Open Text Corp (OTEX) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Open Text financial results for the second quarter of fiscal year 2009 conference call. (Operator Instructions). I would like to remind everyone that this conference is being recorded today, Wednesday, January 28, 2009 at 5 PM Eastern Time.

I would now like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everybody. We will move ahead with the call. First, I'm going to read our disclaimer.

During the course of this conference call, we may make projections or other forward-looking statements relating to the future performance of Open Text or its subsidiaries. These oral statements may contain forward-looking information, and actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information.

Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors or assumptions that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in Open Text Form 10-K for the fiscal year ended June 30, 2008, and of course in our press release that was issued earlier today.

With that, I'll turn the call over to Paul McFeeters, or Chief Financial Officer. Paul?

Thank you, Greg.

Turning to the financial results for our second quarter of fiscal 2009, total revenue for the quarter was $207.7 million, up 14% compared to $182.5 million for the same period last year.

In Q2 North America was responsible for 50% of our overall revenue; Europe, 45%; the remaining 5% coming from the rest of the world.

License revenue for the quarter was $64.9 million, up 18% compared to $55.2 million we reported last year.

Maintenance revenue for the quarter was $100.4 million, up 11% compared to $90.6 million last year. Professional services and other revenue in the quarter was $42.4 million, up 15% compared to $36.8 million in the same period last year.

We reported second-quarter adjusted net income of $34 million, or $0.64 per share on a diluted basis, up 30% compared to $26.2 million, or $0.50 per share on a diluted basis, same period a year ago.

Gross margin for the second quarter before amortization of acquired technology was 73.7% compared to 73.1% in the second quarter last year. Customer support gross margin was 82.7% in Q2 FY '09 compared to 84.3% in Q2 of the prior year. Professional services margin was 24.7% compared to 17.8% last year. The increase in professional services margin is attributable to better utilization rates and a grouping of higher margin hardware revenues in this category.

The pretax adjusted operating margin before interest expense was 25.9% in the second quarter compared to 24.7% last year. With respect to our adjusted earnings, the tax rate for the quarter was 30%. Actual cash taxes payable continue to be in the 15% to 20% range.

Net income for the second quarter in accordance with GAAP was $0.8 million, or $0.01 per share on a diluted basis, compared to $10.7 million, or $0.20 per share on a diluted basis, for the same period year ago. The fully diluted share count for the quarter was 53.2 million shares.

As of December 31, 2008, deferred revenue was $177 million compared to $180 million as of June 30, 2008. Accounts receivables as of December 31st, 2008 was $127 million compared to $134 million on June 30 of last year.

Days sales outstanding was 53 days as of December 31 compared to 60 days as of June 30, 2008.

Operating cash flow in the quarter was $39.8 million compared to $39.3 million in the same period last year. The current year over your comparison is negatively affected by restructuring charges and timing differences in working capital.

The term loan balance at December 31 was $292.5 million, reduced from $390 million in October 2006 with scheduled repayments of $7.5 million and accelerated payments of $90 million.

Again this quarter, we have added a chart in the press release to provide more visibility into the effective foreign exchange on our operations. It shows the percentage of revenues and expenses in US and other major currencies. The net effect on our operations due to FX was a positive $0.02 per share.

During the quarter we acquired the remaining 3.6% of minority shares in IXOS for $12.4 million. On October 31 we used approximately $101 million of cash -- net of cash acquired to purchase the shares of Captaris. We did not buy back any shares in the quarter.

While we will not be breaking out the financial effect from the Captaris acquisition in this quarter, it was accretive to our results in the quarter. We are on track to have Captaris business on our operating model by the end of our fiscal year.

Last quarter, we stated that we would reduce worldwide employment by approximately 10% starting from a post-acquisition combined workforce of 3600 reducing to 3200. In addition, we would continue to rationalize facilities in both Open Text and Captaris.

We also stated that Open Text's restructuring charge would be approximately $20 million, and this charge would be recorded in our statements of income. The break-out of the charge is $11 million for workforce and $9 million for facilities.

This quarter we took a restructuring charge of the $11.4 million with the remaining expected to be in Q3/Q4.

As part of our purchase accounting for Captaris, we also indicated that the costs for reducing the workforce and facilities will be approximately $20 million. The break-out of that charge is also $11 million for workforce and $9 million for facilities.

In our purchase price adjustment on the balance sheet, we have charged $13.6 million as of December 31 with the remaining $6.4 million to be a further adjustment to the purchase price through fiscal '09. As of December 31, we have acted on 65%, or approximately 260 employees. The remaining reductions for the most part will occur through the balance of the fiscal year.

We continue to confirm that the cost saving in our operations as a result of these actions will be approximately $20 million for this fiscal year with a run rate savings of approximately $40 million for fiscal 2010. Approximately $3 million was achieved this quarter with the remaining savings in Q3 and Q4.

As part of acquisition accounting, the fair value of the acquired deferred revenue for customer support contracts. The total adjustment for Captaris was $2 million, and $0.5 million was written down in this quarter.

Now I'll turn to the Company's pretax adjusted operating margin model. We remain confident in our plan to maintain expenses in the 14% to 16% for development, 24% to 26% for sales and marketing, 9% to 10% for G&A, 2% for depreciation. A copy of our business model is available on our website as part of the investor PowerPoint presentation.

I'll end my portion with a reminder that we will be presenting at several investor conferences in the coming weeks, the details of which are posted on the investor relations section of the website. Please contact our investor relations department for more information.

Now I will turn the call over to John.

Thank you, Paul. Hello, everyone. Thank you for joining us today.

We are pleased with our Q2 results, and as Paul mentioned, we generated $64.9 million in license revenue in the quarter, growing 18% over Q2 last year. Of this license revenue, 20 -- 25% came from new customers, and 75% came from our installed base.

In the quarter we had good performance in all regions, and approximately 70% of our license sales were driven by demand for compliance-based solutions such as e-mail management, records management, and e-discovery.

In addition we are finding that CIOs are spending where they can achieve measurable ROIs within their fiscal year, particularly when streamlining and automating their business processes or meeting compliance needs.

In Q2, we saw license revenue broken down by vertical as 21% from government, 14% from financial services, 11% from high-tech manufacturing, 10% from energy, and 6% from pharmaceutical and life sciences.

In the quarter we saw more diversification both by vertical sector and geography than we have been past quarters.

Taking a look at the larger transactions in the quarter, we had five transactions (technical difficulty) $100,000 and an additional four transactions over $1 million. An average ECM transaction size was just over $240,000, essentially unchanged from the same quarter last year.

Examples of significant wins in the quarter include SBB AG, Switzerland's largest travel and transportation company. They purchased the Open Text content lifecycle management solution to improve processing efficiencies in creating, storing, managing, and controlling documents. The SBB also expects to reduce storage costs by using our solution.

Supporting their Web 2.0 strategy, Getty Images, a leading creator and distributor of digital content, purchased Open Text digital media solutions as the platform to help drive revenues and reduce costs by providing centrally organized and instant access to images from their website.

The City of London Corporation, which provides local government services, selected Open Text to provide a comprehensive corporate records management and archiving solution. The Open Text system will help the City of London eliminate the duplication of both electronic and physical files with the goal to deliver better services to the many residents, visitors, and businesses they interact with daily.

From a sales operation standpoint, we closed the quarter with a combined sales force of 320 quota-carrying sales execs.

License revenues from partners was approximately 38%, which is in line with our goals.

On the product side, we are pleased that we received the Department of Defense certification for our records management and content lifecycle management solutions for Microsoft SharePoint.

We also announced in the quarter the new release of Open Text Fax Server Connector for Microsoft SharePoint, a comprehensive document capture and delivery solution for SharePoint. The products were previously marketed by Captaris under the RightFax name.

We also announced Open Text Recruiting [Manager] for Microsoft SharePoint, a solution that helps to simplify the recruiting process within organizations. This product is part of a continuing Open Text strategy to build applications that extend SharePoint based on the Open Text ECM suite.

Regarding Captaris, as Paul mentioned, the integration is slightly ahead of schedule and was accretive the first quarter.

In November, we hosted Content World, our annual global user conference. This was our largest conference ever with over 1600 attendees including over 1200 customers and nearly 300 partners in attendance. At the conference we presented the 2008 GlobalStar award to customers for innovative and successful ECM deployments. Winners this year included Hasbro, Halliburton, Northrop Grumman, The Supreme Court of the Netherlands, GM Europe, and Bruce Power.

We continue to see a strong pipeline, and despite the global economy, we see demand for compliance driven solutions as well EPR integrated solutions that produce rapid ROI, as I mentioned earlier.

I also want to remind everyone that our revenue seasonality trend should be similar to what we experienced in fiscal 2008, even with the addition of Captaris. We have always been committed to meeting our profit margin goals and strong cash flow for our shareholders, and will continue to manage the business accordingly.

While I will leave it to the industry analysts to predict the ECM growth rate, we believe that we will continue to perform at the top end of that range.

On that note, we are comfortable with our current first call consensus expectations for the fiscal year on both the top and bottom line.

With that, I would like to open the lines for questions.

(Operator Instructions). Mike Abramsky, RBC Capital Markets.

Thanks very much. John, on that last point, you're comfortable with the first call top and bottom line? That seems to be actually perhaps a slight improvement to your visibility in terms of your comments last quarter where you said you were comfortable 90 days out.

Right.

Is that a fair interpretation? And can you explain why that might be, what's causing that?

Basically, so we have good comfort, obviously, on under 90 days out. And from what we're seeing in the extended pipeline, we feel comfortable. It really is just looking at the pipeline, the amount of pipeline and then calculating from that.

Okay. How do you feel about your sales coverage in this environment, and are you -- in giving that kind of -- I guess it's not a forecast but obviously an outlook or comfort statement with what's going on and what is expected. What -- how do you feel about the risk of revenue volatility or changes in visibility, given the environment? What kind of -- can you give us some sense as to what's giving you confidence, given sort of the volatility that's going on out there?

Correct. So obviously, I think as everyone is seeing volatility, is seeing concerns, so therefore part of what we've done is to discount even further our normal pipeline. But what we are seeing is a pretty good mix, as we said, both geographically and vertical, that the pipeline is adequate to meet the needs that we see.

Now obviously, if there was some major downturn, further downturn in the economy, we would have to revisit. We do -- and we have been for the last two quarters -- instead of just the weekly review of the pipeline, it's almost a daily review of the pipeline on a global basis. And from what we're seeing, as I said, we feel comfortable.

The diversification by vertical and geography -- could you -- more than usual could you explain that a bit?

So as you may have seen from past quarters, usually the high-tech manufacturing is usually much larger than that, as well as things like financial services would be normally lower. We have seen areas both in financial services and other areas that are looking at these areas and doing some significant deals in these areas. And so it's much broader than is seen. As well as often you'll see Europe being strong one quarter, North America being strong in another, they've both been strong in this quarter and continue to both have a strong pipeline -- as has Asia-Pac.

Then lastly, you're pro forma EBIT margins look like they hit an all-time high. Can you just talk a little bit about how you were able to achieve this? It looks like your G&A is at an all-time low as a percent of revenue, and is this -- how do we think about kind of the trend going forward in the future quarters?

It's Paul. I'll take that. The -- as I mentioned, we're not changing our model, but as we have been indicating each quarter, expect us to operate in the upper end of the range. Of course as you point out, it's above that range. I think putting John's comment reminding everyone of looking at historical seasonality going forward would mean that I wouldn't think that we would be pushing that any further up in Q3, and we will have to see how Q4 works out in terms of our restructuring charges, whether or not we need to adjust that.

So I think we will just continue to confirm we're definitely at the upper end of the range. We went over that upper end of the range for this quarter, but we're not changing our model or forecast going forward on that margin.

At this time.

At this time.

Scott Penner, TD Newcrest.

Paul, maybe to just quickly clarify that last comment, you said you didn't expect to push up against it in Q3, but in Q4 you'd revisit that given the pace of the restructuring, I guess. Does that mean revisit your guidance on the operating model, or the restructuring itself?

No, I was commenting on the operating model, Scott.

Particularly as it relates to seasonality, Scott, Q3 is usually a little down on Q2, then back up in Q4.

Right. Okay. And Paul, again, the support revenue -- I assume just the marginal jump over Q1 is a function of the currency?

No. It would be both the currency of course and Captaris.

Okay. But there were some -- was there some negative currency effects on support?

Well overall, as I mentioned, the FX actually positively affected the bottom line by $0.02. So it wouldn't have had a materially negative effect on the support on the revenue lines.

And just the services margin, you made some comments about utilization and some higher margin hardware pass-throughs. Is this a sustainable level going forward?

We certainly -- for the professional services operations for Open Text, as we've been indicating over time, that we're expecting to get them into the low 20s, which we achieved. And I was commenting that there's a further uplift for adding the hardware margins that are, again, a result of Captaris. So I would say yes, and now we would be in the -- you would expect us to be in -- certainly in the low 20s going forward as our -- as we were achieving -- as we were expecting to achieve.

And just -- John, just for you -- the split when you look into the pipeline, is it still maintaining about that 70/30 on the compliance I guess versus the ROI type projects? And are these projects -- again, last time you made reference to instances of I think it was like tables optimization at SAP. Are these still the kind of applications that are driving it?

Exactly, Scott. And we are -- while it's been 70/30 for the last couple of quarters, my gut reaction feeling is that we will see more of the back office and front office streamlining as long as you can prove that ROI, but I think we will see more of those.

And just lastly, John, one clarification. The $4 million deals, are those all deals that were signed in the December quarter, or are some of those -- and if so, could you give the number? -- some of those just chunks of previously taken or signed deals?

Those were all signed deals.

All Q2 (multiple speakers)

Yes. All brand new deals that quarter.

Tom Liston, Versant Partners.

Not to beat up the forecast too much here, but a lot of the comments out there are from partners, and certainly some of your competitors talk about just really difficult to forecast anything. And one of the comments was -- that we've heard is, it's a just-in-time budgeting type environment. And we have heard a lot about CFOs not finalizing budgets, and I have a real hard time pinning down numbers.

Are you finding that they are piecing out portions just because of the need involved with your solutions. Or what gives you confidence where -- given your partners aren't willing to put a number out there and CFOs don't have a final number? Is it the CIOs talking, or the CFOs? And how do you reconcile that?

So I think there's really two things, Tom. One -- to remind everybody -- if we look at -- 50% of our revenue is on maintenance. It's been pretty steady at 92-plus percent renewal, and even in this tough economy we're seeing those renewals pretty much holding.

If we look at our professional services backlog, that's about 25% of our revenues. We're seeing a strong backlog, no kind of downturn in that. So again, that's fairly predictable.

So really you're looking at that 25% of license revenue, and two things on that -- one is we have over the last two quarters been focused on our customer base, our installed base, where if I look at the big deals this past quarter, they were to the majority existing customers rolling out large -- these larger deployments. And so as we go forward we will continue to focus on those and obviously feel comfortable that those will happen.

The last point is, as I mentioned also, as we look and scrub our pipeline on almost a daily basis, we obviously are being more conservative than usual in that pipeline, as well.

That's good. Just to confirm -- and Paul might have given a number. Was it about 92% renewals this quarter as well?

It was 70%.

No, renewals.

Oh, sorry (multiple speakers). Maintenance renewals, yes.

How do you -- when you look at your customer base -- and certainly I haven't matched it all up, but there are some decent sized layoffs going on with I assume some folks that are using Livelink as a seat -- where do feel that number sort of bottoms out here in the coming quarters as guys look to say, okay, we don't need those licenses or those maintenance contracts anymore?

We certainly haven't seen any to date, and we haven't seen much in past recessions. In fact, what we do see is where -- more in things like mergers, acquisitions where they will merge the seats in there. So even in the companies where obviously our customers have significant layoffs, we haven't seen a drop in maintenance. Most of our products -- in fact a good majority of the products are obviously -- it's not shelfware. This is being used. And in fact, as I said, from our customer base we're seeing them using more seats.

Two quick ones. License at Captaris -- is it basically in line with your previous guidance of being down probably from 20% to 30%?

It's -- so it's 20% to 30% for the year. Usually when you do an acquisition, the first quarter is not quite as dramatic as that. But it's pretty much in line with what we expected it would be, and so we do believe the trend will be there.

Finally, just Paul, other income -- obviously you know some of the parts in there, but that's a big number this quarter. It's worth going through some of the pieces there.

The main piece on that, Tom, really is, again, adjustment -- FX adjustments, foreign exchange adjustments.

Is there anything else that's material?

No, nothing else material.

Paul Steep, Scotia Capital.

John, maybe you could just talk a little bit about strength within specific partners and how that played out this quarter.

We're seeing particular strengths with Microsoft and working very well with them. Deloitte is also doing extremely well, and as well as we've seen with SAP, good work particularly with the new solutions that we've built with them and the Captaris product.

The only other one I would have would be just are there any major compliance initiatives out there? Like the last time through in '01 we had [SOX] and we had some of the other compliance projects that were broadly being initiated. Is there anything else that would as a macro trend sort of explain some of the strengths out there that you've seen in the quarter?

On a global basis, from MiFID in Europe and there's different ones in Asia. The other thing along that is still compliance particularly around e-discovery, so a lot of it is that as well. But it seems to be ongoing. There seems to be new ones cropping up every quarter.

Last one just for Paul. You've done a good job on the working cap. Anything we should think about on the DSOs in terms of any reversals there? It looks like it's moved to sort of a new lower level. Any big changes on that front, or is this sort of the new norm?

I wouldn't go quite so far as calling it a new norm. Paul -- certainly giving credit to our team in collecting, but Open Text is still very comfortable around the 60-day mark.

Richard Tse, National Bank Financial.

Hi, John. Can you talk a bit about the competitive landscape? Some of your competitors showed a bit of softness this quarter. And if you look at Interwoven -- sort of your perspective on why they are sort of wanting to sell at this time. And any color you can provide on that that would be helpful.

So two things I would say, Richard -- one is, we have clearly been taking advantage of the disruption that EMC and IBM have had in integrating -- still even today -- Documentum and FileNet. So we're seeing wins in that area, some of that because the companies are trying to force customers to do significant, costly upgrades in these areas, and customers are looking around and saying, well, I can probably do it cheaper and more -- and faster with Open Text or with Open Text/Microsoft. So we're seeing some significant wins in that area.

The other thing with Interwoven, I would say one of our areas of -- as we look at our portfolio mix, one of the concern areas would be in the web content management, where -- like most managers -- if somebody came to me and said, our website is looking a little old; we need to spend $1 million to clean it up. I wouldn't see that as a must-have. And so what we're seeing is people -- it's not critical; people are putting off those decisions to upgrade their websites. And so I would see that Interwoven, like our web content products, are seeing some softness in the market.

And then just with respect to sort of the deals today, is there sort of any change in how they are getting done -- meaning the timing of these things as well as the potential for increased discounting on licenses?

On the discounting, we're not seeing so much. We are obviously being careful as we did previous downturns, is to chunk the products to make them not so big, so they don't have to go through Board approval, all those kind of things. So we're obviously doing that up front.

And as we look at the pipeline, we're being extra cautious and extra sensitive of each step of the sales cycle to make sure that we haven't missed anything and that the money is still there, and etc. So it's -- we're being extra cautious in every step of the sales cycle.

The good news is, many of them being our customers, we're very familiar, have good relationships, and so they're being very cooperative in helping us navigate through their purchasing cycles. So we're not seeing a significant delay even though we're being cautious in how we do it.

Blair Abernethy. Thomas Weisel Partners.

Just a couple of things, Paul. I wonder if you could just walk us through the changes in your headcount from the September quarter, just given your core business, where it's gone, and then what the Captaris business did.

Yes. So, Blair, I won't break those out for confidentiality reasons in terms of the two operating entities, but I will tell you, as we stated, that when we acquired Captaris, the worldwide workforce was 3600, and we've taken about 240 people at this point out of the workforce, so we have about 160 further to go.

Okay. So the 240 is basically out of your OpEx in the second quarter; right?

That would be correct.

Okay. And then the 160 is coming out over the next two quarters?

Over the next two quarters.

Again, just on this -- on the restructuring expenses that -- the $11.5 million that you've booked so far, it's -- how much of that was cash?

Approximately $3 million of that was cash.

And the income statement restructuring was purely the Open Text side of the restructuring?

Yes, Blair. Thanks for that clarification. It was purely the Open Text. The other is in our purchase accounting on balance sheet.

And then the other income expense -- or the other expense of 12.5 -- was that all forex?

85% virtually was forex. The majority of that is forex.

What are your plans in terms of debt reduction?

Well, yes. We didn't repeat our use of cash, which -- debt reduction is always one of the options. Repurchasing shares is an option, and of course acquisitions. So we don't specifically state which one of those three will be a priority for us as we go forward.

I mean, at this time as you know, our all-in rate on that $300 million is approximately 4%. So I would say based on today's interest rates, we might hold onto it except for normal principal repayments for the short term.

Great. And then just on your deal metrics -- on the large deals, you said four deals over $1 million?

That's right.

What -- were there any sort of multimillion-dollar deals in there, anything over $2 million or $3 million?

There was one over $2 million. The rest were just over $1 million.

Great. And last question. John, just -- I wonder if you can just expand a little bit on the government business -- it seemed to be a pretty big contributor in the quarter -- and sort of where was that coming from? Across Canada, the UK, Australia -- that kind of thing.

Right. Actually it was pretty mixed between Canada, Europe, and Germany in particular, and Asia-Pac. So it was, as I've mentioned, fairly distributed across all regions.

Any notable new customers in that?

The German -- one of the German government's -- in fact, their tax -- whenever the German equivalent is of the IRS.

Dushan Batrovic, Canaccord Adams.

The drop in the high-tech manufacturing vertical, is there anything besides some of the macro weakness or general quarterly lumpiness to make note of here? Is this a vertical that should come back to where it has been as far as being one of the dominant verticals that you participate in?

Actually, Dushan, I'm not sure there was that much of a drop in it. It was more that they were higher revenues from the -- from other sectors. So it kind of evened it out a little more. We're not particularly -- particularly when we talk about high-tech manufacturing, we also include the telcos in there, and we aren't seeing significant opportunities there. So I wouldn't see it as a decline in that sector.

Any of the smaller deals -- I mean, the deals that you signed that were in between (technical difficulty) $500,00 and $1 million, would you categorize any of those as being the type that could have been larger but were split up into smaller pieces because of a customer's reluctance to put more cash up front?

I wouldn't say so much is customer reluctance as that we tried to structure it in such a way that it is easier for them to do the deals without long processes of getting Board approvals, etc. So it's usually because, again, they're -- a majority are our customers, that it's in -- as we do it to collaborate together of what's the best way for them. We don't want our customers having shelfware. We want them to be using these products.

So it sounds like those deals do have an opportunity to grow.

Right. So another way to say it would be, the deal -- exact -- that's exactly the point, that these are not because the customers are -- have been reluctance to spend more money. They -- the part that is key though to the sales force is, you've got to prove return on investment fast, and if you can do that, then they are willing to buy.

There's been a lot of discussion around compliance. One of your competitors or one of the other industry players out there -- Autonomy coming after Interwoven -- do you see them becoming -- is that a company that you would encounter more often based on compliance being a motivator in many of the deals that are being signed these days?

We probably will. We haven't seen them to date. We rarely see Interwoven in this space. We could potentially see them in the future, but as I said, to date we haven't seen much of them.

Lawrence Rhee, Blackmont Capital.

With respect to your compliance offerings, you've talked about compliance driving growth for the better part of close to two years I think, and it's obviously continued to drive growth in this current time period. When you look into your pipeline and opportunities, how much of a runway do you think remains in terms of compliance driving growth?

So I would -- again, I -- two things on that one, Lawrence. One would be, we are seeing this whole issue is around -- streamlining business processes is growing, so that would obviously have affected the ratio. But on compliance, pretty much on a worldwide basis there are new compliance rules coming out every quarter. So I wouldn't see a reduction in that for the foreseeable future -- certainly for the next two or three years.

With respect to various verticals, do you see any other verticals that may have not been a big contributor recently that could represent bigger opportunities with respect to compliance down the road?

Not so much in compliance, but on the -- so pretty much I'd see compliance across all industries. There's no one that sticks out. You might argue that further down the road you certainly will see more compliance around financial services. But I would say that industries like government, construction will obviously be areas of -- that we think will grow.

And just with respect to financial services having a nice spike up in terms of contribution to the quarter, would you view that as a red flag, or just a bigger opportunity for you in this environment?

Some of the financial service sales were related to merger acquisition where they were using our software to help in that process. So I would see that opportunity continuing.

Barbara Coffey, Kaufman Bros.

Good afternoon. In working with the system integrators, which you've done more of recently --

Right.

Are they particularly good at certain verticals, or are there certain compliance issues that they have packaged your products with? So I'm wondering, are your direct sales force going after different opportunities than the system integrators? And sort of how to look at that dynamic?

I would say two things, Barbara. One would be that the -- obviously there are certain integrators who have a much bigger footprint in certain verticals, and so particularly for things like government -- where some are stronger than others -- we tend to work with them in that, but we also do have -- we're seeing like Deloitte and Accenture embracing this sector and doing a lot more work together in that space. So we are seeing some significant opportunities with the systems integrators, particularly Deloitte and Accenture.

And do they have any different kind of sales cycle length time that -- approach than what you're (multiple speakers) the other side of your businesses?

Typically, they will have been working on the opportunity probably for a longer time. At the time that they bring us in, the cycle is pretty much the same, the nine months. If it's a little larger, 15 months -- that kind of range. It's not -- certainly not shortening dramatically. But they usually are larger deals when we work with them.

Steven Li, Raymond James.

John, back in November you announced SAP would be reselling your product. Can you talk about the initial traction you're seeing? And are there more potential apps coming for SAP?

So yes -- to both. We saw some very good trac -- and sorry, Steven, I didn't mention in my speech that they -- we did release that product. They are reselling our VIM product. We have seen some traction which was -- it was their year-end, and so we were -- thought that maybe that they'd be busy closing out the business, etc., that they wouldn't be focusing on it at this time. But they -- we did see significant traction, and we think that will happen in future, and we are looking at another -- a number of opportunities with them for building applications -- as we are with Microsoft.

Right. And can you maybe talk about the areas you're looking at?

At this point, I can't. But I could certainly get that information for you for next quarter.

Great. And John, maybe can you also comment on just the overall deal flow from [SA] (technical difficulty) given some of the challenges they've had.

That they've had?

Yes. Is it still strong or has it -- is it down with the market?

It's -- what I would say is, is what we're seeing is opportunities for the SAP salesmen to go back and sell additional licenses into their existing base, which may be a little easier for them, particularly with things like the VIM solution. So we've seen tremendous (technical difficulty) interest in that.

As they go forward, it's -- we're going to have to watch what goes on. But it certainly this quarter has not been down. Now obviously, this is their Q4. Will it -- Q1 will be where we will see more.

But as I said, at this point in time we're seeing quite a bit where the other partners, as well, people like (technical difficulty) Microsoft where they haven't seemed to have been hit as much.

Ralph Garcea, Haywood Securities.

Just a couple of quick questions. On the government side -- again, another great quarter and you keep showing success at the federal level across most countries. Do you see an opportunity there at provincial state levels, local levels -- if you look at Australia through Europe and that -- where that market is probably three, four ex as large as is the federal market you've been successful in?

Right. Actually -- so one is, we do see this as a tremendous opportunity, and we have had some successes. As you may know, Open Text -- before we acquired Hummingbird -- didn't really do much in this area at all, whereas Hummingbird did. And we've been able to capitalize on that, and we are seeing some interesting growth in that area across the board in Europe, Asia, Asia-Pac, and North America.

Is it different price points there when you go on a per-seat level, or do sort of strike an enterprise deal with the entity like he did with the Canadian deal (multiple speakers)

It's actually more at the solution level where we would be selling for example like tax collection or driver's license scanning, that kind of thing. So it's more at a solution/problem level than an enterprise-wide site license. They typically -- they are not big enough to warrant having a massive site license, but there are key solutions that have been very -- the great thing about it is often what you'll find is that one province or one state is a leader and that if you sell it in one state, it's fairly easy to then get follow-on with those other states with a relatively low cost of sale.

Then I guess a quick one for Paul. Given the pipeline on the services side, do you think the utilization rates -- from the Open Text perspective you can maintain those levels going into the second half of fiscal '09 and then the rest of the calendar year?

You're taking me out too far, Ralph. I can tell you that we can certainly -- as John said, in the other revenue line we can see good visibility out 90 days. I wouldn't want to project pass that.

So -- I would say, Ralph, that one is -- our goal is to keep them in the low 20s and that Q2 -- this past quarter -- is usually a good one because we have a lot of additional training because of the user conference. So -- but even if you took that out, we do believe that we've made progress and we should be able to get to the low 20s going forward and on a regular basis.

Is that keeping the same rates in the respective geographies, or do you sort of have SWAT teams that -- US guys that you would send into a European engagement? Or how are you managing (multiple speakers)

No. It's -- we have a large team in Germany that does do SWAT in -- around Europe, particularly things like Nordic, the UK. We'll do SWAT teams in Benelux, things like that. But in America it's pretty much a self-contained team. There's not a lot of interchange between the teams.

Gabriel Leung, Paradigm Capital.

I've got a couple of quick things for you, Paul. First, can you remind us again how much cash restructuring costs there are to pay out?

This quarter that were paid out, Gabriel?

Yes. How much you paid out I guess this quarter, and how much remains to be paid out.

So we paid out in total the total restructuring between Captaris and Open Text, about between $5 million and $6 million. Of the combined, again, organizations I would say half of it will be paid out in cash this fiscal year, and the remaining, throughout the following fiscal years -- or year or years, because about 50% or just less than that are restructure (technical difficulty) facilities, so as you know, until we get those sublet, the cash goes out in a elongated fashion as though we're continuing to pay rent.

Secondly, just given where LIBOR rates are now, should we expect to see that interest expense line start to come down a little bit, or is the interest collar you have in place going to offset some of the benefits there, at least until it expires over the -- I think later this year.

Sure. Absolutely. The underlying base rate on the loan is coming down, as I mentioned earlier. All-in rates including our existing collar is around 4%. I would just point out the mark-to-market charge this quarter was $1.5 million. So it negatively affected our EPS by $0.02. So that's absorbed in that line already. But for between now and the end of our collar, which is the end of this calendar year, we will have a net $3.6 million to bring back into that line.

Great. And then just on the services line, any chance you can break (technical difficulty) to how much of the services revenues were associated with hardware resells?

Yes. So we're -- we're just reviewing that right now in our MD&A. So it's a timely question, and I don't have a definitive answer at this moment.

Okay. So it will look at the 10-Q I guess for that. Just lastly for you, John -- you might want to answer this; you might not want to. But just on the pending Interwoven acquisition, and I guess given the lack of sizable independent ECM venders left in the space along with your stated desire to remain independent -- at least for the time being -- do you think it's worth it for you to pursue Interwoven to gain the real estate, or do you think there's just no chance of that ever happening?

There's no chance of that happening I don't think.

Marx Schappel, Benchmark Company.

Good evening. Just one question. Paul, I was wondering if you could just clarify one more time the $12.5 million charge on the other income line.

Yes. So the -- most of that 85%, Mark, as I mentioned, is adjustments to -- FX adjustments on repricing basically inter-company loans in various subsidiaries at the end of the quarter.

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

Well, thank you, everyone, for your questions.

And just to wrap up on the quarter's highlights -- Q2 was a good quarter. We believe that business remains steady for us. The Captaris integration was accretive and is tracking slightly ahead of schedule.

And while we face these uncertain economic times, we continue to focus on meeting our profit goals, and we remain positive on the outlook for the fiscal year 2009, and I'm comfortable with the expectations on first call for FY '09.

This concludes our call for today, and thank you, everyone, for participating.

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