Open Text Corp (OTEX) 2011 Q2 法說會逐字稿

Good evening, ladies and gentlemen, and thank you for standing by.Welcome to Open Text Corporation's second quarter fiscal year 2011 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 and instructions will be provided at that time. (Operator Instructions)I would like to remind everyone that this conference call is being recorded today, Wednesday, February 2, 2011 at 5 PM Eastern time. I will now turn the conference over to our host, Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

Thank you, and thank you everyone for joining us. Please note that 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 are all statements that 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 while 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 a conclusion, forecast or projection in the forward-looking information, and the material factors or 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 the Form 10-K and Form 10-Qs of Open Text as well as in our press release that was issued earlier today. With that, I will turn the call over to Paul.

Thank you Greg. I will highlight the results for the second quarter. Total revenue for the quarter was $267.5 million, up 8% compared to $247.8 million for the same period last year. License revenue for the quarter was $79.2 million, up 9% compared to $72.7 million reported for the same period last year. Maintenance revenue for the quarter was $136.7 million, up 5% compared to $130.3 million for the same period last year. Services and other revenue in the quarter was $51.6 million, up 15% compared to $44.8 million in the same period last year.

Gross margin for the second quarter before amortization of acquired technology was 75% which remained consistent compared with the same period last year. Adjusted operating income increased 18% to $84.5 million, or 32% adjusted operating margin from $71.4 million, or 29% adjusted operating margin in Q2 last year. Adjusted net income increased 41% to $70.5 million this quarter from $50.1 million in the second quarter last year. Second quarter adjusted earnings per share was the $1.21 on a diluted basis, up from $0.87 per share for the same period a year ago. Adjusted tax rate for the quarter was 14%. We expect the FY 2011 adjusted tax rate to be between 12% and 14% and cash taxes to be in the 5% to 10% range.

Net income for the second quarter in accordance with GAAP was $37.1 million, or $0.64 per share on a diluted basis compared to $21.2 million, or $0.37 per share on a diluted basis for the same period a year ago. There are approximately 51.8 million shares outstanding on a fully diluted basis for the quarter. Operating cash flow in the quarter was $40 million compared to $32.5 million in the same period last year, an increase of $7.5 million. Absent the impact of special charges included in the quarter, operating cash flow would have been $45 million for the quarter versus $40 million in the same period last year. On a year-to-date basis, operating cash flow was $89 million compared to $37 million in the same period last year, an increase of $52 million. Absent the impact of cash paid relating to special charges, the operating cash flow was $101 million compared to $54 million for the first six months last year.

On the balance sheet at December 31, 2010, deferred revenue was $214 million compared to $230 million as of June 30, 2010, and accounts receivables of $135 million compared to $132 million at the end of last year. Days sales outstanding were 44 days as of December 31, 2010 compared to 50 days at the end of last year and 52 days at the end of Q2 last year.

The sequential effect of foreign currency movement on adjusted earnings per share was a positive $0.02.In comparison to the second quarter of last year, the foreign currency impact on adjusted earnings per share with a negative $0.06.We closed the StreamServe acquisition on October 27, 2010. Total consideration for this acquisition was $57.2 million net of cash acquired. StreamServe was accretive to our operational results and contributed $0.03 to our adjusted earnings per share for the quarter. There was no change to our pretax adjusted operating model for this quarter, and we expect our annual operating net margin model to continue to be in the range of 25% to 30%. The full details of our operating model are available on our website.

Today, we announced that we entered into a definitive merger agreement with Metastorm, a leading provider of business process management, business process analysis and enterprise architecture software. Total consideration for this acquisition is expected to be approximately $172 million, net of cash acquired. The purchase consideration is subject to customary purchase price and hold back adjustments. Metastorm's revenue run rate is approximately $70 million to $75 million on an annual basis and is breakeven on profits and slightly positive on an EBITDA basis. The transaction is expected to close in the third quarter and is subject to customary approvals and Metastorm stockholders consent. At that time, we will issue more information with regard to our integration plan. Now, I will turn the call over to John.

Thank you, Paul. Hello ,everyone, and thank you for joining us today. I am very pleased with our second quarter results. We are on track for our year, and all geographies had excellent results throughout the quarter.

As Paul mentioned, we generated $79.2 million of license revenue in the quarter. Geographically, the Americas were responsible for 53% of revenue, Europe 41%, with the remaining 6% coming from Asia Pac. Of the license revenue, approximately 37% came from new customers and 63% from our install base. We had 13 transactions over $500,000 and an additional six transactions over $1 million. This compared to nine transactions that were $500,000 and six transactions over $1 million a year ago. Average transaction size was approximately $290,000 which is relatively unchanged from last quarter.

The larger transactions in the quarter came from the public sector, financial services, high-tech manufacturing and the petrochemical industry. Examples of customers that bought in the quarter include a SABIC, one of the world's top petrochemical companies in Saudi Arabia. They purchased Open Text's ECM suite to provide their 37,000 users around the world with a single integrated ECM solution, but included integration with SAP with Microsoft SharePoint and Open Text's strategic alliance with SAP and Microsoft were key factors in the SABIC selection of us. Another customer was Scottish and Southern Energy, one of the largest energy companies in the UK. They purchased several components of the Open Text ECM suite, including content lifecycle management and e-mail archiving for both Microsoft Exchange and IBM Lotus Notes.

Trinity Mirror, one of the UK's largest newspaper publishers, purchased Open Text's content management, the complete suite of Open Text Content Analytics and Open Text Semantic Navigation. Trinity Mirror will implement the suite to manage high volumes of incoming content feeds and rich media which are expected to dramatically increase during the 2012 Olympic games in London. [Montera], a leading multinational dairy company extended its investment in Open Text technology with the purchase of Content Server, extended ECM for SAP, Contract Management and CLM services for SharePoint. The Open Text ECM suite will facilitate the sharing of information and knowledge to ensure compliance and address risk management across the organization.

In Q2, we saw license revenue broken down by vertical as 20% from technology, 16% from services, 15% from financial services, 15% from natural resources and base materials, 11% from public sector, 6% from healthcare, 6% from consumer goods, 6% for industrial goods and 5% from utilities. Once again, compliance based solutions were responsible for approximately 60% to 70% of license sales. And despite government spending cutbacks, we continue to see pipelines gained in the government vertical over the long term.

From a sales operations standpoint, we closed the quarter with a combined sales force of over 364 quota carrying sales execs, up from 323 last quarter. With the addition of StreamServe sales reps plus some recent hires, we now have more than sufficient capacity to meet our annual plan.

Maintenance retention rates in the quarter remained the same, roughly in the low 90s. License revenue from partners and resellers with approximately 38% in the quarter, SAP continues to track well at approximately 10% of annual license sales. With Microsoft, we announced that we recertified our records management to Microsoft Solutions against the DoD standards. We are the only leading ECM vendor to have 35 solutions with SharePoint 2010.

The Oracle relationship is progressing well, with Oracle influencing one of the larger transactions in the quarter. With SAP, we announced a series of enhancements to our extended ECM for the use with SAP Solutions. These enhancements will allow users to access shared workspace and collaborate on content relating to SAP business transactions.

At Content World in November, we profiled Open Text ECM suite 2010. This is the largest product release in our Company's history. All the major components of the suite are now shipping and actually drove several key transactions this quarter. Also at Content World, we showcased a new release of Open Text Everywhere, our mobile ECM offering, enabling businesses, users to gain access to critical content and processes from their iPads and iPhones. Open Text Social Media was once again used as a social forum for the G20, this time in Seoul, South Korea, and we are encouraged by the demand we are seeing for our social workplace solutions. Currently, we have close to 40 customers in process installations using these new products.

This week, we announced availability of our Open Text Portal Solution. It brings together content from Open Text ECM suite and many other sources into a single, highly flexible and personalized interface for intranet, extranet and customer facing websites. As you may recall last quarter, we announced the agreement to acquire StreamServe, adding document output and customer communication management software to the Open Text ECM suite. This quarter, we introduced Open Text's StreamServe Persuasion Version 5 which helps increase the efficiency of document-based communications and improves customer engagement with easy integration with ERP systems.

As Paul mentioned, today we announced that we have reached an agreement to acquire Metastorm, a provider of software for business process management, business process analysis, as well as enterprise and business architecture. We look forward to welcoming their employees and customers after the transaction closes, which should be by the end of the current quarter. Once it is closed, we were happy to share our integration and go-to-market plans with you.

Turning to our outlook for the remainder of FY 2011, the industry analysts are telling us they expect ECM license revenue to grow at an average of 7% to just over 10%, slightly up from last quarter. This will be through 2013. And while we are not providing guidance, we feel confident with our business model . From a seasonality perspective, we are working hard to smooth out our pipeline, and we have been focusing on reviewing our sales forecast in detail and our pipeline visibility and product predictability is improving. So, in summary, we had an excellent quarter across the board, we exceeded our margin targets, delivering record profits for our shareholders and are tracking to our model for the rest of the year. We remain positive on the outlook for fiscal 2011. With that, I would like to open the line

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

Thank you. Just to -- first of all, John, you mentioned the ECM suite 2010 drove some of the key transactions in the quarter. Is this existing customers that are buying new modules within the suite or something different?

That is correct, Scott, this is existing customers buying and upgrading their suite.

Okay. And that is about the timeframe that you'd expected it to happen it?

It happened slightly ahead of what we'd expected. I was expecting it more within this quarter, I expected it to start beginning.

Right. In your commentary about some of the key deals, I seemed to notice, and maybe it is just ones that you are highlighting, more deals where there are both SAP integrations and some form, Microsoft integrations. Is that fair to say that you are seeing more of that type of business?

It is. We are seeing it particularly where customers are looking to either reduce expense or to maybe build new services, et cetera, by integrating both the unstructured data and structured around their EPC systems. So, we are seeing quite a bit of that in the pipeline.

And in the StreamServe acquisition, maybe to ask this in a way that you can answer. Just last quarter. I think you mentioned that the run rate was $50 million in revenue it was about 25% to 30% of license revenue. If we were to do the math for the two months, is that about the contribution?

Yes, that would follow. Yes, we could use the same metrics.

Okay. So, it wasn't a significant drop off in business as there sometimes is?

No, they were pretty much right on plan.

Okay. And then, lastly, and I will pass the line. The Metastorm deal, according to some numbers that are out there, looks like about 40% or so of their topline, at least as of these last numbers, with license revenue, is that about the next?

It's a bit less than that. We are not in a breakout the revenue mix. It is a little higher, as you point out. I think the last public information is 2008, so you would expect the maintenance revenue line to increase as a percentage, but it's --

It's pretty close to our model, I think, Scott.

Okay, that's fine. Thank you very much.

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

Hi, thank you very much, and congratulations. Just overall, with the -- especially the top line on the license revenue being robust, can you give us some of the dynamics in the quarter in terms of what did well, do you feel you are taking it more from competition opposed to maybe the market is growing nicely. It seems from some of the industry analysts and certainly some of enterprise software companies, there is a bit of a pickup, and certainly your more cyclical verticals seem to be outperforming and new customers were good number too. So, can you talk about overall environment and how much you see sort of trending over 2011?

I think, Tom, some -- quite a bit of it was, as you saw, we had a slow start in Q1. Some of this particular around governments where they were delaying -- even though they had the budget they were delaying, or in some cases, they were cutting. But what we have seen is, the good news was across the board, both Americas, Europe looked strong. It seemed that the UK, Germany had come back well. Asia Pac looks good. And the good news is the pipeline is building, so there is clearly an interest in this area that's -- where the people believe they can either save money or make money with these product. So, from a pipeline standpoint, it's probably the healthiest pipeline I have seen in quite a while.

And so do you have a sense on their calendar 2011 budgets, and it looks like they are increasing their ECM use? And then the second question related is do you feel like you're win rate's higher versus your competition?

The competition is pretty much the same. We would say so. We are also seeing, as Scott pointed out, we're seeing more work integrating with Microsoft SharePoint, as well as with SAP and Oracle. So, we are seeing this more of the integration under the structured data with the unstructured data to build applications solutions around that. Competitive wise, we've been doing well there for probably the last 18 months, two years. I would say the win rates are pretty much the same.

Okay, very good. And Metastorm, can you give us a sense, Paul, roughly topline growth over the last few years? And secondly, do you have any early indications of what -- that might impact your tax rate?

Actually, let me answer on the growth, Tom. Usually when we do an acquisition, we look at licenses, declining somewhere in the 20% to 30% range. We believe because of the BPM is in a growth area, as well as it is a good fit to what we are doing, we don't see the decline in licenses as much. In fact, we expect them to be fairly flat with last -- with their last year results. On the tax situation, I will let Paul answer that one.

Tom, we will just be able to get into our tax planning post acquisition. It certainly won't affect the effective tax rate 12% to 14%.

Sure. And real quick, do you know the percentage of revenue from government?

For this --

For Meta--

Down slightly this quarter.

Very good. Thank you.

Thank you.

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

Great. John, maybe worth talking about our just looping back post last quarter, how Europe has turned out, or what the turnaround there is sort of shook out like this quarter, post the results last time?

I would say they two things, Paul. One was the catch up of the deals that slip in Q1. They did come in, as well as the pipeline, which we have been focusing on heavily, has been building nicely in Europe. So, we feel that it is much more predictable, we don't see another lag. So, all in all, we've pretty encouraged with the pipeline there.

Okay. And in the US? How is that trended? Like last quarter it was good.

Yes.

It's a little shaky during parts of last year.

We've been seeing the UK -- in fact, the Americas in general, both North America and Latin America, picking up. Canada doing well, and we've seen that been building steadily for the last two or three quarters. So, it looks to be continuing to build nicely.

Okay. Fair enough. That's it for me. Thanks, guys.

Your next question comes from Richard Tse from Corm ark Securities, please go ahead.

Hi, John. Could you give us a little bit of rationale behind this Metastorm acquisition, maybe give us a sense of how this transaction came about, and how you plan on targeting it into your current base?

Right. A couple of things I would say, Richard. As we mentioned earlier, there is a lot more interest of linking structured data from SAP, Oracle ERP systems to their unstructured data, and we see the workflow obviously is being allowed to be able to do that efficiently. And while we've had work flow for quite a while, we -- I believe we haven't had enough critical mass to really grow this area. It is obviously a growth piece of the ECM suite. And the second piece of it is with mobile computing, we really, again, see the workflow piece of it being the glue that will allow people using their iPads or smartpads, smartphones to be able to access corporate data on the road, anything that they could see at their desktop. So, we see it as strategically employing going forward in the mobile area.

Over the course of the year, would you look at integrating into the ECM suites or give us a sense how that would work?

We will actually give you more detail as we -- once the deal is completed at the next call, but yes, we see integrating pretty fast.

Okay, fair enough. And just a quick question for Paul, on your other expenses it was $6 million there, it seemed to be a pretty sizable number relative to past quarters. What was that coming from?

Yes, still foreign exchange, book loss, not cash loss on foreign exchange of subsidiary balances.

Okay, great. Thank you.

Your next question comes from Kris Thompson National Bank Financial. Please go ahead.

Great. Thanks guys. Just back to the Metastorm here, do we need to think a little bit more about the segmentation of the revenue between the three buckets that you've outlined there? The BPM, BPA and enterprise architecture? Is it mostly BPM? And the reason I'm asking is, just a quick look we've had so far, it looks like SAP and Oracle are important players in that space. I'm just wondering if there is going to be some channel costs there with your new partner, Oracle and obviously your existing one, SAP. And maybe, I don't think Microsoft is a big player, is that really the reason why you wanted to acquire this company? It looks like there's a lot of integration going on with SharePoint with these guys.

Right, so Kris, to answer the first question, we wouldn't see breaking it out. Really, when you're looking at business process management, the analytics and architecture are a piece of that. So, when people buy it, they typically buy the whole package.

Okay.

Secondly, the Metastorm product is basically dot net, so obviously Microsoft centric. And so we would see helping with the share point and building the Microsoft relationship. We do have -- have had for quite a while the Java product, which we use with Oracle and with SAP. We don't see that much channel conflict in these areas. The -- typically, the work flows interface to the SAP and Oracle work flows anyway, so it's not -- it's really coexisting, not replacing.

Okay. So , I guess, what about your existing install base? Is there a lot of overlap? Can you maybe just sort of give us an idea a of, maybe Richard was trying to go here, how you guys learned about this opportunity? Did one of your key partners come to you and say you should have a look at this, it makes a lot of sense? Can you provide any more

So, the interest was particularly around the Microsoft relationship and building on that relationship, so that was a key area. But, if you look at workflow, business process workflow in general, the salespeople, the consultants, it really doesn't matter which tool you are using, its all the same. So, we think with the critical mass of Metastorm, we can do a lot more work in this area, whether it be in Java or dot net. Okay, that's helpful. And can you give us an idea of the number of employees they have? Is it 300, 350, or is that too high?

Yes, about 350 employees.

Okay. And John, while you we have you here, can you give us a little more color on your Oracle road map, just an update.

Yes, it's, as I mentioned, the Oracle piece is going well with the AP solutions as well as the archiving. We're building that, and the relationship is pretty much on track, and I'm very pleased with that relationship.

Okay, and just finally for Paul, on the Waterloo buildout, can you break out your growth CapEx or what you spent in Waterloo on the new building and how much is left?

It's about $7.5 million, the total CapEx on that would be just around $22 million. The balance should be expended pretty much in the next two quarters.

Okay, so this quarter was about $5.5 million?

About $5.5 million, yes.

Okay, thanks a lot, guys. All the best.

Okay, thanks, Kris.

Your next question comes from Stephanie Price from CIBC World Markets please go ahead.

Hi. Could you talk a bit about new customer wins in the quarter, what they were buying, and who was driving it? Whether it was the direct sales force or partners?

It was a mix, Stephanie, it was probably about half and half of with SAP particularly on the larger deals. Actually, it was pretty much with SAP and with Microsoft. And then obviously, the one I mentioned with Oracle, but I would say 50/50 with partners.

And in terms of what they were buying, compliance sounds like it is still the biggest product out there you're seeing?

It was compliance, but it was also linking, as I said. The ERP modules, most -- the whole suite of the ERP systems with archiving and e-mail management, records management, that kind of thing.

Okay. And last quarter, you talked about eight large deals in the pipeline post Q1. Did all those now close, or could we expect some of those to move into Q3?

Those, six of the eight did close, were part of that. And the other two, government ones, we do expect to close.

Great. Thank you very much.

Okay.

Your next question comes from Mike Abramsky from RBC Capital Markets. Please go ahead.

Yes, thanks very much. So, Metastar looks like a good acquisition. It's got quite a lot of enterprise customers, and it's kind of an extension, I think, of your current business. It looks like you paid a little bit more, if I'm calculating this correctly, then you did previously for other acquisitions. And I'm just wondering if that is just because of the quality of the business and the opportunity there? And if that may actually expand your acquisition pipeline a bit because of your willingness to pay a little bit more here?

Just on multiple (inaudible), it's around 2.2 to 2.3 at the lower end of the revenue range that I quoted. So, it's a little bit more, not significantly more, and it was -- also previously, John can answer the second part of the question, but the -- it was previously indicated that their revenue mix is a little higher, licensing typically what we do when we pick them up. So, that contributed a little bit to that. But as you say, that wasn't that much over some of the software related businesses.

And we see less of a decline in revenues as we integrate them, so that helped a little bit. In answer to your question, the pipeline for acquisitions we see is quite healthy. And obviously, as I mentioned earlier, particularly with smartphone mobile computing. We see workflow as the glue to a major, very important piece of that. So -- and you're right, it does expand the kind of close technologies associated with this.

And basically, based on your cash flow, it looks like you could do at least one of these size every eight to 12 months?

That would be fair, Mike, yes.

Okay, and then Metastorm, I think EBIT margins are similar, around 7% or 8%, yours are at 30%. So, if you're talking about sustainability of your margins, then either/or you're bringing in them pretty quickly into your model, or you have some parts of their business that are doing really well, like even maybe some of the legacy parts of your business, or both. So, could you just give us some perspective on that?

As we have been looking at acquisitions, I think we try to make it clear that to your point, if we are picking up companies with slight EBITDA profit as we talked about, then yes, there's a little bit of drag on the operating margin. Although I do want to point out, as you would well know, that it's going to be fairly accretive because we are using cash to acquire it. Just StreamServe at lower revenue was $0.03 accretive this quarter, and we just closed it through the quarter. So, yes, it will have some initial dilution and I think, depends on, as John indicated, that someone would not draw up in revenue we wouldn't expect like some of the other ones. But at the same time, it might take a little longer to get up to the upper end of the range of our margins and start adding to the net margin.

But that's how you should think of it, Mike. Because we said as we see growth in some of these portfolio products, we'd see the growth offset some of the profitability. Whereas some of the other products in the portfolio are extremely profitable, higher than the norm. So, if you look at it across the portfolio, we should be somewhere in our model range as we advertised.

Okay, that's good. And then just lastly, with regard to what happened in Q1 with regard to the miss, going forward now, your tone -- you prev -- is this a change in tone, John, from previously where you talked more about both execution and also potential limited visibility to demand,? You seem to be talking a little bit more about now confidence in your pipeline domestically and going forward? Is this a shift in that visibility?

I would say I'm on a macro level, we don't see the economy on a global basis getting that much better anytime soon. Although, we are seeing the pipeline for our product building nicely. But to the second piece that you said, from an operational execution standpoint, we have spent a significant amount of time on looking at the pipeline, scrubbing the pipeline, building the pipeline and looking at the predictability of the pipeline. And we've been tracking over the last two quarters, I feel much more comfortable with that.

Okay. Thank you very much.

Thanks, Mike.

Your next question comes from Sera Kim from GMP Securities. Please go ahead.

Hi, good evening. Just wondering, I understand that there was some catch-up with the Q1 delays, but I'm just wondering, were there any deals that you were expecting in future quarters that got pulled ahead into Q2?

Not really, Sera.No, we feel, as we said, it was really -- if we look at last quarter where I mentioned that the shortfall in Q1 we'd make it throughout the year, we're getting pretty close to that. And so we feel, looking at the pipeline for the remainder of the year, we feel pretty comfortable with that.

Okay. And given the strong results in Q2, how should we look at seasonality for the balance of the year?

There is no more difficult, because were not getting guidance, Sera, this is Paul. We tend to actually look at history and looking at that, and when we see history, as you know, we were more volatile last year and of course, Q1 this year. So, maybe prior to the last year for the seasonality trends. Certainly, Q3 does go down from Q2 and in Q4, it rises again.

Okay. And earlier you mentioned that the pipeline is healthiest that you've seen in a while and that you've scrubbed it so you've got -- you are pretty comfortable with it. So, in your pipeline, how many deals would you consider to be kind of these larger size deals? And would these be related to enterprise wide type deployments or just customers buying more and more components of it?

Given the tough budgets for our customers, we always tried to chunk some of these deals. And in fact, some of the ones that we have done this past quarter, even fairly large ones, do have follow on business in both coming with the next two quarters, but also in the following years. So, as we are seeing bigger deals overall, but we're also trying to offset that with spreading them and making them up with smaller transactions as well. And so, as we've been focusing on the pipeline, we think as we build the pipeline, we have more opportunity to balance the big ones with the smaller ones.

Okay. And I guess, with these larger deals, and I understand that they are chunked down, is there -- does it require larger services component? And just wondering if you feel that you've got sufficient capacity?

In general, that tends to be the case. And with capacity wise -- so as you might have seen, our professional services has picked up year-over-year. And to date, we have good capacity where we are continuing to look at this area to make sure we have the right skills. Particularly as now we look at Metastorm, we think that professional services in that area will be needed, so we probably will do more that area. But in general, we're pretty good shape for the professional services. But to answer your question, yes, the bigger deals do tend to have more professional services with them.

Okay, great. And just last question, I think earlier in your commentary you mentioned 40 customers in progress for installation for social media, did I hear right? And also, what verticals are you seeing the greatest amount for this?

Right. Government is obviously, as they seen the program and used it at the G20, they are the main leaders, but also high-tech as well. So, quite a few of our customer base has seen it and want to use it.

Great, thanks a lot.

I would say government, of the 40, the government is predominant at this point.

Okay great. And congratulations on the quarter.

Thank you.

Your next question comes from Gabriel Leung from Paradigm Capital, please go ahead.

Thanks, just want to go back to Metastorm for a second. John, I know you haven't closed the transactions yet, but can you give us a little more color into Metastorm's vertical segmentation, where they were strong in? And also, as you look into the Metastorm customer base, can you give us a sense of what sort of ECM deployment they have in place? Is there a lot of Open Text, or is a lot your competing vendors?

So, to answer the first, I would say they are strong in pharmaceutical and government, would be their strengths. But if you look at their customer list, it's very similar to ours. So a lot of joint customers that are using our products. Although, we do have a number of very large customers that we don't have. So, that would also be good follow-on business for that. But as we said, pharmaceutical and government would be that could be the key ones I would see to focus.

Okay. Just moving onto your partnerships, SAP continues to plug along nicely, it looks like you're getting some pretty good traction on the Microsoft side now. And I think based on the last update that we had with Microsoft and yourself, sounded like they were planning on putting more resources in place for fiscal 2011, both yours and Microsoft's. Are you finding that that's what's driving a lot of the new business on the license side now? Is a lot of it being driven on the Microsoft side? Or is it still being driven by customer demand? What do you think's --

Yes, I think it's more by customer demand where they are seeing, building, using these applications that they can save money or make money by integrating the structured and unstructured applications . And so, we are seeing that demand build up. Second piece of it is, for a while there, we were not seeing a lot of interest around web content management where obviously, people are not going to spend money updating their websites if budgets are tight. But we are beginning to see much more use of the portal where again, they are taking advantage of their ERP systems with their customer information systems, et cetera, to provide these services or streamline processes for their business to save money. So, I would say it is more

Okay. Just one last thing. I guess in your preamble, in terms of the outlook anyways, you talked about smoothing out some of the deal flow of the pipeline, that sort of thing. So, should we take that to mean that we could potentially see less seasonality than has been the case the past? Or, was that just a general comment on how you are doing the pipeline right now?

My goal is to try and smooth it out. I obviously failed in Q1, where it was like that. So -- but the goal is to smooth it out and try and do that. And I think generally, I think we are going to be able to do that over time.

Okay. That's great. Thanks guys.

Your next question comes from Blair Abernethy from Stifel Nicolaus. This go ahead.

Thanks. Nice quarter, guys.

Thank you.

Just a quick one for you, Paul and then something for you, John. Paul, on a large deals, can you give us more color? Were there any deals over $3 million or $4 million?

There would be one.

Okay. Was that over $5 million? Over $6 million?

Okay, no. There were a couple of multimillion, but including professional services.

Okay, great.

Relating to a comment that was made before, there were a couple like that which were fairly big.

Okay. And just on -- I missed the very first part of the call, did you give any revenue contribution from StreamServe this quarter?

We didn't, but it is $13 million. It will be in the 10-Q, so I didn't mention it, but $13 million.

Okay, great. And then John, the -- I wonder if you could give me a little more color on the -- what you're seeing in the government vertical in the various geographies. This has always been important vertical for you. And what areas, obviously we know a number of governments and under stress. What areas are you guys seeing that you're getting new business in?

I'd say there were two key areas, actually three. One would be they are looking at E government, so how can they provide services to the citizenry at a lower price and more efficiently? The second is they are trying to look internally. So, for example, like this whole social media, if you think of it, Facebook, but secure with records management, et cetera, to where they're using to collaborate within government. ANd then the third area, particularly around mobile computing, we are seeing the highly mobile workforce. So, military, police, et cetera, are using, in fact, leading edge, some pretty neat applications in this space.

Okay, great. Thanks very much, guys.

Thank you.

Your next question comes from Eyal Ofir from Canaccord Genuity, please go ahead.

Thanks, congrats on a good quarter, guys.

Thank you.

Two quick questions from me. First off, can you guys talk a little bit more about the mobile applications and what you are seeing in terms of customer demand? Are you starting to see that coming through, and when should we expect in 2011 to start seeing a ramp there?

I think so. The interest in this area is everything from things like expense management on a global basis where they can submit their expenses, track your expenses, approve expenses. But also, applications in the field. So, everything from military training in the field, and that's just in time training where they might be trying to do something, they don't know what to do, they can download and use that in line. So, there is a number of interesting applications that are being created. But the -- and workflow, obviously, is a major piece of that. And you will see us over the this coming year building applications in the space and then really start ramping in 2012.

Okay, perfect. And then, just on the -- going to the OpEx lines, I know obviously sales and marketing was up pretty significantly this quarter. You had a pretty good license revenue that was expected. But in terms of how much seasonality we should be building into that line into Q3 can you guys talk about what your baseline should be before the acquisition and then what it should look like after?

I would -- I think the way I would look at that is in do the six months, and I think if you combine Q1 and Q2 together as a percentage, that would be a good indicator for the balance of the year.

Okay, perfect. Thanks. Best of luck.

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

Yes, just a follow-up. First of all, Paul, did you say StreamServe was $13 million?

Yes. Remember, there's two months in this quarter, Scott, not --

Right. So that, if you analyze that, that's upwards of $80 million, which is a fair side higher than $50 million. Is that going -- is $50 million still the number on a more annualized basis?

Well, on the -- having said the 13, there's a little more skewing, there's still more skewing. It doesn't come in as evenly as maintenance and that. And so it would still be the annualized number we gave you at the acquisition date.

Okay. And lastly, just John, with the, what could be viewed as a reboot of the duet relationship between SAP and Microsoft, can you just remind us, I don't remember it ever being much of a factor competitively for you before, but if you could just sort of run through the history there?

Yes. So, basically, Microsoft and SAP build a relationship originally where they, from the outlook, you can access, I believe it was only two or three modules like SAP, HR, so that you could get into SAP without going -- without knowing anything about SAP, but it was only a couple of modules. This time around, they are looking more to interface to the SharePoint as opposed outlook . And again, we see it as actually an opportunity for us because we can provide the records management, documentation, security, scalability. So, we are actually looking to work with both the two partners to build solutions in this area. And obviously, with the Metastorm as well, provide work flows around those applications. So, it's an opportunity. It's early days yet, as to what they're going to

Right. Okay. Thank you, I appreciate it.

Okay.

(Operator Instructions)

Okay. Thank you, operator. So, just to recap. We had an excellent quarter for license revenue, our pipeline remains strong, and we remain committed to delivering on our margin and profitability targets for the year. Thank you again for your questions, thank you for attending.

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