Open Text Corp (OTEX) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Open Text Corporation third quarter fiscal 2009 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. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Wednesday, May 6, at 5:00 pm eastern time.

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

Thank you. Hello, everyone, and thank you for joining us. My apologies for the delay. We wanted to wait for all of the callers to be connected to the call. With me today are Paul McFeeters, our Chief Financial Officer, and John Shackleton, our President and Chief Executive Officer.

And before we begin, I'd like to read the 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 's Form 10-K for the fiscal year ended June 30, 2008, and in our press release that was issued earlier today.

And with that, I'd like to turn the call over to Paul.

Thank you, Greg. Turning to the financial results for our third quarter of fiscal year 2009, total revenue for the quarter was $192 million, up 7% compared to $178.8 million for the same period last year. In Q3, North America was responsible for 51% of our overall revenue, Europe 43%, the remaining 6% coming from the rest of the world.

License revenue for the quarter was $51.9 million compared to the $51.5 million we reported last year. Maintenance revenue for the quarter was $101.9 million, up 11% compared to $91.6 million last year. Professional services and other revenue in the quarter, $38.2 million, up 7% compared to $35.6 million in the same period last year.

We reported third quarter adjusted net income of $31.4 million or $0.59 per share on a diluted basis, up 24% compared to $25.4 million or $0.48 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 73% compared to 74% in the third quarter last year. Customer support, gross margin was 83% in Q3 this year compared to 84% in Q3 of the prior year.

Professional services and other margin was 21% compared to 19% last year, increase in margin is attributable to better utilization rates and the grouping of higher margin hardware revenues into this category. Pre-tax adjusted operating margin, or interest expense, was 24.4% in the third quarter compared to 24.2% last year. With respect to our adjusted earnings, the effective tax rate for the quarter is 30%.

Income for the third quarter, in accordance with GAAP, was $22 million or $0.41 per share on a diluted basis, compared to $7.3 million or $0.14 per share on a diluted basis from the same period a year ago. Fully diluted share count for the quarter was approximately 53.4 million shares.

As of March 31, 2009, (inaudible) was $201 million compared to $179.5 million as of June 30, 2008. Accounts receivables as of March 31, 2009, $111.7 million compared to $134.4 million, June 30 of last year. Days sales outstanding was 52 days as of March 31, compared to 60 days as of June 30, 2008.

Operating cash flow in the quarter was $72.9 million, compared to $49.8 million in the same period last year. Q3 is normally the strongest collections quarter of the year due to the higher percentage of customer maintenance renewals at December 31.

As in previous quarters, we have added a chart in the press release to provide more visibility into the effect of foreign exchange on our operations. It shows the percentage of revenues and expenses, US and other major currencies.

Net effect in our operating income due to FX was immaterial. However, we did see a significant impact on gross revenues and expenses compared to Q3 of fiscal 2008, as major currencies have declined anywhere from 15% to 25% compared to the US dollar.

For example, for the approximately 55% of our revenues in foreign currencies, and assuming an overall average decline of the US dollar of 20%, would result in an impact to year-over-year total revenues of approximately $20 million. Of course the same effect benefited our expenses, as indicated, had a negligible effect on the bottom line, to reflect the effective hedging of our operations.

As confirmed last quarter, we will not be breaking out the financial effect from the Captaris acquisition, although it continues to be accretive. We are on track to have the Captaris business on our operating model by the end of our fiscal year.

In Q1, we stated we would reduce worldwide employment by approximately 10%, (inaudible) from a post-acquisition combined work force of 3,600 reducing to 3,200. As of March 31, we have acted on 70% or approximately 280 employees. Remaining reductions for the most part will occur through the balance of the fiscal year. In addition, we'll continue to rationalize operating facilities in both Open Text and Captaris.

We also stated that the Open Text restructuring charge will be approximately $20 million, and this charge will be recorded in our statements in income. Breakout of the charges is $11 million for work force and $9 million for facilities.

This quarter we took a restructuring charge of $1.8 million, and to date we have booked a $13.2 million restructuring charge with the remaining expected in Q4 and a portion in Q1 of FY10. Approximately $2.5 million in cash was paid out during Q3, and year-to-date cash paid was $5 million.

As part of our purchase accounting for Captaris, we also indicated that the cost for reducing the workforce and facilities would be approximately $20 million. Breakout of the charge is $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 March 31, the remaining $6.4 million to be a further adjustment to the purchase price in Q4, and Q1 FY10. Approximately $2.4 million was paid during Q3, year to date cash paid was $4.5 million.

We continue to confirm that the cost savings 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. $9 million has been achieved to date.

As part of the acquisition accounting, we fair value the acquired deferred revenue, customer support contract, total adjustment for Captaris $2 million. $500,000 was written down this quarter.

Now I'll turn to the Company's pre-tax adjusted operating margin model. We are confident in our plan to maintain expenses in the 14% to 16% range for development, 24% to 26% range for sales and marketing, 9% to 10% for G&A, 2% for depreciation. Our operating net margin will remain at the upper end of our publicized range of 20% to 25%. A copy of our business model is available on our website, part of the investor PowerPoint presentation.

We anticipate a reduction in our effective tax rate for fiscal 2009, no more than 28%, although we continue to use 30% for this quarter. Cash taxes as a percentage were also decreased into 15% from previously reported 15% to 20%.

As you have probably seen, we have announced our intent to acquire Vignette for consideration of cash and shares. Proposed issue of shares will result in a dilution of approximately 6.7%, and the cash portion of the transaction will be fully funded by the combined cash of the entities and will not require use of debt.

I'll turn the call over to John.

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

I'm happy with our performance in a difficult environment. I'm very pleased that we remained in our margin model and met our profit goals. I'm especially pleased with a strong cash flow from operations, and satisfied with our constant currency revenue growth.

As Paul mentioned, we generated $52 million in license revenue in the quarter. Of this license revenue, 29% came from new customers, 71% came from our install base.

In the quarter, we had good performance in North America, which generated 51% of total sales. Europe was a little slower, generating approximately 43% of total sales. And Asia-Pac remained constant at 6%.

Approximately 60% to 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're finding that there's renewed demand for our classic ECM solutions, which achieved rapid and measurable return on investment. Particularly in the areas of streamlining and automating business processes.

In Q3, we saw license revenue by vertical as 15% from government, 15% from high-tech manufacturing, 13% from energy, 9% from financial services and 9% from consumer products. In the quarter, we saw good diversification, both by vertical sector and geography, with continued vertical strength in the areas of government, utilities and telcos.

Taking a look at the transactions in the quarter, there were two transactions over $1 million, and seven transactions in the $500,000 to $900,000 range. This trend reflects our sales model of chunking our larger deals into smaller parts, that can be recognized over several quarters. This makes it easier for our customers to receive budget approval and shorten the sales cycle.

Our average transaction size was approximately $370,000, up slightly from the same quarter last year. Examples of significant wins in the quarter include, United Launch Alliance, a joint venture between Boeing and Lockheed Martin, which provides spacecraft launch services for the US government. They purchased additional licenses for content life cycle management and Microsoft SharePoint integration, to help manage the documentation of work flow processes required for their launch, and for procedures for certification and authorization.

Hydro One Networks, which operates Ontario's high voltage transmission systems, purchased the Open Text ECM suite for content life cycle management and CLM services for SharePoint. Open Text Solutions were selected because of their ability to integrate into Hydro One's current platform, which includes SharePoint and SAP to help create a best in class information management technology platform.

Burger King Holdings, the world's number two hamburger chain, purchased SAP and voice management by Open Text and Colfax, OCR. The Open Text Solutions were selected because of their tight integration with SAP and Colfax to help provide a quicker implementation process and reduce total cost of ownership.

Loblaw Companies Limited, Canada's largest food distributor, has chosen the archiving of records management capabilities of the Open Text ECM suite. And finally, the Swiss Post purchased Open Text document access and archiving for SAP, the rollout of accounts payable and data archiving solutions.

From a sales operations standpoint, we closed the quarter with a combined sales force of approximately 270 quota carrying sales executives. License revenues from partners was approximately 49%, which is above our range of 30% to 40%, but we're expecting to move back to that range going forward.

Our strategic partnerships with SAP, Oracle and Microsoft are doing well, and we will continue to focus on selling solutions that support our alignment with these partners. This quarter we announced that we acquired Vizible, a small Toronto based company for under $1 million. Vizible's 3D digital media interface technology will further expand our digital asset management and web 2.0 solutions.

On the product side, we announced that our new e-discovery solution has been extended to Open Text's e-doc's customers. Now organizations, particularly large legal departments, will be able to significantly minimize the need for third-party processing and will be able to control the costs of litigation by culling irrelevant information.

Regarding Captaris, as Paul mentioned, the integration is slightly ahead of schedule and was accretive in the quarter. We expect the Captaris business to be in our full operation model by the end of the June fiscal year.

Regarding Vignette, this addition would continue to reinforce our position as the largest independent ECM provider. And would further our market presence in ECM with additional strength in web content management and provide strong records management expertise, that will help in our compliance-based positioning with customers. Vignette has a very strong customer and partner base, and both would gain from an expanded solutions portfolio and the support of a much larger ECM company.

We continue to see a strong pipeline despite the global economy, but with customers taking slightly longer for approvals. There is continued demand for compliance-driven solutions, as well as ERP integration products that produce rapid ROI. This was reinforced by our customers at our recent content day events in Germany and the UK, where we had record attendance.

I also want to remind everyone that our license revenue seasonality trend in Q4 should be similar to what we've experienced in previous years. Obviously this could be impacted by FX fluctuations.

But our focus remains meeting our profit goals and cash flow goals for our shareholders, and we'll continue to manage the business accordingly. Overall IT spend appears to be flat year-over-year, but the industry analysts are still suggesting security and ECM are key initiatives going forward.

And while I will leave it to the analysts to predict the ECM growth rate, we believe that we'll continue to perform at the top end of their range going forward.

On that note, we are comfortable with the first call EPS consensus expectations for the fiscal year, and we'll update the street after our acquisition offer from Vignette has been voted on by their shareholders. Before we open the call to questions, I'd like to remind our participants that our offer is in front of Vignette's shareholders, so please restrict your questions to issues covered in our press release earlier this morning.

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

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions). Your first question comes from Scott Penner with TD Newcrest, please go ahead.

Thanks, John, just on the Captaris deal, I know it is only the second quarter, but do you have any achievements of note on the cross-selling side?

Actually we're seeing some, particularly in the utilities and government, we're seeing, with the Captaris OCR and our interface to SAP products, we're seeing some significant deals in those two areas.

Okay. And on the -- I noticed you said you were comfortable with the first call earnings guidance, and obviously last quarter you said you were comfortable with both top and bottom line.

Right.

Is that by design that you're no longer--

It is mainly the FX fluctuations, it is hard to calculate what they're going to be. As we've seen with the natural hedge that we have, we're absolutely certain will not affect the bottom line.

Okay. And on the -- just on the non-compliance related businesses, on the -- you mentioned the areas of payables, do you have any new products coming up there?

Actually we're seeing quite a number of new products that will be coming out on what we call the back office streamlining processes, so a lot of work flow integrated with both SAP and Oracle. And then on the front office, particularly around our web 2.0, the new Vizible products, et cetera, we're seeing a number of product solution areas there that you'll be seeing in the near future.

And then just lastly, what are you seeing as far as updates on the competitive landscape? What is going on with IBM and EMC?

The -- for the past nine months we have seen significant wins against them. They seem to have been in some kind of disruption, probably with internal organizations, et cetera.

On a global level, it is interesting, about two quarters ago we saw US, particularly in the US, but North America in general, where budgets were kind of being cut or were being held. We then saw last quarter -- we saw that in the UK, and then this past quarter we saw it in Germany.

The good news is, we're seeing a comeback in the US and we're beginning to see improvement in the UK. So that we're hoping that Germany will have a similar following within one more quarter, that they should be back to spending in these areas, as well.

But on the competitive side, we're not seeing much compared to competition.

And just to, Paul, I think you mentioned, I just want to be clear on the tax rate, you mentioned that going to -- did you say no more than 28% and what was the timing on that?

That's right, Scott. No more than 28%, and that would be applicable for the fiscal year, 2009.

Okay. So we should see some sort of, let's say, adjustment in the fourth quarter?

Exactly, Scott.

On the interest expense, Paul, in the past there's been a fluctuation relative to some instruments there. Were there any -- was that -- that item have any kind of impact again?

It did this quarter, Scott. There was a $800,000 credit on that non-cash mark to market, which is, as you point out, has caused the fluctuation. So credit of 800,000 was booked this quarter.

Okay. And just to be clear , that is included in the adjusted EPS

Yes.

Okay. Thank you.

Your next question comes from Tom Liston with Versant Partners, please go ahead.

Thank you and good afternoon. John, just on the comments about the revenue guidance, I haven't double checked the numbers, but I don't think the currency's moved that much sequentially since our last call at least, year-over-year it certainly has. But when you last gave the guidance, I don't think it has moved much, or Paul, do you have some numbers around how much that has moved versus your revenue streams?

Well, I think Tom, there is -- yes, it has moved again negatively but what we're pointing out is the impact year-over-year.

Okay.

In other words, could we just talk about it -- it has weakened out there and we talked one month into the quarter last time, and there was some debate about the growth rate of ECM, and you said you've worked it in your forecast and discounted extra this time. And even with the currency effects, there's still a, looks like a license revenue miss.

Can you talk about what has changed, or if it has changed, because it doesn't seem to be all just currency on a sequential basis since we last spoke about guidance in the market.

Yes, so as well as the currency, you're right, Tom, is that there is, as we said, particularly in Europe, some slight delays in acquisitions. But we're beginning to see that pick up. We are, again, scrubbing the pipelines, discounting the pipelines even further, but having said that, the pipeline is still very healthy.

Okay. And, Paul, on deferred revenue, the incremental gain you have sequentially, that is a seasonal cause, year-over-year it is down, is that mainly currency, or can you just talk about renewals in general.

Sure, I can. It is all currency. Tom, it is all currency, it's a pretty significant effect on the balance sheet. Our renewals are staying in the 92%, 93% range. Deferred revenue had not been adjusted as (inaudible) only as a result of adjusting foreign currencies on the balance sheet.

Okay. And finally, obviously you can't talk specifically about Vignette until it closes, but traditionally most of your acquisitions have been at least in some growth mode or a very minor decline when you acquired them, and allowed you some time to get that onto your business model. Obviously last quarter, Vignette's license was down 29% and overall revenue down 24%. What do you think your experience brings to be able to manage a company or potential acquisition maybe in a larger decline mode than most of your historic acquisitions?

Actually, Tom, I think both (inaudible) that had been declining, like 30% previous two years to our take over, as well as Hummingbird that was declining significantly and unprofitably. We turned that around fairly fast, putting our products in with their products, we're able to stop that and again particularly protect the maintenance base.

So we think with Vignette, they've got a great customer base, some good products, and we think within the space is now the leader, we think we can stop that dramatic fall off of license. Their maintenance has remained fairly steady.

Okay. Thanks. I'll pass it along.

Thanks, Tom.

Your next question comes from Richard Tse with National Bank Financial, please go ahead.

Hi, guys. Just wondering if you can maybe comment at all in terms of when this deal does close, how long do you think it will take to cut over to your operating model, will that be a one or two-quarter event? How should we see that?

Rich, this is Paul. I think for now, the best we would offer you is that, we would consider it to be accretive in the first year of operations.

Okay.

We could get more visibility at that time.

Right, and with respect to the product line, their strength in web content management, how would you see that fitting in with the existing red dot offering that you have?

There is a couple of things. They have some very strong large customers, high-end, heavy-lifting type applications, very similar to what we had with our Gauss product. They have also got some analytical products that are very strong as well.

In addition, I think their records management team, very strong people there, so it would be a great compliment to us.

But would you be keeping sort of the both divisions, or would you be integrating the products?

Seeing as we don't own the company yet, it is probably not appropriate for us to comment on that.

Okay, fair enough. Just finally, with this being sort of the big remaining play out there in the public market, and with no sort of big candidates left, what are you guys doing in terms of the new product development front? Last year I think you spent a lot of time talking about web 2.0, there's going to be fewer plays out there for you to acquire of this size. So, can you give us a gauge in terms of what is happening on the R&D front and organic initiatives?

I think the key thing, Richard, put it this way. What we're seeing in today's market are these issues around being able to do rapid return on investment, streamlining business processes, both back office and front office.

If you look at most corporations, about 25% of their expense come from the back office. 75% from the front office. So, helping customers reduce costs of their front office or improving costs, improve services to their customers, we're seeing as the key issues.

I think, as you saw with the Vizible acquisition, we see this whole web 2.0 rich media management as being key for our future, and that's where a lot of the development efforts are going.

Okay. Great. Thank you.

Thank you ,

Your next question comes from Joseph (inaudible) from Deutsche Bank, please go ahead.

Hi, good evening, thank you very much for taking my call. There is a couple of questions that's already been asked but I have a couple more. The first one is, within the limits of what you can comment on the Vignette acquisition. Can you give us a sense for the type of revenue synergies you're looking for by integrating the products, maybe with a couple of practical examples, maybe in specific verticals, et cetera.

The second question I have is, my understanding is that the Vignette portal platform is actually using autonomous technology underlying it, assuming the acquisition closed, is that something that you would continue that relationship from an OEM perspective or you would actually be replacing that with your own technology. Thank you.

On the last, Joseph, again until we own the company, it is not appropriate. Once it is approved, we will absolutely provide you with a detail of our plans of what we would do.

But just to give you some general comments on the first question, really, about what might we do with the product. As we said, they have some very strong brand names in the web content management that I believe would allow us to support those companies more effectively, would be able to cross-sell some of our other products into those key customers.

They have a very strong group of records management folks that are, around compliance we see this as major growth areas for us, around compliance. And so that would be a natural fit as well.

So between the strong customer base that they have, the ability to cross-sell and up-sell and provide them a fuller suite of products, and support them more efficiently on a global basis, I think that would be the key. As I said, as well as the strong records management group that they have, which with 60% of our products selling into that space, would be a natural add-on to our organization.

Okay. Thank you very much.

And if I may just add one last follow-up, are you in a position to discuss what other targets that you consider and eventually why did you choose Vignette? Thank you.

I think within the ECM space, obviously Vignette was one of the last major players in this space, so it was -- as well as we felt -- we felt from both a geographic and product-wise, there were synergies there. Other areas, obviously under consideration would be as we look at streamlining back and front office, we would be looking at application solution vendors that work in these areas.

Okay. Excellent. Thank you very much.

Thank you, Joseph.

Your next question comes from Paul Steep with Scotia Capital, please go ahead.

Geat, thanks, well I'll take a shot at it one different way, which is on the Vignette side, is there any reason, John or Paul, to think that this deal would work any differently than your operating model to other prior deals, maybe with a little more tempering, given the economic climate?

I'll take that one, Paul. Again, we would not really be able to talk about how we're operating or integrating this business before the acquisition, so I appreciate you trying to come at it from another angle. But, as you know, we're a Company that works very hard on maintaining our operating model.

Got it. Fair enough. Actually one quick clarification from you. Can you just remind us on the deferred revenue write-down for Captaris on the quarter?

Yep. The total write down on the acquisition was $2 million, the impact for this quarter was $500,000.

Okay, that is what I thought you said. The last one would be, why would we assume I guess, John, that you guys wouldn't look to go maybe further afield for further acquisitions and segments that would be adjacent, things like BPM and other segments in and around adjacent ECM?

That would be what we would look at.

Okay, fair enough, thanks, guys.

Your next question comes from Lawrence Rhee with Blackmont Capital, please go ahead.

Hi, just a couple questions with respect to Vignette, if I may. Just from a high-level -- can you just add some color around their customer base, and whether or not you can give even a percentage of what type of customer overlap there exists with Open Text and Vignette?

Couple things. One is, they have a smaller customer base but a fairly high brand image, brand recognition base. A lot of overlap of customers. Very large customers, we have a lot of joint customers, and obviously we're well entrenched in those customers, and would see a lot of synergies and cross-selling potential in that customer base.

Got you. And also with respect to just the price paid, would you be able to add some color whether or not, were you guys the only players at the table or were there other vendors sniffing around Vignette as well, if you're aware?

Again, I think that will all come out, Lawrence, as we get into it, and all of that information will be made available. It's probably a question you should ask them.

Great. Okay. And, lastly, just clarification, I had my notes that you expected to realize what, $17 million in cost savings in the next two quarters, which includes this March quarter and June quarter. Can you just quantify how much of that $17 million you realized the cost savings this particular quarter.

$6 million this quarter and $9 million year-to-date.

Great. Thanks, guys.

Thanks, Lawrence.

Your next question comes from Mike Abramsky with RBC Capital Markets, please go ahead.

Thanks very much. John, I realize you've been quite consistent on saying you can't talk about Vignette, so I'll ask you a question about Vignette. Are you reluctant to sort of comment at this point, just, is there some chance that the deal doesn't get done?

I think it is just natural prudence, until it has been done, it wouldn't be fair to the shareholders of Vignette to start making speculations of what we might or might not-- or they might or might not do. We don't foresee any problems. We think they're a good joint synergies that would be good for both shareholders.

Okay. But is there a chance that the deal gets done at a different price, or something substantially different than what we've seen at this point?

We don't anticipate any.

Okay. Just going back over sort of the last couple of quarters in both your outlook and also performance. Could you reconcile for us, your comments have been fairly consistent on macro-demand for compliance, as well as your pipeline remaining healthy.

Yep.

But in the last couple of quarters, you've been pulling in your outlook in terms of what you're comfortable with, first it was revenue, in the last quarter it was seasonality and 90-day pipeline. And now it's just EPS.

Yep.

So, are you seeing, is revenue visibility declining on the deal delays because of the economic department, like you said in Europe, et cetera.

Right.

Do you expect that to trough, or you're just not sure. How do we think about the trend going forward?

It is a little bit of both. So as I said, if you looked at the US, where we didn't lose deals, it was just almost they stopped spending for 90 days, and then started releasing the funds, so that's now picking up again.

We saw that in the UK and we now saw it in Germany. Should we anticipate that we will see that in Asia-Pac next quarter, and so we're just being even more conservative than we've been. The good news is, is though we're not losing deals, they just are being delayed.

But does the delay give you some, like is there visibility to those actually closing, or is that's what's kind of more difficult to see, is to sort of when those things will and if come through? Delay can be, we're just not getting the signature, or delay means we sort of know we're getting it but it is sort of stretching out.

Right. And I think that is what is happening, is that people usually from a customer base, the usual sales cycle chain, they're being suddenly new requirements in that chain that the customer -- that the, say it was the CIO, suddenly there are new requirements within that company, that make them need to do certain things. So there is additional steps, if you will.

But what's happening is they are closing, and so it's the uncertainty of, are more steps going to be put into the space, the visibility, the knowledge that they're going to close is still there. It just has impacted us on the number of closes.

Okay. And is that kind of current comment on now focusing in EPS consensus reflective of still perhaps that currently lower visibility in the current quarter that you're in right now?

Actually, so what happened is in the US, we're now seeing that clarified and much more defined. UK has picked up. We're still anxious in Germany, and then obviously we're saying there are other areas we might experience the same thing, so we're going to be additionally cautious because of that.

Okay. And then lastly, just with regard to Vignette and a kind of high-end products, are there any low-hanging fruit either in your existing customer base or Vignette's customer base for sell-in and sell-through, that look interesting to you?

Yes, particularly the analytic tools that Vignette have. As I mentioned to Lawrence, we have a lot of large customers that we share as -- and so opening up that whole product suite to those customers we think will be a lot of low-hanging fruit.

Okay.

Things they might have wanted but couldn't get as easily.

Okay. Thank you very much, John.

Thank you.

Your next question comes from Dushan Batrovic with Canaccord Adams, please go ahead.

Hi, thank you. So, John, it sounds like things did get a little bit worse since you spoke in January. I wanted to get a sense as to what that actually looked like and when that actually occurred. Was it February, March, I guess another question I'm asking, the question is around linearity in the quarter. And so far what you've seen in April, are you extrapolating April for the rest of the quarter, when you say that you're comfortable with EPS, or are you banking on any improvements this quarter?

For example, Germany, if you had asked in January, our customers would have said there are no budget issues, everything is a go. And then in March it was, as the economy hit them, the GDP issues went from, I think 7 to flat, almost overnight, that they suddenly became cautious.

And so we hadn't -- it was almost like in the last weeks of March that this happened in Germany. So all we're doing is extrapolating and saying, could that happen in Asia-Pac, how long will it take to recover in Germany -- what we found in the US was typically 90 days, and in the UK it picked up after 90 days.

So we're doing a little bit of extrapolation over that. On top of that obviously, is the FX, who knows what is going to happen?

When you mention the big deals being chunked up here, has that process accelerated of late based on what you're seeing in the economy?

Yes, we've been trying to accelerate that for the last, certainly six months.

And could that impact your commentary around how we should think about license seasonality at some point?

It could eventually do that, and we continue to look, so far -- obviously when we do acquisitions like Captaris, we continually look at will that impact our normal seasonality. So far it hasn't, but we'll continue to look at that, and obviously with Vignette we would need to look at that, as well.

Last question from me, on Vignette, obviously, any pressure in perhaps entering into this transaction a bit earlier than you would have ideally wanted to, based on their own process of evaluating strategic alternatives. And I ask that because of the Captaris integration still hasn't fully been completed and economic conditions are kind of tough.

I would say that the Captaris integration is going very smoothly. You know, a little ahead of schedule. And wouldn't really -- the people who are integrating the Captaris team would not be the same group that would integrate the Vignette team.

And so, no, this is a -- we see this as one of the last large ECM vendors, we see them as very compatible and synergistic. So this is a long-term strategic acquisition that the timing was, we weren't neither rushing nor delaying. We felt that it was the right time at the right price that was fair for both, all constituents.

Okay. Thank you.

Thank you ,

Next question comes from Gabriel Leung with Paradigm Capital, please go ahead.

Thanks, Paul, just have two questions for you first, just on the tax rate, just to confirm, you said that fiscal '09 tax rate should average around 28%, right.

No greater than 28%.

Any sense of what 2010 would look like for Open Text as a stand alone entity?

I'll comment on that, if I could, next quarter and give a better visibility for FY10.

Okay, and just on the cost of debts for the remainder of the calendar year, which I think the color is still in effect, should we think about 5% as the cost of debt?

Yes, I think that would be on the conservative side, which would be fine.

Okay. And then a question for you, John, with regards to your outlook for the remainder of the year. I think you had commented that we should expect to see the same sort of seasonality as we had in the past. Is that correct?

Yep.

And I think previously you talked about, in Q4 you typically see a 20% to 25% sequential improvement in license revenues. Is that correct?

That's right.

Barring whatever foreign exchange is, right? I think just based on where spot rates are right now, the things remain unchanged , it looks like you will probably get a sequential benefit on the Euro and the pound, so I guess the question is, all else being equal, are you saying we should expect to see maybe a 20% to 25% sequential increase in

We can't say that.

But that is what you're implying. Okay, that's fine.

Any other questions, Gabe?

No, that's it, thanks.

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

Thank you. John, one more question on Vignette. Would you characterize Vignette as having more overlap compared to a Captaris, which might lead to stronger cost synergies.

I would certainly see Vignette as more Hummingbird-like, in that they had a lot of similar overlap of products, but possibly a different -- in a different market, in some cases.

Okay. And--

But certainly the cross-selling opportunities will be there.

Okay. Great. And can you also comment on what kind of erosion you saw at Captaris, was it worse or better when you guided 30% erosion?

It is tracking pretty close to what we expected.

To what you guided?

Yep.

Question for Paul, can you actually give us what the impact was on the deferred revenues, the FX impact you talked about?

I cannot off the top, but I think if you use the same kind of ratios I gave you before, revenue, it was probably in that range.

Okay. Thanks.

Your next question comes from Blair Abernethy with Thomas Weisel Partners, please go ahead.

Thank you. Just a couple of things here. On the cash that you have on the balance sheet today, assuming you're going to use $40 million to $50 million for this acquisition. Of what you have left, Paul, how much do you foresee as your base working capital needs of cash?

Perhaps I'll answer it Blair, that we're reasonably comfortable, anything above $100 million is not a hard policy, no covenant or restrictions to do that, but that is where we are comfortable.

Okay, and how much of your $237 million cash today is off shore versus US based.

50% of it is in North America, however we can access a significant portion of the non-North American through transfers of funds without withholding tax. So we could access the rest of it.

Okay, so is there any withholding tax on the offshore cash?

On that -- no, none that we would transfer with (inaudible) withholding tax (inaudible).

Okay. So given that scenario, what's your view towards further reducing your debt over the course of the next year, with Vignette in the works?

I think we're kind of in the same position here, we're all in tax rate -- sorry, that rate is 5% or less, we think that's very effective rate, and as we continue to look at opportunities, continue to look at opportunities in the marketplace, I think the order of cash preference will likely remain with acquisitions.

Okay. Thank you.

And shifting gears over to maintenance, you touched a little bit on maintenance renewals. What about the pricing environment on maintenance, and sort of what have you done with the, assuming that some of the Captaris business has rolled in January?

Well, our team is doing an effective job of renewing not only the percentage as we indicated, but also in some cases getting increases, perhaps the rate of increases is not as strong as in previous years, but certainly we are getting increases on average on everything else.

Okay. So--

And so, in other words, we have seen pressures where customers are requesting certain things, but we're working with those customers, and are able to maintain that maintenance. We don't have a lot of shelf software out there, and so justifying the need for the maintenance is not too difficult for us.

Fair enough. Fair enough.

Just, John, just shifting gears to over to you, on the competitive landscape, I'm wondering if you could give us a sense of how you're seeing any changes out there with, in the legal vertical with Interwoven and now with Autonomy. And also in terms of Oracle and Stellant, we're hearing they're showing up a little more often. Are you seeing that?

Let me take that one, first. From what we've seen, we've seen nothing of Oracle, in fact, from what we've heard is most of that team have been totally disbanded, that most of the Stellant executives are no longer with Oracle. So certainly not seeing them.

On the Interwoven, they've gone after the smaller legal firms, and we really haven't seen much of them or Autonomy over the past 90 days. Obviously we will look as they go forward.

Okay. Great.

So far no, the main competition has been IBM and EMC, and as I said we continue to do well in those areas.

Okay. Great. Thanks, John.

Thank you ,

Your next question comes from Paul Lechem with CIBC, please go ahead.

Thank you, good afternoon. Just wanted to ask a little bit about the partner channel this quarter. You mentioned it was at 49% above your target range. What if anything, was unusual this quarter to cause it to be that high?

SAP was doing very well, particularly as we do the Captaris OCR integrating business process work flows into the SAP applications, there has been a lot of opportunities and we see one they did very well, we see the pipeline picking up there with them as well. So SAP was probably the surprise. I know many of the analysts think that knowing SAP had a tough quarter, that that might have affected us, but in fact was not the case.

When you give the 49% number, how do you actually define what a partner sale is? Is it something they've worked with you on, or something they brought you? How do you actually come up with that 49% number?

It's Paul, it's a direct receipt of funds from them. So it is not, if you're asking -- it does not include any influence transactions, so it comes directly from the partners or through the channels.

Excellent. And one more question for you, Paul, is the guidance range you have given for the profitability, the operating profit model. What would it take, if anything, to move you above your current guidance range? How do you see this evolving over time?

Well, as you have seen it increase over the years, I understand the question we're at the upper end of that range and I have indicated in the past we would review it at the end of the fiscal year to see if we might move that range up. As we continue to benefit from the cost savings that we've discussed this quarter, it's only tempered by integrating acquisitions who were not on model and bringing them to model.

So that combination, Paul, that we have to come out with by the end of the year and then give you a little bit better visibility on that. For now we're staying with the upper end of our range of 20% to 25%.

Excellent. Thank you very much.

Thank you ,

Your next question comes from Ralph Garcea with Haywood Securities, please go ahead.

Good afternoon, just a couple of questions, I guess. Following up on your March comments, of the deals that were delayed over the last couple of weeks of March, how many have closed through April and early May?

A good percent of them have closed. I don't know exactly, but it's tracked very well.

And of the original size of the deal, as you sort of had it in your pipeline, would you say it is 20% less of what you had expected, or 50% from your chunking comment?

Let me make sure I understood what you said, Ralph. Of what we were expecting last quarter that moved in, are we expecting the same amounts?

Yes, if you thought the deal was going to be $500,000 let's say to close in the last couple of weeks, did it close at $500,000 in April.

Yes, it closed at the same amounts.

Okay. I mean, as the process started with regards to Vignette, and you were doing your due diligence, were you getting feedback from customers and in your partner channel that this would be a great business to integrate into the rest of your portfolio?

Yes. As I mentioned, we have a lot of joint customers who, in many cases suggested why hadn't we done this.

Just going back to your larger deals. You mentioned two or three on the SharePoint side.

Yep.

Which, would you say SAP is, or the SharePoint's now caught up to SAP with regards to the size of your customer base, or are they still, is SAP still--

We're certainly seeing a lot of progress. I'm very happy with the Microsoft partnership.

Okay. And just lastly, Vignette has been predominantly a 65% America's, 30% Europe.

Right.

Would you see the product road map going forward selling Vignette into American and red dot and go through Europe, et cetera, or would you continue developing all three products?

Again, we can't mention that. We'll get back to you on it in detail on that, but I would say that geographically that -- it wouldn't be an issue. I would see on a worldwide basis.

And then I guess for Paul, sort of to what Paul was saying on the previous question, assuming this deal closes and you get to a billion run rate, it should be easy to increase that operating margin range from 25% up to 30% given the scale?

Nothing is that easy, Ralph. No, again I will stay with what I said. We continue to work toward our operating model, right now upper end of 20% to 25%, and as we move forward, we'll update that model. But I wouldn't conjecture at this point that that's going to move up. Until we, one, have the acquisition and we are able to talk about the integration.

Okay. Thank you.

Thank you ,

Your next question comes from Blair Abernethy with Thomas Weisel Partners, please go ahead.

Thanks, just a quick follow-up, Paul. I don't know if you hit on this or not, but on your income statement you had a $11.5 million, $11.6 million in other income. Can you just walk us through what is in that number?

Yes, it would be fairly -- it's pretty much all FX, again Blair. It went the other way last quarter as you know and it was primarily all FX there. It's the same this time, although it is a credit, as you know this quarter.

Okay. That's great. Thank you.

Your next question comes from Dushan Batrovic with Canaccord Adams, please go ahead.

Hi, sorry, just a quick follow up. The tax rate comment, 28% for the full year, I think would imply a slightly lower tax rate for Q4. And when you talk about being comfortable with consensus EPS for Q4, does that -- are you assuming that lower tax rate?

No, I wasn't -- no, we're not.

So you're assuming with the 30% tax rate?

Right.

Perfect. Thank you.

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

Okay. Thank you for all your questions, and just to wrap up on the quarter's highlights, we achieved our profit targets and generated strong cash flow. And while we were impacted by the global economic slow-down, we believe the business remains on track, and we'll continue to focus on meeting our profit goals.

Captaris integration is accretive and will be on the model by the end of June. And with the continued demand for compliance-based solutions, we remain positive on our outlook for 2009 and beyond.

And as I mentioned, we're very comfortable with the EPS expectations on first call for FY 09. This concludes our call for today, and thank everyone for participating on your questions.

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