Open Text Corp (OTEX) 2010 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Open Text Corporation second quarter fiscal 2010 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). I would like to remind everyone that this conference is being recorded today, Wednesday, February 3, (technical difficulty) 2010, at 5 PM Eastern. I would now like to turn the conference over to over to Mr. Greg Secord, Vice President, Investor Relations.

Hello everyone, thanks for joining us. With me today are John Shackleton, our President and Chief Executive Officer; (technical difficulty) and Paul McFeeters, our Chief Financial Officer.

During the course of the 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, while making a forecast or projection as reflected in the forward-looking (technical difficulty) [information].

Additional information about the material factors or assumptions that could cause actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information, and the material (technical difficulty) assumptions that were applied in drawing a conclusion while making a forecast or a projection as reflected in the forward-looking information are contained in Open Text Form 10-K for the fiscal year ended June 30, 2009 and Form 10-Q for our first quarter ended September 30, 2009, as well as in our press release that was issued earlier today.

With that, I'd like to turn the call to Paul McFeeters.

Starting with the financial results for our second quarter in fiscal 2010, total revenue was $247.8 million, up 19% compared to $207.7 (technical difficulty) [million] for the same period last (technical difficulty).

License revenue was $72.7 million, up 12% compared to $64.9 million reported last year.

Maintenance revenue was $130.3 million, up 30% compared to $100.4 million last year. Maintenance revenue was reduced by $600,000 as a result of purchase price adjustments related to the Vignette and Captaris acquisitions.

Services and other revenue was $44.8 million, up 6% compared to $42.4 million in the same period last year.

We reported second-quarter adjusted net income of $50.1 million, or $0.87 per share on a diluted basis, up 47% compared to [$34.0 million] (technical difficulty) [or $0.64] per share on a diluted basis the same period a year ago.

Gross margin for the second quarter, before amortization of acquired technology, was 74.8% compared to 73.7% (sic - see press release) in the second quarter last year. The increase is primarily due to a favorable revenue mix.

Professional services and other margin was 18.7% compared to 24.7% in the same quarter last year. The decrease in margin and is primarily due to lower margins on acquired professional service contracts and some delayed implementations. Margins targets in services as 20%.

Pretax adjusted operating margin before interest expense was 28.8% in the second quarter compared to 25.9% in the same quarter last year.

The adjusted tax rate for the quarter was 27%, the same as Q1, 30% in the same quarter last year.

Operating cash flow in the quarter was $32.5 million compared to $39.8 million in the same period last year.

Net income was higher by $20 million. There were restructuring cash payments of $7 million and negative working capital changes of $20 million, essentially a timing difference. Net income for the second quarter, in accordance with GAAP, was $21.2 million or $0.37 per share (technical difficulty) [on a diluted] basis compared to $0.8 million or $0.01 per share on a diluted basis the same period a year ago.

There were approximately [57] (technical difficulty) [million] shares outstanding on a fully diluted basis for the quarter.

Foreign exchange movements (technical difficulty) affected the current quarter's adjusted earnings by less than $0.01 per share.

The mark to market impact of a change in fair value of the interest rate collar was $1.2 million (technical difficulty) in the current quarter. The interest rate collar expired on December 31, 2009.

On the balance sheet at December 31, 2009, cash was $247.6 million compared to $275.8 million at June 30, 2009. (technical difficulty) that period the net cash paid for the Vignette acquisition was $90.6 million.

Accounts receivable was $143.4 million, up from $115.8 million at the end of our June quarter.

Days sales outstanding was 52 days as of December 31, 2009 compared to 58 days for the previous quarter and 53 days at the end of Q2 last year.

As part of the Vignette acquisition, we stated that we would reduce worldwide employment, continue to rationalize facilities in Open Text and Vignette. To date we have recorded an (technical difficulty) [within] special charges of $20.6 million and expect to incur an additional charge of approximately $12 million and (technical difficulty) [$9] million for workforce reduction and $3 million for facilities. The cost savings as a result of these actions continue to be in line with our previous estimates at an annual run rate savings of approximately $40 million to $50 million compared to the combined cost base, pre-acquisition.

The acquisition of Vignette was accretive to our results in Q2, slightly ahead of our original plan.

Now I'll turn to the company's pretax adjusted operating margin model. We are confident in our plan to maintain expenses in the 14% to 15% range for development; 24% to 26% for sales and marketing; 9% to 10% for G&A; and 2%, depreciation. Our annual operating net margin is projected to be in the 22% to (technical difficulty) percent range, and we expect to operate at the upper end of that range.

And now I'll turn the call over to John.

Hello everyone, and thank you for joining us today.

I am very pleased with our performance this quarter. Sales were consistent across the (technical difficulty) in all geographies and verticals. Our strong license revenue growth in the quarter has brought us what we expected year-to-date.

In Q2 North America was responsible for 50% of the revenue, Europe for 43%, with the remaining 7% coming from Asia-Pac. Fairly consistent with Q2 in prior years.

The core ECM business did well, driven by (technical difficulty) [compliance]-based solutions. In the quarter we saw license revenue grow in most verticals, with 22% from government, 19% from high-tech and manufacturing, 15% from energy, 13% from financial [services] (technical difficulty), and 10% from health care and life sciences. (technical difficulty) [license] revenue, approximately 35% came from new customers and 65% from our installed base.

Most of our large transactions were from follow-on sales to existing customers. The average transaction size was approximately $290,000, slightly down from our last quarter's $300,000.

Examples of significant wins in the quarter include Suncor Energy, and Open Text customer since 2004. Suncor extended its Open Text ECM solutions to include Content Lifecycle Management, eForms, and SAP integration.

Marathon Oil extended their existing Open Text ECM deployment (technical difficulty) [SAP] applications.

Commerzbank also extended its investment in Open Text.

And Air Liquide, the world leader in (technical difficulty) industrial gases, purchased Open Text Content Lifecycle Management and Open Text Extended Collaboration for about 14,000 users. They have been an Open Text customer since 2003.

In the quarter we had approximately 350 quota-carrying sales executives.

License revenues from partners and resellers was approximately [forty-] (technical difficulty) in the quarter.

SAP continues to be our largest partner, contributing approximately 10% of our license revenue in the quarter. But Microsoft and Oracle also influenced large transactions and continue to show increasing demand for solutions in archiving, records management and compliance.

This quarter we announced an expansion of our ECM solutions for Oracle applications with the introduction of new content access and accounts payable solutions.

Regarding the Vignette integration, it's progressing well, and we are very encouraged by the synergies we see from the combined businesses.

On the product side Vignette Content Management 8.0, an enterprise scale web content management solution which was requested by customers for (technical difficulty) that improved usability and included a new user (technical difficulty) [interface] and an ergonomic design that makes it easy for non-technical business users to create their own websites.

Keeping with our commitment to Vignette customers, we also released Vignette Portal 8.0, a solution that allows organizations to provide customers, employees and partners with a rich media Internet experience.

At Content World in November we also demonstrated our soon to be released mobile offerings for the entire Open Text ECM Suite. This will add many unique capabilities for our ECM customers, and we see strong demand for these content applications on mobile devices.

We are working with RIM, Apple, and Motorola, and others to position ourselves as the leader in ECM ability.

Also in the quarter we were positioned in the Leaders Quadrant of Gartner's 2009 Magic Quadrant for Enterprise Content Management (technical difficulty) on an evaluation of the Open Text (technical difficulty) [vision] and ability to execute.

Industry analysts continue to tell us that IT spend in the environment for FY '10 will (technical difficulty) challenging, but they believe the ECM market will grow in the mid-single-digit range. We still believe we will be at the top of this range.

As a reminder, our revenue seasonality trends in the coming year should be similar [to] (technical difficulty) [seasonality] we experienced in fiscal 2009.

From a profitability (technical difficulty) [standpoint], we're clearly on-track with our 22% to 27% adjusted operating margin and expect to be in the upper end of that range, as Paul mentioned.

We are also comfortable with current first call consensus revenue estimates for Q3 and Q4.

So now I would like to open the call for questions.

(Operator Instructions). Scott Penner, TD Newcrest.

Just first of all, maybe on the web content management side, which has been a source of weakness for the past couple of quarters, did you see any of that spending come back? Which would be I guess a quarter ahead of what you had expected?

Yes, that was -- it has come back, and it was quite a bit of the license revenue came from that area.

Okay. Now, you mentioned that seasonality should be in the range of prior years. Given a strong December quarter, I guess you'd expect that there's still some additional WCM backlog?

I would keep it within the range we've seen before. As you remember, Q3 we typically do zero to minus 5% of Q2, and then Q4 we usually do 5% to 15% of Q3. Really traditional seasonality. But -- and that is for licenses.

Right. Okay. That's helpful. And then you mentioned a couple of the -- a couple of large deals that tacked on SAP integration. How is it (technical difficulty) [progressing] from the SAP front on the new reseller agreement?

It's going very well. We were very pleased with the SAP relationship, both in Europe and in North America. And we are also looking at some future additional products that they will be selling into that channel.

Great. The Vignette -- now, with the Vignette 8.0 and the Portal 8.0 released, how long do you expect until there is -- until I guess all of the installed base have those products, have it installed, and are positioned to upgrade the functionality?

Many of these large corporations typically do a major upgrade once every 12 months or so, so I think to get (technical difficulty) [their] cycle of upgrades, it's probably going to take 18 months to -- for the majority of the large installations.

Okay. Paul, just to -- if you could remind me, the mark to market that you said was $1.2 million positive this quarter, I am pretty sure that's in the [adjusted] (technical difficulty) [income] number, and just confirm that. And what was the number, positive or negative, last quarter?

Last quarter it was about the same, so the answer is, yes, it's in adjusted. It's in the interest line in our financial statements. It was about the same last quarter. A year ago there was actually the other way, a charge of 1.5 -- just in case you're comparing the year-over-year (technical difficulty), that's the big change in the interest line. So positive about 1.2 last quarter, negative essentially 1.5 in Q2 of '09.

And just last thing again, Paul, the deferred revenue balance on the balance sheet dipped, as it always does in the December quarter. But it seemed to dip by more than (technical difficulty) [years].

No -- I hear you. I think unfortunately somewhat you have to pick up, as you know, the Vignette deferred revenues, so it's -- there's a delta there to deal with and a little bit of, as you know, the write-downs on acquired maintenance, deferred maintenance, both with Captaris and Vignette. But adjusting for that, we think it's fairly normal or fairly seasonal, as you point out, to come down. So period over period our analysis shows it's on a normalized basis.

Okay. Thanks. I'll pass it along.

Tom Liston, Versant Partners.

Thank you and congrats on the quarter.

Just a couple of questions around -- there were some comments obviously, Microsoft, and we've heard and you're discussing Oracle improving. Can you quantify that any more or give us some -- you talked about some of the areas, but can you give us a little more context on how they are progressing and maybe some expectations for this year?

So basically what we are seeing with Microsoft, we'd seen initially pickup in the US. We are now seeing more pickup in Europe. And on (technical difficulty) and so in general, kind of extending SharePoint installations, cooperating with the SharePoint products where we added -- give them additional functionality, scalability, that kind of thing. And it's pretty much, as I said now, it's where -- it started in the US, and now it's on a worldwide basis.

On the Oracle side, we are doing a number in the area of PeopleSoft and particularly around expense management, that kind of thing. So we are seeing some interesting pickup.

Has anything changed in go-to-market or resources invested such that that uptick has occurred?

It's -- we have invested more on the Oracle side. We'd already invested [significant] (technical difficulty) in the Microsoft relationship, so that's pretty stable. But we have invested recently in the Oracle side of things. So we would see certainly within the -- by the new fiscal year we should see increases in Oracle activity.

And obviously went through some leadership changes at year-end. Can you just comment on those. And is there any other pieces you need (technical difficulty) [to] layer down as you take it to the next level?

No. So on the -- obviously as we are growing to be a $2 billion company, we need to bring in exec's who have been in that billion-dollar plus (technical difficulty) [organizations], and so we brought in people like Eugene Roman, who is heading up -- he's our Chief Technology Officer; James Latham, our new Chief Marketing Officer. So these are guys with a lot of experience. Below that no (technical difficulty) we'd -- [we're] (technical difficulty) pretty comfortable now with the team that we've got.

Just a quick one for Paul. He said the collar is off that debt now? Or against -- when you [applied it] (technical difficulty) it's not -- it's done now?

That's right.

So that's the reason you're not paying down debt, obviously is the low interest rate, because it's still based on LIBOR; correct?

That's correct.

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

Mike Abramsky, RBC Capital Markets.

Thanks and congratulations. John, just want to reconcile -- you beat handily Street on the top a million and on the bottom line by $0.17. So why just say you're comfortable with the next two quarters at Street? Because wouldn't that sort of be lowering your guidance or your outlook? Because last quarter you said you were comfortable with full-year top line and bottom line.

And we are (technical difficulty) full-year top line/bottom line. The Q2 -- if -- Q1 was a little weak, if you remember, on the license, and so we feel that Q2 has made that license revenue up, so we feel pretty comfortable in line.

Right. But what -- last the quarter you were guiding -- this is before the Street's obviously going to include this quarter in their numbers. So isn't that -- why wouldn't you flow through the numbers and say you are now comfortable with higher Street? You were comfortable with Q2, Q3, Q4 last quarter, so if you've beaten on this quarter, wouldn't that flow through to a higher outlook?

You could say that we want -- we prefer (technical difficulty) [conservative], and in this economy you never know.

Well I appreciate that, but I'm just -- and I don't want to beat a dead horse here, but are you then saying you have lower visibility now on last quarter and the last two quarters of the year? Or this is sort of an anomalous situation and maybe not sustainable through the end of the year? It's like why would you not now say, okay, we are comfortable with Street plus 40 and Street plus $0.17?

What we are saying (technical difficulty) is that we feel year-to-date, the two quarters together, we're exactly where we needed to be on our budget. And we -- so we feel as looking at Q3 and Q4, we feel the first call estimates are in line with what we think. And we would leave it at that.

All right. Still a little confused there.

On Vignette, what was the contribution in the quarter? And is the license mix of Vignette -- you said was pretty high. So is that -- I assume that's above the normal 80% to 85% services that they -- comprises --?

The GAAP contribution for Vignette was $2 million. Total revenue was $30 million. And they were about one third -- in the past typically one third in total revenue for license.

So this -- is that what is the case this quarter, is it higher?

No, it's not higher. It's not reducing quite as fast as John anticipated, which is why we are doing better also this quarter, that we said it became accretive. So it's less than that as a percentage (multiple speakers) go break it out, but it's a bit less than that as a percentage now.

Okay. And then just to clarify kind of going forward, we should think about license for the next couple of quarters, as you said, down 0% to 5% from this level, and then Q4 up 10% to 15% from that level?

Yes, which would be in the range of the first license revenues.

Okay. And then SAP (technical difficulty) percent -- I think this is the first time you've sort of talked -- broken that out. Is that unusually large?

For SAP this is their Q4, so this is usually their best quarter. But it was certainly better than last year.

Okay. And (technical difficulty) again, is that sustainable in terms of that contribution? Or is that (multiple speakers) just a Q4 thing?

It's -- oh, I would say it's sustainable but based on their seasonality. So obviously they have a -- always have a very strong Q4 but a fairly low Q1. We would expect to follow that seasonality. But absolutely sustainable. We certainly see the pipeline growing with SAP. We are very happy with that.

Great. Congratulations.

Richard Tse, National Bank Financial.

Just a couple of quick ones here. The tone sounds like it's improved, obviously. Can you give us a sense of what you're hearing from your accounts versus last quarter? Because I think you were -- it seemed a bit more conservative last quarter. Obviously with these results (multiple speakers) you're a bit more comfortable there.

I think the key was -- is if you looked at last year, we -- as usual at our November Content World, we -- the year -- last year we talked to a lot of our CIOs that were looking at investing -- starting new projects in the new year. And that did -- some of that didn't happen. So we were being cautious, cautiously optimistic that -- because we heard this year that the same thing, that a lot of new projects were going to begin in the new year, and this time they did. So I think that's where the -- we were (technical difficulty) just --

While we think the pipeline is certainly picking up, I think there is still an ongoing cautiousness around -- from the IT spending, etc., that they are being very careful where they put their money. And luckily, as the analysts point out, one of the key areas that they are spending is in the ECM space.

Okay. And I guess specifically on the products, you mentioned compliance being the driver here. Can you give us a bit more color in terms of the products specifically and sort of the (multiple speakers)

So a [lot] (technical difficulty) still around the compliance, eDiscovery, but as we -- as [some] (technical difficulty) mentioned earlier, we have (technical difficulty) [up] this quarter in the web content management side of things, which was a pleasing (technical difficulty). The other piece would be, we saw quite a [bit] (technical difficulty) SAP integration to SAP applications.

Okay. I expect that some of the products (technical difficulty) like the social media and mobile. What are you guys targeting in terms of the first year of those product launches of your base that you think could convert and sign up for those product here?

(technical difficulty) seeing significant interest, particularly in the government space with social media and mobile. And for mobile particularly in the military side of things. We -- it's a little early to say. I could tell you better in Q4, as we release the products next -- in the next quarter what the pickup will be. Certainly in governments we see quite a take-up. We are very bullish on what's happening in the government space with the mobile computing.

Okay, great. Thank you.

Brian Freed, Morgan Keegan.

Good quarter. Real quick, as you look out at the competitive landscape, you seem to be gaining or maintaining share versus the big guys like IBM and EMC. But there is a pretty large number of (technical difficulty) fast-paced competitors popping up on the radar screen. Can you talk a little bit about how you see the opportunities for ECM playing out in the Software as a Service part, how you look to address that over time?

(technical difficulty) in the small- to medium-sized companies we see Software as a Service as a great opportunity. And (technical difficulty) we are -- we have services in that area, we will expand services in that area, particularly again governments are very interested in this. But I would see it also more in, as I said, small to medium.

So we are looking at this very closely. Things like social media, digital asset management, etc., are naturals for this. And so we are talking to a number of our customer base.

The interesting thing is I think we'll see a blend of (technical difficulty). So for the big corporations, while they might do SaaS or cloud computing for a specific application, there will be still things they will want to keep very secure behind a firewall.

(technical difficulty) [interesting] that we see the SaaS products mainly as a speed to deploy, not so much as a cheaper alternative. So people -- if you're looking where the IT organization is installing or upgrading new products once a year, if I can get it from an outside vendor (technical difficulty) weeks or certainly months, that's (technical difficulty) alternative (technical difficulty) that's what many of the customers are looking for.

Thanks.

Blair Abernethy, Thomas Weisel Partners.

Nice quarter guys. A couple things. You've talked a little bit about the Vignette web content management. What's happening over on the RedDot side?

On the RedDot side, again, what we see is this is more for the small, medium (technical difficulty) companies. We see a big interest in that, and particularly in the European space. And so we will actually be focusing and expanding the functionality of the RedDot product, focused on that small- to medium-sized companies, but also particularly around the Software as a Service opportunity with that product.

And did that business -- did that grow year-over-year?

It was probably flat year-over-year. And again, I think as we've mentioned before, as people saw the Vignette acquisition, it was -- they were holding off to wait and -- do we invest now? Do we wait to see what happens, etc.? Now I would expect it to pick up.

And in terms of your large deals, you didn't break it down very much for us. Can you give us a sense of number of deals, and maybe (multiple speakers)

Oh yes. Sorry. There were six deals over $1 million (technical difficulty) deals, so -- and that -- and it was probably 50/50 between government and oil and -- oil/gas utilities. And then on the -- we saw quite an increase of deals in the $500,000 range. I don't have that number off the top of my head, but we'll get it for you. I think it was around nine, which was up from last year.

Were there any deals north of $2 million or $3 million? Individual deals?

A couple of those deals were north of $2 [million] (technical difficulty)

Okay. Great. Also, on the -- can you talk a little bit about the legal verticals, which was (technical difficulty) one of the core areas for Hummingbird? Just sort of how you see that vertical playing out these days, and what you're doing in that market.

We -- what we see around eDiscovery is a very hot market, and what we see with the large law firms, a great opportunity. We also though are selling more to the large corporation legal departments where they're actually reducing their external legal costs. So we see that as a much bigger market than the selling to a specific law firm. And that's where our focus has been on eDiscovery, and will continue to be.

How has that vertical held up during the recession?

Actually very well because of eDiscovery, particularly in the financial services area.

Great. And just a question for -- just another question on the sales side. What is your rep count? And sort of the -- if you break out where the reps geographically are located now?

The -- so the quota headcount is 350. And it's pretty much I would say -- 50% would be North America, 40% would -- 43%, 45% would be Europe, and then the 6%, Asia-Pac -- as it follows the revenue.

Okay. Great. Last question for me. Paul, just on the (technical difficulty) what are -- going forward what are your debt repayment plans?

I think for the near term it will still be just to make the minimum 1% repayment.

Okay. Great. Thanks very much guys.

Paul Lechem, CIBC (technical difficulty)

On the -- going back to the license number in the quarter, should we view that as sort of a one-time catch-up from the pent-up demand of the web content management customers holding off around the integration period of Vignette?

Actually yes (technical difficulty) and with also a little bit of catch-up on Q1 where things got delayed a little bit. But yes.

So the -- your views on the actual pipeline and backlog at this point in time versus (technical difficulty) [ago] ex that kind of pent-up demand. Can you give some color around just the general sales activity?

We see the pipelines stronger, certainly. But again, I think there is still with our CIOs a kind of cautious -- while they're starting projects, they are concerned that their budgets might be cut again. So they are being very cautious in the way they do things.

Some of the things we have done, again, is the chunking of large deals to -- so that they would -- might be lumped into three or -- three quarters, four quarters, that kind of thing. And so we're -- and we see people wanting to do that.

Okay. And you made some changes to your US sales force in terms of organization and focus in the last year. Can you give us (multiple speakers) some sense of (technical difficulty) where that is, actually what you're seeing? Or where -- you've completed that process. Is there more to come? And what does it mean going forward?

So basically that focus was to focus more on the customer base, to provide more support to that customer base, and more of a large (technical difficulty) process. We have completed that process, and we are seeing the results of that I think. Again, one of the strong reasons for Q2 was that the US did have a good quarter. Having said that though, I think from an economic side of things, the US is still probably hurting more than most countries.

Right, okay. On the SAP reseller agreement, the expanded reseller agreement you signed with them last quarter, is it too soon to get -- to give us any tangible (technical difficulty) that it's actually working? Or when should we start to see tangible signs? And how can you sort of gauge that?

Right. So I think the key -- obviously a leading indicator is that SAP is coming back to us asking to sell more of our products. So that's an actual. I believe we are actually their fastest-growing -- if not the (technical difficulty) [growing] partner, certainly in the top two. And there's a lot of interest around this area from the SAP reps. So we certainly see significant growth this coming year, looking at their pipeline.

And do you have insight into their pipeline?

Oh yes. We share our pipelines on a very regular -- we have a very close working relationship built, and yes, we do, we share both our pipelines.

And then two quick questions for Paul, if I may. (technical difficulty) one (technical difficulty) is on the timing of the remaining Vignette restructuring charges. Well, I shouldn't say Vignette exclusively, but the restructuring charges from that, stemming from the acquisition, are they still likely to be done by the end of this fiscal year?

Certainly the charges will be, either [show] -- there may be some continuing cash flow payments past the end of the fiscal year, but (technical difficulty) the balance that I referred to of $12 million to be all [accrued] by the end of the fiscal year and charged to the earnings by the end of the fiscal year.

Okay. On your amortization of intangibles, is there anything expected to roll off the current level anytime soon? Or should we expect it to kind of remain in this ballpark?

It will remain in this ballpark, including the Vignette of course increase, for a few years. The -- we'll have -- the schedule will show in the 10-Q, but it will remain at this level for a few years.

Okay, thank you very much.

Derrick Wood, Wedbush Securities.

You said web content management is picking up, obviously some of it due to some quarterly catch-up. Aside from that, are you seeing greater willingness to spend? Or are web content management initiatives still a little lower in priority?

I think you're right. It's still a little lower in priority. I think the traditional ECM compliance, document management, records management interfacing to ERP systems is still the main [driver] (technical difficulty) but we have seen, particularly for companies who (technical difficulty) are kind of rich media, who do a lot of their commerce through (technical difficulty) have begun to open that up again and to initiate projects.

And what's -- it may be too early, but what's the feedback been on the 8.0 release?

From the beta sites we've been working on, it's been very positive (technical difficulty) one of the good things that has come of it is the products are much more [stable] (technical difficulty) the way (technical difficulty) the QA and releases are a little more reliable and consistent than had been in the past. And so the feedback we've got (technical difficulty) as well as a lot of the features in that release were kind of customer requested, and they have been requested for probably two years. So there's quite an interesting anticipation of using the product.

Just to get some clarity still on the WCM side, so the catch-up, was that more on the Vignette side or the RedDot side or a combination?

It was a combination.

Okay. And in terms of the outlook, you guys aren't really changing your stance obviously at this point, but what would it take for you to get more positive or better visibility or confidence in growth beginning to accelerate sustainably going forward?

I think the key area of nervousness for me is the US economy. Very positive in Europe, very positive in Asia-Pac, it's just concern over the US. Canada also doing very well.

Last question and I'll let you go. On the SAP front, just can I get some clarity on how you guys record revenue? I thought it was in arrears, and so a lot of that revenue would come in January. Has something changed? Or did SAP just have a more upfront quarter?

Well, it's basically -- in some cases it does follow the quarter, but in the recent quarters more of the transactions that occurred happened early enough I'll say in the quarter so that we were able to (technical difficulty).

Great, thank you.

Dushan Batrovic, Dundee Securities.

Just to touch on your outlook one more time, still trying to gauge your level of conservatism there. And is it safe to assume that you are leaving some room for -- in the -- if the economy does deteriorate further, some of the pipelines, some of the visibility that you have, you're leaving room for some of those to be severed or some of those projects to get cut, just in case? Is that a fair way to interpret what you're saying about your [outlook] (multiple speakers)

That's right. If you -- if we looked at last year, we had business in the pipeline that (technical difficulty) that had been committed to that suddenly budgets got pulled back, and while they're -- they had every intent of doing business, they no longer had that budget. So we -- we're just being cautious.

Okay. All right. So if those projects don't get cut, then you should do a little better than perhaps your outlook, okay.

Right. Yes.

And also just can you remind us of your priorities for cash right now? If you're not really planning on paying much debt off in the near term, what's the plan for the cash?

It's primary -- again, we would have three uses, although I already spoke to not likely going after reduction of debt. We do have an outstanding repurchase opportunity, which is probably kind of second, so first remains and has been for a while, acquisition opportunities.

And you still see a pretty good pipeline there?

A very healthy pipeline. In fact, it's probably picked up.

And last question from me is just on the sales organization, some of the adjustments you've made, quite often there are disruptions that come with those types of moves. Have you -- nothing is in the numbers, the numbers were great this quarter, but have you seen any -- even anecdotally any disruptions that still might have impacted your group over the past couple of quarters?

Actually we've been -- we just had our achievers' club this past week and very positive feelings, very -- I feel very comfortable with the team on a global basis. We'd started this change over a year ago, and so it really has -- it's just beginning to pay off, we believe, and we see there will be a stabilization now and continue to grow.

Terrific. Thanks very much.

[Gabriel] (technical difficulty) [Leung], Paradigm Capital.

Just going back to the discussion around acquisitions (technical difficulty) priorities, are you (technical difficulty) on your traditional document management and web content management play? Or are you started looking beyond your core ECM offering to expand upon? And can you talk about some of the things you're looking at?

Yes. So really what we're looking at is in the traditional document management, etc., a (technical difficulty) more of a regional type thing, where we might look to increase our footprint in (technical difficulty) [Asia-Pac], or in Europe there are certain areas where we need more professional services. Actually in Canada also we need more professional services to help our customers implement our products on a more timely basis. So that would be one.

The other area that we are looking (technical difficulty) what we see in the (technical difficulty) solutions for verticals, so things like ECM for utility companies or for government or media, like BBC, etc. So there'd be companies with kind of vertical domain expertise providing the kind of ECM into those areas. That's where we see -- we see the major growth area being in government and government associated companies like utilities, health care, etc.

Secondly, on the -- I guess on the channel partner front, I think there's some news over the last week or so about SAP starting to resell some -- [a few management] solutions within -- I believe it was in insurance and finance verticals. Any comments around that and how you see that playing out between your partnership with SAP?

Yes. We see it as really -- it's normal business. We obviously work with SAP but also with Oracle, Microsoft, so SAP does the same with multiple vendors. We really have a very close relationship. It's over 20 years old with very tight integration to the SAP product. And we expect -- as I mentioned earlier, we are I think the fastest-growing partner that they have, and we certainly have talked to SAP executives that that will continue.

Just on the Oracle, you obviously talked about putting some more investments (multiple speakers) into that, hoping to get some benefits over the course of the year. Is your view that the Oracle relationship will evolve very similar to that with SAP such that Oracle reps will themselves start selling the Open Text Suite?

Absolutely. Our goal would obviously be to have a similar relationship with them, and -- but -- and we're already beginning to see that the sales reps are doing that, but absolutely. We'll start with initial specific applications, but we would see broadening that relationship.

Just a last question for you, Paul. Obviously your target in terms of the cost synergies with Vignette remain a $40 million to $50 million (technical difficulty) [annualized] basis. But can you talk about how much of that was there a recognized in Q (technical difficulty) I believe Q1 there was almost no synergies recognized. How about in Q2?

Yes, we are starting to track in Q2. I would put it in a $3 million to $5 million range for Q2.

Perfect. Thanks a lot guys.

(Operator Instructions). There are no further questions at this time. Please continue.

Great. Well, thank you for your questions. And just to highlight on Q2, we had a very good quarter with strong license sales bringing us where we expected year-to-date. We are also pleased with our profitability this quarter, generating increased operating margins and strong operational cash flow. And we also saw the Vignette integration being slightly ahead of (technical difficulty)

With that, we will conclude the call for today, and thanks everyone for participating.

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