Open Text Corp (OTEX) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Open Text Corporation conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference call is being recorded on Monday, November 3, 2008, at 5:00 p.m. Eastern Time.

I will now turn the conference over to Mr. Greg Secord, Vice President of Investor Relations. Please go ahead.

Thank you, everyone, for joining us.

Today we will be discussing our financial results for the first quarter of 2009. Earlier this afternoon (audio dropout). As in our previous calls, after our prepared comments, our Operator will queue for questions. (Audio dropout) (Safe Harbor statement).

Now I'll turn the call over to John Shackleton.

Thank you, Greg. Good afternoon, everyone, and thank you for joining us today. Today we be talking about our Q1 results, discuss some customer wins, update you on our partner strategy, and review some of the highlights for the quarter. We will also explain our plans for integrating Captaris, and talk about our approach to managing the business in these uncertain times. But first, I would like to turn the call over to Paul to discuss the financial results.

Thank you, John.

Turning to the financial results for our first fiscal quarter, total revenue was $182.6 million, up 11% compared to $164 million for the same period last year. In Q1, Europe was responsible for 49% of our overall revenue; North America, 46%; the remaining 5% coming from Asia-Pac. Licensed revenue for the quarter was $50.1 million, up 13% compared to $44.3 million in Q1 last year. Maintenance revenue for the quarter was $98.4 million, up 14% compared to $86.3 million last year. Professional services revenue in the quarter was $34.1million, up 2% compared to $33.4 million in the same period last year. We reported third quarter adjusted net income of $28.2 million or $0.53 per share on a diluted basis, up 28% compared to $22.1 million or $0.43 per share on a diluted basis for the same period a year ago.

Gross margin for the first quarter, before amortization of acquired technology, was 74.7% compared to 73.4% in the first quarter last year, reflecting improved utilization. Professional services margins were 18.7% compared to 17.7% in the first quarter last year. Pretax adjusted operating margin before interest expense was 23.8% in the quarter. With respect to our adjusted earnings, the tax rate for the quarter was 30%. Actual cash taxes payable will continue to be in the 15% to 20% range. income for the first quarter, in accordance with GAAP, is $14.7 million or $0.28 per share on a diluted basis, compared to $7.8 million or $0.15 per share on a diluted basis for the same period a year ago. The fully diluted share count for the quarter was approximately 53.1 million shares.

As of September 30, 2008, deferred revenue was $161.2 million, compared to $179.5 million as of June 30 of the previous year. Accounts receivable at September was $108.3 million, compared to $130.4 million on June 30th of the previous year. Day sales outstanding was 53 days as of September, compared to 60 days for the previous quarter, and 51 days for Q1 last year. Operating cash flow in the quarter was $24.8 million compared to $32.2 million in the same period last year.

Operating cash flow was impacted by a short-term delay in collections from our customers in the last two weeks of September, due to the significant market conditions at that time. However, we have subsequently collected the shortfall, and it did not result in any bad debt or credit issues. The term loan balance at September 30th was $293.3 million, reduced from $390 million in October 2006, with scheduled repayments of $6.7 million and accelerated payments of $90 million.

To provide more visibility into the effect of foreign exchange on our operations, we have added a chart in our press release that shows the percentage of revenues and expenses in US and foreign currencies. As I mentioned previously, the company has maintained somewhat of a natural currency hedge in foreign countries. In Q1 fiscal `09, the net impact due to foreign currency movements was effectively zero.

As we've mentioned before, the three basic uses of cash are to make acquisitions, pay down debt, or repurchase shares. We announced earlier today our intention to file for a share buyback on Nasdaq for up to 5% of our outstanding shares. On October 31st, we used $130 million of cash to purchase the shares of Captaris.

Today, we are announcing that we will reduce our worldwide workforce by proximately 10%, and will also reducing facilities by closing or consolidating offices in certain locations. These activities will result in a restructuring charge of approximately $20 million. These actions are taken to ensure we maintain profitability consistent with our published operating model. Cost savings in the combined operations will be proximately $20 million for the remainder of this fiscal year, with an exit run rate savings of approximately $40 million for FY10. After giving effect to these restructuring actions, the financial effect from the Captaris acquisition will be neutral this quarter and will be accretive in Q3 and on our operating model metrics Q4 FY09.

Now I'll turn to our pretax adjusted operating margin model. We remain confident in our plans to maintain expenses in the 14% to 15% range for development, 24% to 26% range for sales and marketing, 9% to 10% for G&A, and 2% for depreciation. This will generate a pretax adjusted operating margin of 20% to 25%, and as demonstrated in our results throughout the fiscal year, we expect to continue in the upper end of that range. A copy of our business model is available on our website as part of the investor PowerPoint presentation.

I would like to close with a reminder that Content World, our global user conference, is in Orlando, Florida from November 17th to the 20th of this year. We are hosting an analyst investor briefing on Wednesday, November 19th, at the conference. Details, including the dial-in number to listen to the presentation as well as complete downloads of all the company presentation material, will be made available in the Investor Relations section of our website. Please contact our Investor Relations Department for more information.

Now I'll turn the call back to John.

Thank you, Paul.

We are pleased with our Q1 results and as Paul mentioned, we generated $50.1 million in licensed revenue in the quarter, growing 13% over Q1 last year. Of this licensed revenue, 38% came from new customers and 62% came from our install base. In the quarter we had good performance in all regions, with particular strength in the UK and Germany. Approximately 70% of our license sales this quarter were driven by the demand for compliance-based solutions.

Taking a closer look at the transactions in the quarter, we had five transactions over $500,000 and an additional seven transactions over $1 million, compared to the three transactions over $1 million in the same quarter last year. Average transaction size in the quarter was approximately $300,000, slightly up from our usual $225,000 in the same quarter last year. Examples of significant wins in the quarter include Bruce Power, Ontario's largest independent generator of electricity, which expanded their current Livelink platform to include e-mail management. [Patch] Associates Limited, a global engineering construction management organization, also a longstanding customer, extended its investment in Open Text by purchasing additional licenses of Livelink ECM to support their expanding business operation and critical go-to-market support. [Fox Net] Work Group purchased Livelink ECM and accounts payable J.D. Edwards. These solutions will provide Fox with the tools to establish a more effective and efficient accounts payable operation, and help the organization to meet statutory requirements. Safeclean, another existing customer, is expanding its suite to include Livelink ECM document and records management solutions. Safeclean will extend their policies to content within Microsoft SharePoint and applications.

From a sales operations standpoint, we closed the quarter with a combined sales of force of 270 quarter carrying sales execs, up slightly over last quarter. Licensed revenue from partners was approximately 38%, which is in line with our target goals. Building on these partner relationships, we recently announced records management and archiving capabilities for Microsoft's new cloud-based operating system, Windows Azure, a first in this area. We will incorporate these cloud-based capabilities into our enterprise library services offering early next year.

in the quarter, we also announced Open Text's storage services for SharePoint, a solution that helps customers increase the scalability of their SharePoint solutions and reduce storage costs. We also introduced an expansion of our content lifecycle management service for Microsoft Office SharePoint Server 2007. We are extending this solution to our eDocs customers, to provide integrated records management and archiving capabilities, and improve compliance initiatives. With SAP, we released version 2.0 of Open Text's Employee Information Management Solutions, which provides tighter integration with the SAP ERP human capital management solution. Another key product announcement in the quarter was Open Text e-mail lifecycle management for law firms, a solution that combines fundamental e-mail filing and archiving capabilities, helping firms define, secure and control the process by which e-mails are managed. Recently, Open Text was named a leader in the Gartner's Magic Quadrant for Enterprise Content Management 2008, which evaluated companies based on their completeness of vision and ability to execute.

On Friday, we announced that shareholders of Captaris had voted in favor of our bid to acquire Captaris for approximately $131 million. Typically, as in previous accusations like Hummingbird, we would expect the Captaris run rate for licenses to decline 25% to 30% in the first year. We have already begun the process of integrating and streamlining global operations accordingly. As Paul mentioned, part of this initiative will be to centralize operations of both Captaris and Open Text.

The changes we are making involve some tough decisions, but will eliminate redundancies that invariably come when merging two companies into one. This will not change how we support and interact with our customers, and we are and still committed to a set of regional sales and service centers so we can execute close to the customer and provide the same service they have come to expect from Open Text. As we go through this transition, customers will remain our top priority. We have a track record of delivering excellent services, and we'll continue to do so.

From a product perspective, we will be continuing the support of all Captaris products, and in the coming weeks we'll be announcing how these products will be marketed under the Open Text brand. In summary, while we see a strong pipeline, we are taking cautious stands due to the economic uncertainties, and will manage the business accordingly. While we'll leave it to the industry analysts to predict the ECM growth rate, we believe that we will continue we will perform at the top end of that rate.

In previous times of slow economic growth, Open Text has been committed to meeting our profit margin goals and strong cash flow for our shareholders. As we look at fiscal 2009, we will continue with this strategy. Even though we are adopting this cautious outlook, I am still confident in our 90-day pipeline, and despite the macroeconomic state, we are continuing to see demand worldwide in areas such as archiving, compliance, and e-discovery, and we fully intend to capture these customer opportunities. I also want to point out our revenue seasonality trend in the coming year should be similar to the seasonality we have experienced in fiscal 2008, even with the addition of Captaris operations.

With that, I would like to pass the call to the operator to take questions.

Thank you.

(OPERATOR INSTRUCTIONS)

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

Hi, thank you, good afternoon. On Captaris, can you talk a little more about the rationale for acquiring them there? They look to us that they are in a bit of organic growth and [new] decline over the last few years, and certainly wou8ld be guided to further decline of license. Can you talk about the cash payback that you looked at when you bought this, and why this versus other use of cash?

Yes, Tom, this is Paul. We won't quote exactly our internal metrics for the cash payback. I think as you have noted already, we are paying a one-time revenue. So as we indicated, you know, we will bring Captaris on our operating model in this fiscal year, and that would imply we expect its contribution of cash, and I will call it in a prorata fashion in terms of what we do in Open Text to consolidate it. But this met our internal metrics of other acquisitions that we've done in terms of internal rate of return and payback.

Is three to five years sort of a proxy?

It would be -- let's say the mean would be around five years.

Okay, great.

From a business standpoint, Tom, it will obviously enhance our SAP, Oracle and Microsoft partner relationships.

Absolutely. Just going back to Open Text, Paul, on the DSOs, I'm a bit confused. The DSOs are excellent, but you talking about collections not being as good at the end of the quarter. Can you explain that again?

That's a good question. I know it's counterintuitive. The main reason that the DSO calculation was the way it was because when we converted our receivables at the end of the quarter, you know, a lot of foreign the currencies have weakened against the US dollar, so it's just worked out on the calculation that you're using a lower account receivable. If I adjust for that, Tom, it would be - if I can call it an FX neutral basis, it would be 60 days, same as the end.

Okay, there you go. And that, I assume, explains the deferred revenue issue because obviously year-over-year it doesn't look the best, and sequentially didn't look good in terms of normal patterns. Can you confirm it's currency, and talk about your renewal rates?

Yes, absolutely. It is currency and also the lowest -- you know, we have seasonality through our contract renewals. As so it's one of the low points, so it had the seasonality effect, and it's also primarily due, as you indicated, yes, to conversion of foreign currency into US dollars. Our renewal rates remain in the 92%, 93%.

And restructuring of $20 million, is there any writedown and intangibles or anything? Or is that mainly a cash outlay?

So of course the cash outlay and restructuring would happen, a combination of when employees are given severance packages and continuing obligations, if you will, on restructured properties. So those details are yet to follow. As you know, we have just acquired it so we will be disposing of that in our normal course.

Okay. Just finally, John, you explained it finally well, but the issue - the industry [announcements] have very optimistic about spending. We are starting to see that being corrected a bit. But you have seemed very confident. So what do you talk to your own customers about, that the some of the others, like SAP and EMC and such, you know, they are seeing something different than you're seeing in terms of confidence about their outlook, so can you explain why your outlook is a little more bullish than the industry?

There are a couple of things, Tom, I would think. One is the whole compliance area, where what we are seeing are many of our customers trying to mitigate risk in that area and buying more seats, et cetera. The second is also what we're seeing particularly in this tight economy, is that they are trying to streamline and optimize their back office processes, so things like accounts payable, et cetera, automating that. We are seeing a lot of interest in that area. And the other, probably, third piece, is we are pretty well balanced, as you know, between North America and Europe, and so we are seeing very strong pipelines, particularly in Europe.

Great. I'll pass the line. Thanks, guys.

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

Good evening. John, maybe you can talk about some the partnerships that, you know, obviously you're in deeper with SAP now with some of their best run now offerings. Maybe you can talk a little bit, as much as you can, around how those are performing in the market? You gave us a rundown on that but some of those partners, namely SAP, had a bit of a hiccup in the last quarter, how that impacted you or not, as it were?

Well, they had a hiccup in quarter. It has not affected us. In fact, it has probably strengthened some of the things we are doing with them, because there is this need for archiving and business process workflows around accounts payable, et cetera. So the relationship we have with SAP has been very strong. We have also seen quite a bit of growth in our relationship with Microsoft, particularly around SharePoint, working - providing additional capabilities to SharePoint, et cetera. And we have also seen some in the Oracle space as well. So I would say that this - pretty much SAP has been continued, we have not seen any downturn, an increase in Microsoft, and we are seeing some interest as well from Oracle.

And the last one for me, just to be -- if you can talk a little bit about the consulting side. It looked a little bit weaker this quarter, the last downturn, it was a tougher part of the business you have managed, what you have done so far there? And then Paul, if you can just confirm the head count now is? That would be great.

Yes, on the - on the PS side more seasonality than anything. You know, obviously particularly in Europe, where there's a lot of vacation time. But, in fact, we are very happy to see that the profitability of the group is - is getting up closer to where we want it to be, and on the whole we actually see a strong pipeline in the PS area.

And Paul, we have about 600 professionals in that area.

I'm sorry, total company.

Oh, total employees?

Yes.

3,000.

Pardon me?

3,000.

Thanks, guys.

Thank you, Paul.

Your next question is from Scott Penner from TD Newcrest. Please go ahead.

Thank you. Just -- John, just to get a handle on the head count, or what could be involved in the head count reduction, the last number that Captaris disclosed I believe was 600 heads in Q2. How many do they have at closing, and I guess what is the combined number of employees in the organization that you're taking 20% off - or 10% off?

This is Paul. So at the date of acquisition, and I answered Paul's question with respect to the close of the quarter, at the date of acquisition there were about 3,600 employees. We are looking at --

Combined.

Combined. We are looking at the reduction of force, again, on a combined basis, not just Captaris stand-alone, so as I mentioned before about 10% of the work force is the reduction target.

Okay. And when we are thinking of the benchmarks of the $20 million and then the $40 million, is the basis for that, I guess, the combined September quarter operating costs?

Yes, the basis would be exit Q4 -- exit Q1, sorry. Yes.

Okay. And just, John, you commented on the - again, the growth guidance and the industry analyst range. Last quarter you gave the range of 10% to 13%, and that time expected it to be in the upper end of that. I'm just wondering if you can give us some - a little bit more, you know, numbers around what you're now expecting and then, you know, relative to your answer to that, is some of the head count reduction that we are seeing, I guess, to protect the margins in what could be a much slower revenue environment?

Actually, I would say - the reason I didn't give a range, Scott, was because it seems that most analysts are changing their projections on a daily or weekly basis. And so -- but having said so, it's a little hard to know what they are saying this week. But would I would say here is with the reductions, we still will certainly have the capacity in sales to meet - to meet the kind of growth that we would see and expect

Okay. And then just -- lastly, John, if you can comment on any of the, you know, early [upgrade] revenue opportunities, pipeline for I guess Hummingbird customers adopting some of the Open Text products, and are you still - given your conversations, are you expecting that to sort of take place in earnest following the content [loan]?

Yes, so we do see that as well as - obviously in times like this, we focus very carefully on our existing customer base. And from that, we are seeing the demand across the board of our products being fairly strong. So at this point in time, we see a strong pipeline. Obviously as things change rapidly, we are continuing to look.

Great. Okay, thank you.

Your next question comes from Richard Tse with National Bank Financial. Go ahead.

Hi, John. Quick question here. You said that business remains on track, and you said that your pipeline is fairly strong, and you're taking this big haircut in terms of restructuring. Is that -- should we read that largely to be -- that's to get Captaris onto your operating model? Because if everything is strong as you indicated, and it's not due to Captaris, then the margins would be pretty significant in terms of the outlook right now, no?

I'll make a comment and I'll also let Paul add to that, Rich. Really a lot of it is centralization of groups, it's a lot of taking out redundant functions, but it's not just Captaris. For example, they have a very strong group in Seattle, very close to Microsoft, and so obviously keeping that as a center of excellence and taking out other pockets that might not now be appropriate would be a key issue, and there are a number of areas like where reduction of -- they have offices in places as we have offices, things like that. Paul?

Rich, I think I'll just add to what John is saying. Clearly we are wanting to make sure - or ensure that we do continue to maintain our bottom line operating model.

Okay. When you look at Captaris, and you talked about the typical decline post-acquisitions, what was the percentage of revenue coming from licenses for Captaris?

Let us respond back to that, maybe in next couple of questions, and we'll make sure you have the information.

Okay. And one final one here -- I may have missed this -- but the number of deals, some of your big deals here, you said you have seven over $1 million, five over $500,000. How many of those were influenced by your key partners here?

Probably about 40%, Rich. And many of them were -- so about 60% would be existing customers upgrading, and some of those were exit partners as well, so it's kind of a blend. But I would say 40% were certainly working closely with partners to bring those in.

And the main partners there would be?

SAP, Microsoft and Oracle.

So it was across the board on all of those?

Yes, it was.

Okay. Thank you.

Okay, Rich.

Your next question comes from Dushan Batrovic with Canaccord Adams. Go ahead.

Hi, thank you. Let me ask a hypothetical. Would you have announced any restructuring had you not announced Captaris?

Probably not.

Probably not. Okay. So -- so -- I guess you're looking to be cautious here based on what you're seeing on the macro front, but this is an opportunity really to deal with overlap with Captaris more than anything else, given the strength in the pipeline?

That's correct. In fact, obviously with the Captaris integration, we felt it appropriate to do both at this time. So it probably has - as we said, there was no reason for us to do that before. But given the Captaris, given the cautiousness that we see in the market, we felt it appropriate to do it at this time.

Okay. And the cautiousness that you're talking about, is that first-hand experience or is that more looking at SAP's results, reading the headlines, or how much of did that did you actually see in the quarter and looking out?

Really, other than the collections at the very last few days of the quarter, we saw no indications of slowdown. The pipeline was strong. We didn't see any deals being held up because of the crisis, et cetera. So really, it is to your second point, given the news we are reading of other vendors as well as the general concern about the whole global economy, we are obviously being - looking at worst-case scenarios.

Got it. Okay. And last one, just can you remind us, what did you say about accretion in Q3, was it? You're looking for the deal to be accretive?

Yes, that's correct.

So neutral this quarter and accretive next.

Got it. Thank you.

Your next question comes from Brian Freed with Morgan Keegan. Go ahead.

Thank you for taking my call. On the deferred revenue, could you give a little bit more clarity in terms of what the dollar impact of currency was to your deferred revenue balance in the quarter?

Yes. Just give me one moment. It was about $10 million.

Okay. And then secondly, with respect to OEM customers for Captaris, I know they have had some historically, do you think you will be able to retain any of those relationships, and what was the revenue contribution of those?

We certainly believe so. They did have a large OEM model and, you know, the plans would be to certainly look at those - retaining some of those. Paul, do you have the numbers on the Captaris OEM, what the percentage was? We probably will have to get back to you on that Brian, to look at the numbers in detail.

Okay.

But the goal would certainly be to maintain those.

Okay.

Your next question comes from Paul Lechem with CIBC World Markets. Go ahead.

Thank you, good evening. Just wondering on the two small acquisitions you made in the quarter, [Spice] or [Indymotion], was there any revenue contribution from those?

Minimal.

Okay. And in the press release your comments, I think, John you say you're maintaining your current earnings target for the year. Is that the sort of profitability model that Paul gave us? Or what do you mean by that?

Paul, I'll let you answer that.

Sorry, Paul, could you just repeat that question?

In the press release it quotes John as saying, "We maintain our current earnings target for the year." I'm not sure what that is.

So what we said in the past, as you know, in terms of describing our model, we made references also to in the past calls, on the earnings side we are continuing to give our, if you will, our information to the street on that basis. So it's consistent, I think, with what we said before, we are really expecting to maintaining the bottom line, and as we've talked about through our models, I think we have given some indicators as to our comfort, if you will, in terms of some of the consensus estimates on the bottom line.

If you look at first call, we feel very comfortable with the ranges that are in there.

Before the Captaris acquisition?

Right.

So we put the modification on top of those current consensus numbers?

Yes. Sorry, Paul.

All right. And the last question -- just going back on SAP, given that they are an important partner of yours, have there been any change in sales, influenced deals coming through that channel?

No, we have not seen any. In fact, as we said, we have seen a lot of interest from SAP, both continuing relationships in North America and Europe, but also interest in other area - other geographic areas that they are in that we would see expanding that relationship.

Okay, good. That's it for me. Thank you.

Thank you, Paul.

Your next question comes from David Shore with Research Capital. Go ahead.

Thank you. Good evening, you guys. In light of the issue you had with the accounts receivable at the end of the quarter, are you making any changes to your collection policies? And if so, can you describe them?

David, no. As I mentioned, there was no issue with respect to -- it was a disruption as far as we are concerned with the announcements going on in the US and the markets. We just had some customers hold back what we normally would have received compared to the previous quarter. We have collected all that money subsequent to the quarter end. It didn't result in any concerns about our credit policies. Of course, we are continuing to review our credit policies. Actually, in this economy we look at them even harder, but that's unrelated to cash receipts that came in just post-quarter.

Okay. As far as partner revenue goes, are you still targeting roughly 40% coming from partners, or have you looked at that in light of the current environment, of maybe that changing?

No, we actually see that. One thing we have to look at is is that Captaris was heavily a partner in distribution channels. So we'll look at if that has any impact overall. But no, the 40% is about where we would see it.

Okay, and sorry I didn't catch if you said, what was the percentage of license revenue from new customers in the quarter?

From new customers, was around -- let me just check -- Around 36%, I think. I'll double check. 38% from new customers. Sorry.

Okay. Thanks, John.

Your next question come from David Wright with BMO Capital Markets. Go ahead.

Thank you very much. There have been a number of Red Dot announcements. The product line seems to be moving extremely well. Do you have a sense you're gaining market share, and who are you impacting at this point, do you think?

We do believe it is the web content management product out there. We have some very strong customers in that area. it's really across the board, I would say. And again, I think selling it as part of the ECM suite, we are seeing larger customers take it in, than what Red Dot would have seen as a stand-alone before.

So you're not seeing the impact on any one or two competitors specifically?

In fact, we rarely see point web content solution vendors out there.

Okay.

And obviously with Red Dot, we do a lot of selling into our existing base with that.

Okay. Great. On the connectivity side, can you comment at all on that business? And do you anticipate it, with the slowdown in the economy and perhaps employees being reduced across a number of industries, do you see that side of the business impacted at all?

Over Q1, they were right on target, things looked good. We continue to monitor that, because that would obviously be an area that we might see a turndown. But so far, in the pipeline, it's looking pretty much on target.

So really, you know, we have heard lots of scary things about the economy and employment and layoffs and that, but you as yet haven't really - certainly from September it was a great quarter and as yet, you aren't really seeing it in your business at all? Is that correct?

That's correct. Again, we've heard from people like Gartner say IT spend is typically 180 days behind the economy. So that's one data point. But the other thing I would say is if you look at IT spend, that the ECM and security is still right at the top of the list of things that they have to have, and typically around things like compliance, you have to have it. I mean, there's no -- it doesn't matter whether you have the budget or you don't.

Right. So you're obviously in a good space.

We feel certainly better than most.

Yes. How about - the combined number of sales reps after you do your restructuring, what number are you shooting for?

At this point in time, as I said, we really have to look at the Captaris model, because they do do a lot of partner sales, so we can probably get that information for you by the next call.

Okay. And lastly, often you have given out business by sector. Do you have that available?

Yes, it's fairly much the same. it would be something like high tech manufacturing, probably 20% plus; energy, around 14%, 15%; health care is - actually, we are seeing health care pharmaceuticals come up a bit. We are seeing interest in this that area. And government we see is still very strong across the board, both state and local and, you know, Federal. As we have seen over the last year, the US Government, it has been tough for them, but we are seeing it pick up in other areas, and as we see the economy worsen, as it will, we think that government will obviously be very strong for us

Great. Congratulations. Thanks a lot.

Your next question comes from Blair Abernethy with Thomas Weisel Partners. Go ahead.

Thank you. Paul, I just want to touch base on the restructuring and also I guess on Captaris's existing business. They had a sizable hardware and appliances business that they call appliances. What are you going to do with that business? Is that something you are going to continue on? And how will you report that business?

Yes, so I'll mention the business and then I'll let Paul talk about it. So at this point in time we would look to keep it on, just like the connectivity business. It looks a profitable business, we are looking at it, and again, we will have a much better feel on our next call. I will let Paul give some of the background on what some of the numbers are.

Yes, so Blair, we have not made our final decision, obviously. It won't be a material amount of revenue. But you would want to know, of course, what that represents. So we may group it with one of our services line, but we will identify it either in some notes as what it continues to be.

Okay. Great.

It would be a line item for the hardware.

Okay. Great. And, Paul, I'm just wondering if you could -- you skipped over a facet in terms of the expense savings you're expecting for the last three quarters of this year. Could you just walk through that again?

Sure. So the plan would have cost savings of about $20 million with this fiscal year, the remainder of the year. And you expect that to be, you know, effective more in Q4, and then the plan is to have that represent a run rate going out to Q4 of about $40 million fully annualized.

That's based on your current run rate now, and Captaris's as of now or as of the end of June when they last reported?

Not a material difference between the two, so if you brought the two together, it would be a good enough proxy.

Okay, great. One other question. Just in terms of the partners, John, you've talked a lot about the some software partners. What about the SI partners? What's going on on that side? I'm wondering if you can tell us who is kind of leading the charge there for you? And in terms of your partner revenue, can you give us a sense of what the split would be between, you know, the SAP and Microsofts of the world versus the SI partners? How much are the SI partners contributing to the overall model?

It's -- the SI partnership is growing nicely. I would say today Deloitte, who is probably the strongest partner that we have, obviously in Europe there are some of the smaller partners like Logica, et cetera, that would be strong as well. It's much more seanal or - sorry, it's much more -- with the partners like SAP, et cetera, at this point, we can count on a regular stream of revenues. What we see from the SIs is feast and famine, although we are beginning to see that getting better. And we -- I think that next year that will be a growth area for us, and by next year I'm talking, sorry, calendar year, I think for the next two quarters. We are seeing a lot more interest in the SIs in working with us than they have in the past. So we are doing a lot of training in that area with them, as well as a lot of joint marketing. So I would say that Deloitte, [Ancentia] would be the strong ones, Logica in certainly Europe would, Gemini would be another there. But those will be the strong ones.

Okay, great. Thank you very much, gentlemen.

Your next question come from Ralph Garcea with Haywood Securities. Please go ahead.

Good evening, gentlemen.

Good evening, Ralph.

A quick question. If you look at Captaris's geographic breakdown, they were weaker in Europe. Was that just a function of they didn't have the sales capacity there, or was there something around their product lines that sort of dictated that revenue split? And given your presence there, can you leverage their product into Europe?

Right. Obvious they did acquire the Oce Group out of Constance, so they did have a presence in German area with that - on that product line, but I think you're right, Ralph, as a company, Captaris did not have a strong presence in Europe, and obviously I think we can help strengthen that as we go forward. They had a much more US presence.

And I know, you know, the question was asked, but on a combined sales force, will you look at cutting that by 10% or will you more cut on the G&A side on some of the other redundant areas and just focus on growing that sales capacity?

We will basically look, as we join the two, one will be performance, obviously would be one issue that we would look at. The other would be regional areas or product areas that we might reduce a little bit if we saw that that product wasn't growing. Obviously, with sales forces you have duplicate management structures that would obviously be an area that we would look at. But in the whole, the goal would be to protect quota-carrying sales people. Obviously, we would want to grow that.

Okay, thank you.

Okay.

Your next question comes from Steven Li with Raymond James. Please go ahead.

Thank you. Just a couple quick questions. Paul, the $20 million charge, how much is severance and facilities?

We would have, I would say at this point, though we're still finalizing details, we expect to be about 75% would be on the employee side.

75% on the -

75%, 85%. Steven, we haven't finalized all the details yet.

Okay, great. And John, any comments on linearity in the quarter? Was it consistent throughout, and how are things so far in October? Thanks.

Yes. Pretty much as planned, and as I said, think the biggest surprise we had was there weren't any surprises, other than the collections on the last few days of the quarter. So from a revenue standpoint, we -- it was pretty much as expected.

And so far in October, John?

Just checking to make sure it's okay for me to say. It's, again, pretty much to plan.

Okay, great, thanks.

Your next question comes from Gabriel Leung form Paradigm Capital. Please go ahead.

Thanks. Just going based to Captaris, just based on the last few calls, it sounded like you had a couple of large deal opportunities in the pipeline that they expected to close over the course of the remainder of calendar '08, including some with the German government. John, any chance you can comment around what the pipeline is looking like for the remainder of the year?

Again, it's fairly new, but I would not expect any large deals. The remainder of the calendar year, I wouldn't expect any large deal in the next month or so.

Okay. And John, another question. Just want to get your thoughts, just get your expanded comments around your forward outlook. You had mentioned that you think Open Text will grow sort of at the high end of what the industry growth consensus is, whatever that shakes out to be?

Right.

When you talking about that, are you talking about that for Open Text as a stand-alone entity or on a combined basis?

A stand-alone.

Okay. And when you say that, do you mean that on a reported or constant currency basis? Just given what is going on with the US dollar and the Euro and the pound?

Yes, pretty much as a constant currency basis. And that's the hard piece to predict, given the wild swings that are going on.

Okay. And one question for you, Paul. What was the gain or the loss reported from your interest rate collar this quarter? And I presume that would be your net interest expense?

That's correct, Gabriel. It's a $700,000 gain this quarter.

Okay, perfect. Thank you.

Thank you, Gabriel.

Your next question is a follow-up question from Scott Penner from TD Newcrest. Please go ahead.

Thanks. Just one clarification on the comment that you are comfortable with the bottom line. What you meant to say is you're comfortable with the consensus for this year as it stands right now, plus you would expect some accretion related to Captaris?

Is there that's correct. That's on the bottom line, correct.

Right. And just looking at the - your comment about the run rate licenses at Captaris down 25%, 30% first year, you expect the other lines of business absent a purchase accounting to be pretty much in line with where they have been?

Yes.

Yes. That's right.

Okay. And do you have any feel for what those purchase accounting adjustments will be yet, Paul?

No. It's early days, and we will using at least this quarter to finalize that.

Okay, great. Just want to clear that up. Thanks.

Your next question is a follow-up question from Richard Tse with National Bank Financial. Please go ahead.

Just want to follow up on Captaris. How will this affect your relationship on the image capture side with Kofax? They have an image capture component as well.

Exactly. Obviously, we still have a lot of joint customers with Kofax. We have talked with Kofax. We will continue to work closely with Kofax. So, you know, they will be a partner, they will be at our user conference in Orlando next week or the week after.

Richard, it's Paul. Sorry for the delayed response. The license revenue in the past has been about a third of their revenues.

Great. Thank you.

Ladies and gentlemen, if there are additional questions, please queue up at this time.

Okay, well thank you everyone, again, for your questions.

Just to wrap up on the Q1 highlights, it was a good quarter, and while we are facing uncertain economic times, we'll continue to focus on meeting our profit goals. With continued demand for compliance-based solutions, I remain cautiously optimistic on the outlook for fiscal 2009. I'm comfortable with the bottom line expectations in first call for FY09.

So that concludes the call today. Thank you, everyone, for participating and your questions.

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