that I expected licenses within Hummingbird to decline somewhere in the 20 to 30 range. It's around 23. That we believe is done now and now we would begin to see growth.

Okay and just none of it was likely connectivity, maybe a little connectivity. I guess is there anything I don't know anecdotally you can provide us just in terms of sort of pipeline or number of clients that are sort of out there waiting. Cause I know yes, the DM6 was pretty broken when you bought it, to say the least.

I think the most -- the positive that we are seeing is the continued renewal of the Hummingbird maintenance, slightly ahead of anticipation of what we expected. So we'd see that as a sign that the customers are waiting for the new products. The feedback that we've got from those customers, they're very positive about what they've seen. So we feel bullish for the pipeline not only of the Hummingbird products but key other products as well as we start rolling them out in January.

Okay to just key on that and finish up on it, just to clarify what you'd said before, you expected a ramp in Q3 and Q4. Were you referring to your fiscal year or the calendar year as to when the Hummingbird base would (inaudible) the new products?

Good point Paul it's our fiscal year. So as we release that product in January, we do see that picking up.

That makes sense. Alright, the last one then and I'll pass it on. Just it's actually for Paul or for you, just in terms of the long-term debt you've done a good job in drilling that down. What's sort of the target or the thoughts around it? I know every quarter you reevaluate but are you comfortable carrying any debt in the maybe the acquisition environment or buyback?

Yes well we as we do repeat each quarter, have three uses of excess cash which one of course is repayment of debt, purchase and tuck-in acquisitions or share buyback. So I guess we'll repeat ourselves that we're -- we'll have to evaluate that each quarter. I think what we are showing is that we're not going to continue to build cash on the balance sheet. So I think that would be one indicator. And so depending again on tuck-in acquisitions or if we feel a need to go into the market and buyback shares.

Fair enough. I'll leave it there. Thanks guys.

Thank you Paul.

Your next question comes from Tom Liston of Versant Partners. Please go ahead.

Hi, thanks and good afternoon. Just along that theme, Paul what was the main criteria if you -- let's for example -- well, let's talk about acquisitions, but if you didn't have a tuck-in acquisition on the horizon, are you trying to maintain that about a $150 million. Is that a good criteria in terms of deciding whether to pay down the long-term debt? Is there any type of criteria that we can use to model this out?

Yes I think I'll say Tom at approximately that level. So yes $150 we think is sufficient to have on the balance sheet and could fluctuate somewhat there but--.

And the other variable would largely be what the acquisition pipeline would look like?

That's correct.

And on that John what would you say now that we have Hummingbird reasonably integrated and fairly done and behind you. Do you feel that you have an ability to make another reasonable sized acquisition or how would you characterize the environment out there?

The -- as you've seen the environment continues to be acquisitive. There is a lot of consolidation continuing. We do see a pipeline of what we call tuck unders that we could do reasonably quickly and reasonably efficiently. So I think you will continue to see that throughout the rest of this year.

And would that be companies sort of in the $20 million or less type of revenue range or would you even go beyond that?

I would say 20 to 50 range certainly for the next couple of quarters.

Okay and just on the -- to fall back on the question around the strength in Europe, was that largely just on the services side or because of SAP with the branded solutions and their sales force motivation was there a bit of pickup on that side as well in Europe?

There are -- when I referred to the Europe was particularly focusing on license growth. The -- and particularly in Switzerland as I said. But we are beginning to see SAP activity with us in Europe which is very positive. But they also did have an unusually strong quarter for professional services given the quarter.

And was there anything particularly that you can nail down that drove that performance?

The -- particularly the backlog in SAP.

Okay great.

Was driving the professional services performance.

And finally I think you touched -- well you did touch on it but just on the maintenance renewals can you give us sort of an overall number at least you're not going to break it out but give us a bit of what you think the Hummingbird renewals will be coming in at or have come in at?

They're pretty close to our -- around the 92, 93%.

That's the overall business and Hummingbird's in around there as well?

Correct.

Great. Thank you.

Your next question comes from Richard Tse of National Bank Financial. Please go ahead.

Hey guys, a couple quick questions here. First on the operating cash flow this quarter, you know seasonally this tends to be a pretty slow quarter in cash and you guys did a huge number here. Should we think of the sort of the seasonal ramp like in past years that strengthens in Q2 and Q3 you've got sort of the big strong quarter or is this sort of changing the trend here?

Richard I think the trend you could follow it would be very similar and of course we would probably have a seasonally strong Q3.

Okay and then with respect to the current competitive environment, one of your competitors said recently that they've been winning a number of existing Hummingbird clients off of you. Any commentary surrounding that as well as the broad environment and with FileNet and Documentum?

As I would-- as I Richard I believe looking when we track the Hummingbird customer base extremely closely. The -- looking at the maintenance renewals we're very bullish about that. The -- we've seen minimal drop but on the other hand what we have seen particularly in our web content management, we have won significant large strategic deals away from them. So it kind of baffles me to think that they're still talking about this.

Okay and then finally on your partner channel, we had a chance to talk to some of them down at the -- your recent user conference and you're targeting 40% but given some of the enthusiasm around the partner channel, it sounds almost a bit conservative. Are you guys being conservative on that number or what do you think there?

We will be pleased to have it surpass that number. So we are being conservative.

Okay great. Thanks,

Thanks Richard.

Your next question comes from Mike Abramsky of RBC Capital Markets. Please go ahead.

Thanks very much. The -- just wanted to go back on a couple numbers to make sure that I understand you clearly because normally your Q1 and I know this was asked previously but it is probably something to reiterate, is down 15% and you're down only 6% now. So what you're saying is though that wouldn't affect your normal Q2 seasonality being up 15%, the model you previously discussed from Q1?

That's correct.

Okay. And on the organic growth, if we were to assume anywhere between 16 to 20% Hummingbird contraction, that would be about 13 to 15% organic growth for you. Is that correct?

We're not breaking it out and I appreciate that you're looking for that information. Mike's right but I'll put it without averages that your -- the trends are the right direction.

Okay is that in line with some of the numbers that you had cited, which seem a little bit more -- which seem in line with that. So you're basically saying that you're comfortable on a forward 12-month basis with this kind of organic growth level. What are some of the key assumptions you're making to drive that? Because you've got Hummingbird base up sell, the existing and new customer growth. You've got partner leverage and then of course tuck-ins. Which are the biggest drivers of the assumptions for that forward organic growth?

I'm sorry Mike. Just a clarification, when you say tuck-ins are you talking about acquisitions?

Yes sorry.

Don't know so it -- if we're talking about organic growth which we believe would be in that range, the -- I would say that the key obviously in Q3 and Q4 will be the farming of the Hummingbird base with the new products of expanding that. But just as importantly would be the partner channels and the pipeline that we're seeing with our channels. But also with our new Livelink 10 platform we also see farming of the Open Text base. That being significant as well again in that Q3/Q4 timeframe.

Great. Can you give us some sense of the scope of that and why, since you're taking conservative stance, like what is the potential opportunity within the Hummingbird base or the partner channel opportunity there or the farming of your base? Is there some examples you could cite or scope that you could illustrate?

The only thing I'm not quite sure, how to respond Mike. The key issue is what we're seeing across the board. We're seeing the pipeline build nicely as well as I said, looking at the Hummingbird maintenance, that's the renewals are there as well as the customers that we're talking to, the direction that we're going in. There's been very positive feedback as you may have seen in Florida last time. So we are being conservative.

And okay, and then on the acquisition side, I know you did talk about tuck-ins of sort of 20 to 50. I just want to go back to the statement you were making on larger acquisitions cause I think that's probably what people might be a little bit anxious about shall we say is whether you'll embark upon a larger acquisition? What the potential impacts might be? Can you tell us particularly given industry consolidation, can you tell us how people are thinking? How you're thinking about that?

So a couple of things that on the tuck unders as we've mentioned before, there are a number of areas like the UK where we need more SAP expertise, not only to support our backlog of consulting but also to support the activities of SAP. There also as we've mentioned we see areas like Italy, Spain, etc. where SAP see them as a strong area to go after. And we would be providing support for them rather than doing it directly ourselves. So that -- those would be areas. There are also some industry domain expertise of applications that are being built on Open Text Livelink products etc. that we would also see. So these are more of the again the tuck under, 20, $50 million. And we see a number of those that we I could see us acting on in the next two quarters. Larger ones are out there but we'd see those maybe a little later.

Okay and would you -- what having gone through the IXOS and Hummingbird experiences now, what perspective do or parameters or limits do you bring to looking at the larger opportunities?

I think if you look at our history we've always been very conservative about and to me there are two concerns in any acquisition. One is that you overpay and in this market there would be some I would believe overvalued companies that we would not overpay. And then the second is the cultural integration, the technology integration. And as I've mentioned before, typically when you do an acquisition, revenues do decline. And so those are the things that we would be paying particular attention to.

Thanks very much.

Thank you Mike.

Your next question comes from Laurence Rulleau of Blackmont Capital. Please go ahead. Mr. Rulleau, are you there?

Yes, thank you. Great quarter guys. Can you just add some color around your average sales prices. It looks like they're staying pretty well flat for the past few quarters. Now that the Hummingbird integration's pretty well complete, do you sense is that going to start to trend upwards over time?

I believe it will Laurence. From what we've seen it's actually certain deals are getting larger. It's been offset by the connectivity product that do have lower transactions.

I see and is there a range that you would expect this average deal size to get to over the next 12 to 18 months?

Over the next 18 months I would think it would be going more closer to the 300 level.

Okay great. And obviously you've had great success on the partner channel. Obviously I guess with SAP specifically. Is there any more additional movement or color that you can add with respect to Oracle and what you're doing with them?

Yes, good question Laurence. In fact the -- one of the largest deals that we had in the quarter, one of three of the million plus was with Oracle. And went very well. We're also seeing that the work that we've been doing with Microsoft is paying off not only in the field in the U.S. but is now also, we're seeing pick up in Europe as well.

Interesting. And lastly just with respect to one of your smaller competitors, Interwoven, obviously you saw the acquisition they made of I think it's a company called Optimost. Is that a company that you've seen in the past and how does that impact just the competitive environment I guess more in the web based management side?

Yes on that, the red dot product is a much more newer product with much more features etc. And as I said, when we typically compete with them, we win.

Great, great quarter guys. Thanks.

Thank you.

Your next question comes from Robert Schwartz of Jefferies & Company. Please go ahead.

Thanks so much. One quick question for John then a couple on the cash flow. Just following up on this Oracle deal. Was that one done with their applications side of their business? And was there a system integrator involved or was it done with their database side of the business?

I believe it was the applications Robert. Let me double check on that but I believe it was. And no it was just us two.

Great. Paul let me ask you, you get great cash flow in the quarter and a lot of that was tremendous collections. You had the lowest Q1 DSO in a long time. Should we expect the trend down in DSOs?

Certainly we would expect to maintain it in that level Robert. Certainly we -- we're somewhat comfortable in the mid-60's, but we like it a little lower at 64. So as long as we can manage it in that range, which we intend to, I think that's what you can expect.

Okay and then maybe you can help explain a couple of things I see on the cash flow statement. It's purchase of assets constituting a business? What is that? It's about a $2.2 million charge?

Yes we had a small -- we acquired some individuals that were managing some services for the Government of Canada from CGI. And so it was very -- would end up being partly goodwill and partly equipment for us to take over the management of those services.

Was that revenue in the quarter?

There is some revenue in this quarter yes. Small amount.

Can you tell us roughly how much it is?

It would be under -- it was through the quarter; it will be under $500,000.

Okay thanks. And the other one was the acquisition related charges of $8 million. Are those related to Hummingbird and why are they continuing so far after the acquisition?

We continue to record our cash payouts there for the restructuring. Just to go over it again, Open Text restructuring is through the P&L. Of course there are no more charges for Open Text restructuring. There was about a $1.2 million payout. For anything that we continue to payout on the Hummingbird it goes through the investing activities. We paid approximately $6 million or just over $6 million mostly severance related on that. And then the balance is previous acquisitions for facilities. And as you know, we continue to pay a facilities cost unless we sublet it through the terminal lease. And that's what makes up the $8 million.

Okay. Thank you very much.

Thank you Robert.

Your next question comes from David Wright of BMO Capital Markets. Please go ahead.

Thank you very much. The connectivity business, which you operate separately from the other businesses, is there -- could you break that out for us? To tell us what the revenue was for that division?

Hello David it's Paul. Yes again we -- we're not breaking out either our units or separate products in reporting our numbers.

Okay. Just because it has different trends than the other businesses, so it's helpful to, yes and there's been no merging of assets that I can figure out so.

Yes we're just -- I mean we continue to indicate that it is less than 10% of our total revenues. And I think John has mentioned in the past, we're seeing some cross sell opportunities in the customer base.

Okay great. Thanks that's helpful. On the direct services and support expenses line, it was down sequentially in the quarter. I guess you've been doing some restructuring. But how was that achieved that through operations or just fewer people supporting?

Yes two things happened there as I think we did complete if you will reducing staff to an appropriate level. And I think that shows up in turn in the margins that we achieved of 18% this quarter.

Yes. Should we expect it down a little further in Q2 or is it pretty much all in the third quarter?

No I think as again as John indicated we expect the margins to be maintained and now we start to grow them through the fiscal year.

So we expect to improve the margins.

Okay, okay great. On the renewals I think you mentioned with Hummingbird 92, 93 so there is a little bit of slippage. Looking at who is not renewing, is there anything there that you see like would offering price incentives get them to renew or are they switching platforms or what do you see there?

It's almost very similar to our renewals. There's a couple of areas. One might be acquisition, where the company has been bought.

Okay.

Those -- so it's those, we look at each one and a good percentage is that kind of thing where or they've had lay offs where that they no longer need as many seats. So when we look at the 94, 93% it's on the revenue not number of seats.

Okay yes.

We all -- and then the third piece we'll often see is as a company does a more enterprise wide deploy, their average seat obviously is reduced from that deployment which then reflects into the maintenance a little bit as well. So those are the three things. It would be mergers and acquisitions would need less. It would be where people maybe go out of business or reduce their business. But the third is also as they use more of our products, they get a discount which in some cases can affect the slight reduction in maintenance.

Okay. That's great. Thanks. One last thing is on your share count, how should we think about the diluted share count going forward? Now that you're quite a bit larger with the Hummingbird I would think that they'll be options set aside for more employees. You seem to be holding your absolute -- your basic share count fairly flat. But should we see the number rise throughout the year?

No I wouldn't -- no you wouldn't because where the stock price is you know puts more options into money and into diluted calculation.

Yes.

And the company at this time is doing limited option grants.

So for this fiscal year?

I think you can look forward to the same trend yes. Correct.

Okay. Thank you very much. Congratulations on the quarter.

Thank you David.

Your next question comes from Brian Freed of Morgan Keegan. Please go ahead.

Thanks for taking my call. Hey as we kind of look at the OpEx number going forward, you guys have done a good job driving leverage over the past year or so as you integrated Hummingbird, do you feel like there are still segments of your operating structure where there's additional leverage? And can you kind of elaborate what those might be?

Yes Brian we were and we did indicate also in a previous quarter so I'm happy to indicate that we will be looking for some margin improvements slightly both in the gross margin and the OpEx. And we suggested it might be through a in the go-forward period if you will -- periods rather maybe one to two points.

Okay and should we look on the OpEx side? Would that be primarily G&A type things? Or do you think there's from a line item perspective or just --?

Well look -- I would look a little further to the future in the G&A as we continue to sort of work through some back office improvements. So I would just sort of trend it through the OpEx lines and some in the gross margin.

Okay thanks.

Your next question will come from Gabriel Leung of Paradigm Capital. Please go ahead.

Thanks. A couple of questions. First on the partner front, obviously SAP has been a very good partner for you and probably one of your closest in terms of sales and marketing initiatives. When do you think Microsoft or Oracle or Accenture might also reach that level of intimacy with you guys?

A good question Gabriel. I would say as you know from our IXOS heritage, we've probably had over a 12-year relationship with SAP. But we are seeing pick up on Microsoft and Oracle and surprisingly with Accenture coming up fast. So we are -- we're beginning to see significant revenues from all three. And as I mentioned earlier, Microsoft not only North America but Europe now as well. For the first time this quarter we saw that.

Do you think that's ultimately going to lead to a more formal agreement between the Microsoft Oracle parties similar to what you have with SAP?

The -- I would certainly see it with Oracle and Accenture where we might do additional things with them.

Okay.

Actually Microsoft as well.

Secondly I just want to focus on I guess your seasonality guidance for a second -- assuming you guys do the 10 to 15% quarter-on-quarter growth in licenses. That would get you to around call it $51 million in licenses based on what you did this quarter. And I think last year you did $51 million as well and that's an apples-to-apples comparison. Given what you're seeing in terms of the industry growth, i.e. the 8 to 13% growth, would you guys be disappointed if you only hit that $51 million license revenue line?

And so I think as we were indicating Gabriel that you would build that growth in to the seasonality curve. So we would expect to see growth in Q2, expect to see growth in Q4, etc.

Okay last question for you Paul, can you give us a sense of what you expect in terms of remaining cash restructuring charges as it relates to Hummingbird over the course of the fiscal year?

Yes so probably about another $2 million in the severance side for employees and that will come out likely in the next one to two quarters. And that will be finished then. Facilities as you know kind of continues to be paid out over time. We have leases up to 2011. So maybe for this fiscal year another million there.

Okay great, thanks guys.

And Gabriel just to make sure that you clarify, so when we looked at the historical trends of the 10% next quarter etc. but then you should lay on top of that the 8 to 13% growth particularly as we look at new products coming out in Q3 and Q4.

Okay great. Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from David Wright of BMO Capital Markets. Please go ahead.

Thanks very much. With the new products coming out, are they most likely to be recorded as upgrades and therefore in support or will they actually get recorded as new licenses?

It will be a little bit of both David. So for example one of the key issues from the Hummingbird side will be a maintenance upgrade. So it would be on the maintenance side. But what that upgrade will allow them to do will be to access the rest of the Open Text portfolio, things like digital asset management, workflow and those kind of things. So we believe you will see -- we will have both. And so again when we talk about -- to that [18] to 13% growth, we're specifically talking about licenses.

Very good. Thank you very much.

Okay David.

Mr. Secord there are no further questions at this time. Please continue.

Thank you for your questions. And just wrapping up on the quarter's highlights, I'm very pleased with Q1 performance. We met our revenue, profits, and strong cash flow targets. And our partnership program is proving very effective. And that's -- we'll continue to focus on growing revenue while concentrating on meeting our bottom line objectives. And this concludes our call for today. Thank you for participating and for your questions.

Ladies and gentlemen, this concludes the call. Please disconnect your lines.