Open Text Corp (OTEX) 2008 Q3 法說會逐字稿

Good afternoon ladies and gentlemen thank you for standing by. Welcome to Open Text Corporation's fiscal 2008 third-quarter 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 up for questions. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Tuesday April 29, 2008 at 5 PM Eastern time. I will now turn the conference over to Mr. Greg Secord. Please go ahead, sir.

Thanks everyone for joining us. Today, we will be discussing our financial results for the third quarter fiscal 2008 that were released earlier this afternoon. With me today are John Shackleton, our President and Chief Executive Officer; and Paul McFeeters, our Chief Financial Officer. As with previous calls after our prepared comments, the operator will poll for questions. We will get started in a moment but first I'll read a disclaimer.

During the course of this conference call we may make projections or other forward-looking statements related to future performance of Open Text and its subsidiaries. These are all statements containing 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 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 Forms 10-K for the fiscal year ended June 30, 2007 and in our press release that was issued earlier today. With that, I'll turn the call over to John Shackleton, our President and Chief Executive Officer. John?

Thank you, Greg. Good afternoon everybody and thank you for joining us. Today we're going to talk about our strong Q3 results, update you on our partner strategy, discuss some significant customer wins and review some of the product highlights for the quarter. First I will hand over to Paul for a detailed review of the Q3 results.

Thank you, John. (inaudible) the financial results for the third quarter fiscal 2008 total revenue was $178.8 million up 15% compared to $156.1 million for the same period last year. Licensed revenue for the quarter was $51.5 million up 20% compared to $43 million reported last year. Maintenance revenue for the quarter was $91.6 million up 16% compared to $79.1 million last year. Professional services revenue for the third quarter was $35.7 million up 5% compared to $34 million in the same period last year.

Operating cash flow in the third quarter fiscal 2008 was $50 million up 22% compared to $41 million in the third quarter of the prior fiscal year and up 28% compared to $39 million in the previous quarter. We reported third quarter adjusted net income of $25.4 million or $0.48 per share on a diluted basis up 45% compared to $17.5 billion or $0.34 per share on a diluted basis for the same period a year ago.

Gross margin for the third quarter before amortization of acquired technology was 74.1% compared to 71.8% in the third quarter last year. Professional services margins have improved to 19% compared to 17.5% in the third quarter last year reflecting improved utilization. Pretax adjusted operating margin before interest expense was 24.2% in the third quarter up from 31.5% last year. With respect to our adjusted earnings, the tax rate for the quarter was 38%. Actual cash taxes payable continue to be in the 15 to 20% range.

Net income for the third quarter in accordance with GAAP was $7.3 million or $0.14 per share on a diluted basis up 87% compared to $3.9 million or $0.08 per share on a diluted basis for the same period a year ago. The fully diluted share count for the quarter was approximately 52.8 million shares.

As of March 31, 2008 deferred revenue was $181.9 million compared to $137.7 million as of December 31, 2007. Accounts Receivable as of March 31 was $135.7 million compared to $120.6 million on December 31, 2007. Day sales outstanding was 68 days as of March 31, 2008 compared to 60 days in the previous quarter and 66 days from Q3 last year.

In the quarter, we did not purchase any shares under our share buyback program. Term loan balance at March 31 '07 was 295 million which we reduced from 390 million in October 2006 through scheduled repayments of $5 million and accelerated payments of $90 million.

A few quarters ago we updated our pretax adjusted operating margin model. We remain confident in the plans to manage expenses in a 14 to 16% range for development, 24 to 26% range for sales and marketing and 9 to 10% for G&A. This would generate a pretax adjusted operating margin of 20 to 25% and as previously indicated we expect to continue in the upper end of that range. A copy of this updated business model is available on our website as part of the investor powerpoint presentation.

I would also like to update my comments on foreign exchange movements that occurred over the past few months. Due to our global operations mix the Company has maintained some of the natural currency hedge and as a result the net impact due to foreign currency movements was less than $0.02 EPS positive for the quarter. Now I'll turn the call back to John.

Thank you, Paul. We're very pleased for our Q3 results as we continue to demonstrate the synergies and profits realized with the successful integration of Hummingbird. We met expectations for revenue and profits and exceeded our expectations for cash flow from operations.

As Paul mentioned, third quarter revenue was $178.8 million. Europe was responsible for 48% of the revenue and North America for 47% and the remaining 5% coming from Asia-Pacific. We saw particular strength in Europe driven by demand for compliance based solutions and we're happy with our sales performance in all regions and verticals.

We generated $51.5 million in licensed revenue growing 20% year-over-year. Of this licensed revenue, 44% came from new customers and 56% came from our installed base. We had four transactions over $500,000 and an additional three transactions over $1 million. The average transaction size was approximately $290,000 slightly up from prior quarters.

In Q3, we saw licensed revenue broken down by vertical as 37% for high-tech manufacturing, 12% for energy, 12% for pharmaceutical and life sciences, 10% for government and 5% for financial services. We are still seeing global demand in financial services driven by regulatory compliance.

Examples of significant wins in the quarter included the BBC, pulled through Siemens selected Artesia digital asset management product as an essential technology component of the BBC's digital media initiative. We're forming a global partnership with Siemens to make the technologies and know-how involved in delivering this initiative available to other broadcasters who are considering tackling a similar technical challenge.

Now called the world's leading water treatment and process improvement Company, purchased Livelink ECM content lifecycle management, e-mail management, collaboration and knowledge management bundles to add to the existing Livelink document access for SAP solutions. (inaudible) is in the process of retiring and replacing its Lotus Notes system and needs to ensure proper management of content.

The World Health Organization purchased Livelink ECM, Microsoft SharePoint integration and Livelink records management for its global management systems project. This project will help the World Health Organization create a global integrated management and reporting system to provide relevant and timely information to their offices worldwide.

Comcast Entertainment Group also bought in this quarter purchasing Livelink ECM for records management and SharePoint integration. With Livelink ECM acting as their back end repository they will also implement Comcast Management to automate their current contract process.

From a sales operations standpoint we closed the quarter with a combined sales force of over 230 quota carrying sales execs. Given the strong market will continue to invest more in our sales and marketing efforts adding salespeople to support our growth targets.

Licensed revenue from partners in the quarter was approximately 40% and several of our biggest transactions were partner influenced. SAP, Accenture, Oracle and Microsoft all continue to report increasing partner demand for solutions in archiving, records management and compliance. We have met our goal of reaching a 40% partner influenced licensed revenue mix ahead of schedule and I am confident we can sustain a rate in the 40% range going forward.

On the product side, we've had lots of activities. For partners we announced Open Text case management framework, a SharePoint addition, a new development framework that can save developers significant time and money and the creation of scalable (inaudible) enduser management solutions. Also RedDot, the Open Text Web solutions group released its Microsoft Office SharePoint Server 2007 document management integration. This enables organizations to expand the Web visibility of their Microsoft SharePoint document libraries securely and to any online media.

Other developments on the product front this quarter include LiveLink ECM which is an extended collaboration. This is part of our broader enterprise 2.0 strategy enabling Open Text collaboration and Web solutions offering with 2.0 capabilities including wiki, forums, blogs, tagging, moderation, communities and real-time collaboration all within an organization's ECM strategy. In the coming weeks we will be introducing EnterpriseConnect for eDOCS which really completes the delivery of the DMX vision that we outlined a year ago.

Also this quarter research analysts from IDC decided cited the growing adoption of Microsoft SharePoint Server 2007 as driving demand for document management repositories. The paper cites Open Text's complete set of ECM offerings as key to extending Microsoft SharePoint for enhanced content management.

We said last quarter that ECM licensed revenue should grow in the 8 to 13% range on an annual basis and we continue to be comfortable with this estimate. Now I would like to open up the call for questions.

Paul Steep, Scotia Capital.

Paul, maybe you could talk a little bit and John as well chip in a little on the renewal cycle. Based on the deferreds it looks like you had some pretty great renewals when we came to the end of the year. How did that turn out?

We continue to do the low 90% -- 91%, 92% renewal and as you probably know December we have a lot of contracts that do renew and we're still on that same track. So we're very pleased with that number of contracts coming up with that volume that we sustained our renewal rates.

And I guess the John side of that question would relate really to DMX. When I see sort of those high renewal rates that tells me I'm assuming you did something right and the Hummingbird Enterprise customers which weren't quite so happy are much happier now and what is the conversion starting to look like on that front?

Good point, Paul. We're literally coming to the end now the stabilization of five and six and customers are now getting ready to upgrade to those services so we are hoping to see that beginning this coming quarter.

Any sort of anecdotal evidence from the sales force as to sort of what type of funnel is out there in terms of pent-up demand for five and six users wanting to sort of flip over to a new version?

We have identified some of the large customers that are anxious to move and we have got teams working with them to do that. But it's pretty consistent with what we thought it would be.

Great. Two more quick ones for me and I'll pass the line. Just Paul, maybe you could go back on the FX impact. You didn't really outline what it had been on the top line on the revenues and more importantly maybe on the licensed revenue this quarter. I know we talked about it last quarter.

I think we were consistent with our previous quarters that we're not disclosing the gross numbers on the revenues or on the expenses. We're focusing on the net effect on EPS as I said for the quarter we're positive just under $0.02.

Okay, I guess the final one for you then really comes down to free cash flow redeployment and the fact that you didn't move the debt down at all this quarter. What is the thoughts? No buyback, no M&A yet -- where do we go with the free cash?

I think you have helped me in identifying the three uses of cash. As you said no buybacks and we're very comfortable with our deposition on the balance sheet. As you know we have accelerated repayments but you know today's market rates compared to what we have got already in there, we like the interest rate. We think it carries very well and we're under two to one our debt to equity. We are well over six times in our interest coverage. So with the debt markets being what they are today, we sort of like to keep that on the balance sheet for now with those low ratios.

Scott Penner, TD Newcrest.

John, just to clear up a couple of things that were said by some of your peers, have there been any real notable changes in the competitive landscape or any sort of pricing pressure?

Not really, Scott, not the main suspects that remain the same and we're not seeing pricing pressure at this time.

And what is the environment out there for million dollar deals? Were you able to replace the deal assigned in the pipeline? What is the environment like?

On the million dollar deals particularly in Europe we're seeing strong pipeline. As I mentioned before we do try to chunk the million dollar deals. We did have one significant multi-million dollar deal this quarter but as I said we will continue to try and (inaudible) those. The pipeline is positive.

When you say multi -- are we talking two or five?

It's more than two.

Is there any particular driver or is it just generally the compliance in Europe that's driving that?

It is compliance with e-mail archiving, yes.

On the partner front you mentioned 40% and that all of the major partners are contributing. What about guys like the Accenture? I'm assuming that they're somewhere. What's the traction like?

The systems integrators are helping again particularly in Europe. SAP was also -- obviously it was there (inaudible) Q4 where the revenue we could recognize in our Q3 was also -- they had a strong Q4 obviously.

Just finally the sales rep count of 230 doesn't really seem to be moving up too much. Is there the thought that you have the capacity with your partner channel to deliver the higher numbers or does that quarter carryforward have to go up?

Actually, Scott, we have moved the number up some and it's particularly supporting the partner program as well as telesales.

Tom Liston,Versant Partners Inc.

Thank you and good afternoon. Just, Paul, on the cash question I will ask it a different way. I think previously you benchmarked more like a 150 type of number as a target. Is there a little bit increased potential for acquisition that you see out there that maybe you let the cash balance grow a little faster?

I mean I think as the he Company has spoken before we will look at different opportunities but again it's more of what I said is that we're very comfortable with the debt on the balance sheet. It's very manageable leverage so at this time we don't see a need to sort of repay it and we keep our options open that way.

So we're not -- we don't necessarily read into anything and let that cash balance grow?

I wouldn't.

And, John, on the US segment you talked about Europe being strong. You're pleased with other segments but certainly overall revenue was in line, US might have been a little weak as well the financial services vertical I think you said 5% which is probably near the low end of your historic range. Are you certainly seeing some of that in the US, some of the push and perhaps delays as the financial institutions try to sort things out down there?

Actually it is more on the US we're strong except for the government where we have seen for the last couple of years because of the Iraqi War etc. that it has been a little slow but in general both US and Canada have done had a good quarter.

Would you characterize financial services vertical as being slightly below expectations or such is that just the normal (inaudible)

Actually, I would categorize it being slightly above, Tom.

Okay (multiple speakers) and on the partner influenced deals, the number was 40% in the quarter, correct?

That's right.

Any of the big deals partner influenced that you can highlight?

A couple were partner influenced, yes.

And just finally licensed revenue in the quarter was obviously pretty strong year-over-year. I think it was up 20% versus as you characterized the industry more at 8 to 13. Is there any one or two things you could point to that drove up performance whether it was a competitive win rate or certain product sets maybe performing better than expectations?

Good question, Tom. We think because of our strong position in Europe where we are clearly the dominant ECM vendor there we are seeing a lot more customers come to the pipeline. But also as we said, we have had a very strong quarter in North America and it is being driven by compliance, no question about it and with that obviously e-mail archiving.

One more quick question for Paul. Other income, was at all FX the stuff or is there anything else in that (multiple speakers)

No, Tom it is 99% FX.

Richard Tse, National Bank Financial.

On your partner channel can you sort of give us a feel for how big your Microsoft partner channel is relative to the others? And I guess asked another way who is sort of the most significant partner channel today in terms of driving that license base for you guys?

Richard, they obviously -- SAP has been a longer partner (inaudible) than the others. Today is probably our strongest that we're seeing a significant amount of work with Microsoft particularly as we mentioned with SharePoint taking on and being used in a lot of departmental areas. We're doing a lot more work with Microsoft both in North America and in Europe.

If you looked at your license base would you say that over half of that is coming via your key partners in the form of I guess Microsoft SAP and Oracle?

On the license base -- actually I would think it would be in the 30 to 40% range.

Of your product lines today it sounds like compliance, records management is obviously the big driver here. So what is that in terms of proportion of your licenses?

It is still -- it is about in the 60 to 70 range although we're beginning to also see a lot of uptake more in collaboration around our Web 2.0 strategy but also obviously the Artesia products or the digital asset management is strong as well as we see with the Web content management. I would almost say while it has been for the last couple of quarters strong on the e-mail archiving etc. we are beginning to see pickup on other products.

Is that were all your million dollar deals are occurring though today on the archiving and record records management side?

It was probably split 50-50 of e-mail archiving, records management and other things.

Finally on the competitive landscape question there -- what is your sense of EMC? It seems like they've had a bit of a slowing here recently. Is that -- you were saying you have strength here in Europe. Is it -- you think you're taking share away from these guys or give us a sense of where that stands today?

It would appear that way particularly in Europe.

Mike Abramsky, RBC Capital Markets.

Given all the changes that have gone on in the industry now you're facing larger players who have coupled up with some of the pure plays, do you see the need to acquire something bigger than just [tactive] acquisitions to continue to grow? Do you think you can do that independently or do you think that becomes more of an important strategy? Also just lately how are you thinking about trying to avoid some of the challenges that you face in future acquisitions that experienced with (inaudible)

Again, well let me -- there's a few questions there, Mike. We believe we are at a size that we can remain independent (inaudible) Switzerland. Our customers appear to like that. They like us to be independent, they like us to be totally focused on ECM every morning when we wake up and we are seeing a very positive response from our customer base. In fact we just (inaudible) European user groups and last week where we had record attendance I think something like 600, 700 in Germany 800 in the UK and very positive feedback from our customers.

Looking at the whole -- we keep hearing how IXOS was a difficult acquisition and it for us a lot of our success today we could point to the IXOS archiving products, our relationship with SAP. We could point to the IXOS products and we have a tremendous team of people in Europe that gives us the lead in Europe that many of those came from IXOS. So while we keep hearing how that was a bad acquisition we're pretty happy with it.

Obviously I'm not referring to the end gain. I was referring to really stages, John, where (multiple speakers)

The thing on that I would say we overestimated given some of the German labor rules. That took us -- as well as the ability to integrate the product took us a little longer but I would say six months maybe longer than we anticipated. Obviously next time we do anything like that we will absolutely as hopefully I think we showed with Hummingbird we will take those things into account but also in some cases move faster as we have with Hummingbird in getting to where we want to be.

Okay, do you -- you've been making some investments in sales and marketing although again I got a little confused on the sales number because I thought last quarter you were talking about higher numbers. Maybe I was wrong. Is that correct?

We are making investment in sales. I believe the range has actually gone up a little bit this quarter. We will continue to invest in sales.

Okay so have you seen an impact from that or when do expect to see an impact and where are you focusing those investments? I know you have been for example investing in direct sales.

We're focusing on indirect sales particularly in areas that we -- for some example Asia, Russia etc. where we will support our partners in those areas. But we have also been doing direct sales in key areas that we're seeing growth as well as doing quite a lot of hiring in telesales which has been very successful for us this past year.

And we're going through (inaudible) obviously on the telesales it's pretty quick that we see the results. On the partner programs we expect to see those results usually a six to nine month startup for most new salespeople coming onboard.

I guess just the last question which -- in terms of maybe the following four trends which would be industry consolidation or partner leverage or the records management compliance partner demand or your execution -- which do you think will be the biggest drivers of your growth over the next six to 12 months of those elements or contribution to those to your growth and what pending trends or catalysts do you see in any of those areas that might be important to highlight?

So I think, certainly for the next year we actually see two key drivers. One would be our partners with their ERP systems etc. where we can merge the unstructured data and structured data together where people are getting tremendous benefits from that. So I would see that continuing to grow but I also see with our Web 2.0 strategy we're seeing a lot of demand and need for that from our major customers in particularly government areas. So I would see that would be a continued area of growth as well. So two key areas.

Dushan Batrovic, Canaccord Adams.

Thanks very much and John, you touched on this a couple of times. The Web 2.0 or the enterprise 2.0 strategy, just wondering what stage we're at there from an industry standpoint. Are customers piloting? Are they actively deploying on mass? Is this a three-year story, one year story, a five-year story? And secondly how would you rate yourselves right now versus the competition being some of the larger Microsofts and IBMs versus some of the newer startups that are in this space?

So the demand it's mainly beginning in pilot but it's a broad demand in the pilots so there's a lot of interest on a worldwide basis. It's an obvious demand. I would say that given our comprehensive suite that we have where I think we are ahead of our competition as well as we have more comprehensive offerings in this space and we will continue to push in this space as we go forward. So we feel very bullish in this space that we have an opportunity to grow significantly.

If we look at your 8 to 13% growth target for ECM would you classify the enterprise 2.0 as being incremental to that number or as contributing to that number in the longer term?

To me it would be contributing in the longer term. I will see it as we mentioned -- I see this as a two-year window. I see it will pickup significantly in the coming six to 18 months.

So you're saying you would expect more business to shift from the compliance e-mail archiving towards the enterprise 2.0 strategy as ECM evolves?

Probably, yes.

Steven Li, Raymond James.

Thanks, a couple of questions on your margins. Any reason it was -- on the license said, any reason it was as high as it was in the quarter at 94%?

Yes, it was just a mix of third-party software that we didn't ship as much this quarter. So I would take that more as a one-off versus a trend.

So on average, it's more like 92, 93% range.

That's correct.

On the professional services margin, you see that sustainable in the 20% range going forward, Paul?

Yes, you see it is trending up and we're hoping to get it up and we're hoping to get it up just over the 20 to 22% range.

Great and then just one other question. On your free cash flow statement you had an unrealized loss of $2.7 million on the financial instruments. Where do you (inaudible) exactly in your P&L?

That goes into -- that is in our interest line so it's charged there along with net interest income and interest expense.

Did you take that out when you calculated your adjusted EBITDA?

We did not, no, we left it in.

David Shore, Research Capital.

Thanks, good afternoon. John, can you talk about license seasonality going forward? Would you expect to see the same kind of trends you have seen historically?

Certainly through the remainder of this year but I think you bring up a good point, David. I think as we're seeing influence of partners having more influence on our revenues their seasonality is impacting us. So for example with SAP's Q4 they have a spike in that that affects us the quarter afterwards and as we grow, we will be very carefully looking in the coming year, fiscal year of how partner seasonality might affect our traditional seasonality. So it is something we are looking at.

Second question on the expensive side both your R&D and G&A expenses for the quarter were a touch ahead of kind of your guidance range there. Can you talk to please?

I think it was in the range -- our guidance range is 14 to 16 and 9 to 10, slightly over 10 G&A. As David before I mentioned that we would not be grossing up our (inaudible) effect on revenue expenses but clearly 75% of our employees are outside of the US and so those areas are going to be affected as a result.

So there is an FX movement within those lines as well.

Definitely.

David Wright, BMO Capital Markets.

Thanks very much. Good afternoon, just some clarifications to start with. I did miss last quarter's conference call the but going over the transcripts it did say you had 250 sales reps last quarter and I think you said that you had 230 this time.

In the 230 range. It is pretty much -- it's pretty close to the same, David, as it was. We have been investing over the last particularly -- so while peak numbers move in and out direct etc. overall we have increased telesales and partners. So there is some turnover in there so my guess is net net we're probably close to the same as last quarter. But we will continue to invest particularly as we begin coming up to the new year.

So you're trying to grow it, you have more partners helping you. Now where is the turnover coming from?

Turnover as we see the business change particularly as we get maturer accounts we're looking for much more domain expertise in the sales cycle not just people with document management expertise. We are looking at areas and things like Web content management where some of our people don't have those expertise and just (inaudible).

And I too was looking for the clarification on the revenue number excluding the foreign exchange gains. Since you can't give that I wondered if you could explain why you would not be willing to give it.

I think we would get in a situation where we're doing it every quarter and FX moves around quite a bit and we are international. It's management's job to manage that through to the operating line in the margin and that is what we are doing.

It would just be helpful if we're measuring your business on the growth rate what that growth rate is.

I think, David, when we disclose -- our segments are by geography and so I think you can do a fairly close calculation. You know where the FX is going you know where our foreign currencies are.

Could you -- the number of deals -- you had over 500,000. Was that did you say seven? Did I get that number right?

Yes, that's right. It was 7.

And that was including the deals over one million?

No, that's in addition. There were additional deals over the million. This.

Over the million -- and the multimillion dollar customer (multiple speakers)

Let me back up and clarify that. There were four transactions over $500,000 and then three additional so seven in total, you're right.

So when you look at the history there, the number of deals over $500,000 is not a number that's growing so you're getting more business in smaller sized accounts? Is that how it's working out?

No, it's been pretty stable deals between 100 to 500, 500 to one million and one million over. They have been pretty steady within a range for the last two years.

The customer that you have, the multimillion dollar customer, is that a new customer or is that someone that --

That is an existing customer.

Were they on the Hummingbird side or the Open Text side?

No, it was the Open Text side.

Very good. How long would you say that sales cycle was for that very large sale?

It's probably a year -- just under a year.

Was it more than $3 million?

It was more than two.

Finally on Artesia, that was a business at one time I think was fairly -- had reasonably limited market opportunity. It was being sold into ad agencies and things like that. Would you say that its market opportunity has gone kind of mainstream as being used in all marketing departments today or is it just that it's become very popular in the ad agencies?

I would actually say there's a number of areas that it is popular. One obviously is things like broadcasting. Anybody that has got large amounts of video and media libraries that they've got to maintain. So I would say it is -- they're seeing the importance in places like BBC of this but also that yes, I would agree that any reasonable sized company with a marketing department would need this kind of software. We are seeing it in government that they also need it.

Lawrence Rhee, Blackmont Capital.

John, I think you mentioned earlier if I heard you correctly you said you're going to focus on merging the capabilities of unstructured and structured data. If that is the case does that mean you're going to be scaling up your BI capability and is that the Hummingbird piece of the equation? And if so could you just add some color as to what your customer is asking for? Is that something in near-term demand in terms of merging those capabilities together and is that kind of a market trend?

Actually, Lawrence, the merging of the structured and unstructured data it's more in the areas of where people if they're working in say Outlook can access all their ERP systems, all their e-mail, all their Word documents (inaudible) documents etc. from that desktop that they wouldn't have to leave Outlook. Similar if their CFO lived in my SAP he could get contract information, product lifecycle management information as well as e-mail etc. in his mySAP.

So it's more allowing people to live in the environment they're used to living in but get all the information whether it be structured or unstructured. The business intelligence what we see is while we have -- people are asking for that and it's going very well as a product, we also interface with the larger BI vendors like (inaudible) and [business objects]. Customers want us to interface through those products.

Gabriel Leung, Paradigm Capital.

Just going back to the seasonality question, I think earlier in the fiscal year you had sort of alluded to from Q3 to Q4 we should see a sequential improvement on licensees by 20 to 25%. Do you think that growth range is still feasible?

So basically what we have seen are two things. One is the industry keeps talking about this 8 to 13% growth. We see that feasible. We look at FirstCall consensus and looking at their next quarter and FY '09 we feel comfortable with the ranges from both the revenue and profit side. So we feel pretty comfortable with what's out there.

And just in terms of what some of your peers have been talking about, some of them have talked about longer decision-making cycles, just more views from controllers and CFOs on deals in particular. Did you see any of that in your March quarter or into any of the deals in fiscal Q4?

Not really. On one -- I think it was Gartner that put out an article that they had done a survey of IT and were looking at -- I think survey was sometime late last year where they were looking at on a worldwide basis something like a 3.5 growth in IT spend in this calendar year. And they did another survey just recently where they saw that in the US that number had come down by about 10%, so 10% off the 3.5.

But the rest of the world were pretty stable and so we haven't seen it. We're looking -- obviously we're looking given the economics and particularly in the US. We're looking there very cautiously but on the rest of the worldwide we're cautiously optimistic at this time.

Just lastly going back to that 8 to 13% industry growth forecast that you think you should be -- that the company should be able to hit, do you think you can do that organically over the next year or two or do you think you're going to have to tack on another (inaudible) acquisition to get that infrastructure -- to get there?

This is organic. That's what we're talking about is organic growth. As we mentioned this past quarter it was 20% organic growth.

Brian Freed, Morgan Keegan.

Thanks for taking my question. For those of us who are trying to calculate currency could you give us a little bit of color what the split in North America is between the US and Canada?

Europe revenues are about 48% and North America would be 47%. Of that 40% of it is US.

Okay, great. And secondly as you kind of look out particularly within Europe there's been some chatter in terms of the macroeconomic from the US (inaudible) in that way. Have you seen anything notable within that particular geography given your exposure to it?

I was literally over there last week and we're not seeing it. We're not seeing it yet (inaudible) negative reaction to it. There are some areas in financial services that could be affected but from a customer standpoint we're not seeing any kind of concerns or reductions at this point in time.

Blair Abernethy, Thomas Weisel Partners.

Just a couple of things. John, I wonder if you can give us a little more color on the Hummingbird customer base. In terms of the DM 5 installed base and the connectivity products what is happening on the DM 5? I know you've had sort of at least three versions go through. Is the base expanding now or do we have to wait a little while longer?

We believe the beginning probably next quarter that we should be able to start growing some of that back. The products will be released. We have had them in test sites with key customers. The response has been very good -- much more stable products now. But we have also seen that that base has also acquired other products of ours and so as well as obviously we see from the maintenance that they continue to pay maintenance.

We have been trying to stay close with them, work with them on both providing them the need they have for five or six and as I said now in some key accounts we will be working with them to get them upgraded quickly and successfully to and hopefully at a much lower cost than they would have had to go if it had remained Hummingbird. We spent a lot of time simplifying the whole upgrade process.

At this stage though i.e. --

it would not have been reflected in the licensed revenue. That is the question. We believe that will come some of it this quarter but most of it will start in Q1 of next year.

Second question I had is in terms of your new customers overall, can give us some sense of -- can you profile them a little for us in terms of are these -- what verticals are the new customers coming out of and sort of larger corporations, midsized. Where are you seeing I guess the best traction in terms of the new customers?

Good question. A lot of them we are seeing coming from our partners. So it might be in geographies that we're not there; places like Eastern Europe, Asia etc. From an industry mix it's pretty much across the board although we are seeing also that there is a much -- they're not as large as what we would have been selling directly to. These are midsized companies that have a need for this kind of solution that is new. They're not the big global Fortune 1000s.

Scott Penner, TD Newcrest.

Just a couple of things one of which -- do you expect the percentage of services to basically -- well basically the business model in total to remain pretty constant as you grow?

That would be roughly where I think (inaudible) now we're in that 23 to 25% range of revenues coming from [PS]. I would certainly not see it growing much beyond that. Our goal is really to get our customers up and running efficiently using our product as well as enabling our partners but we don't want to get into the customized code business. So, I will say the goal would be to keep it within this range; might go up a couple points at certain times but in general I would say not.

Just lastly you talked a bit about the Web 2.0 and some interest in collaboration. Are these products that are also driven through some of your major channel partners?

Not at this point in time.

Is there any interest from any of them in doing that?

Yes, there is, yes. And we are talking to some of them about it.

And that's at a fairly early stage?

Fairly early, yes.

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

Well thank you everybody for your questions. Just to wrap up on the quarter's highlights we're very pleased with performance in Q3 and the positive outlook for fiscal 2009. We met our revenue and profit goals and we exceeded expectations for cash flow from operations. Our partnership program is proving an effective strategy that supports our alignment with SAP, Oracle, Microsoft and key systems integrators and this concludes our call for today. Thank you for everyone participating and asking questions. Thank you.

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