Open Text Corp (OTEX) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Open Text Corporation fourth quarter and 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.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Wednesday, August 10, 2011. I will now turn the conference over to Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

Good afternoon. And thank you for joining us.

Please note that during the course of the 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 while making a forecast or projection as reflected in the forward-looking information. Additional information about 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 the conclusion, while making a forecast or projection as reflected in the forward-looking information, are contained in form 10-K, and form 10-Qs of Open Text as well as in the press release that was issued earlier today.

With that, I will turn the call over to Paul.

Thank you, Greg.

Turning to the financial results, I will highlight our fourth quarter, and then the fiscal year 2011. Total revenue for the quarter was $285 million, up 19%; compared to $240 million for the same period last year. License revenue for the quarter was $80 million, up 16%; compared to $69 million reported for the same period last year. Maintenance revenue for the quarter was $151 million, up 17%; compared to $129 million in the previous year. Services and other revenues in the quarter were $55 million, up 31%; compared to $42 million in the same period last year.

Gross margin for the fourth quarter before amortization of Acquired Technology was 73.2%, compared to 74.9% in the fourth quarter last year. Services margins were lower in the current quarter, due to supporting customers from a recent acquisitions to achieve previous commitments and delivery of service for lower than our normal rates. This negatively affected overall gross margins by 1%. The pre-tax adjusted operating margin before interest expense was $74 million this quarter, compared to $77 million in Q4 last year. Adjusted net income increased 12%, to $62 million this quarter, from $55 million in the fourth quarter last year. Fourth quarter adjusted earnings per share was $1.05 on a diluted basis, up 11% from $0.95 per share for the same period a year ago.

The sequential effect of foreign currency movement on adjusted earnings per share for Q4 was a positive $0.02. Net income for the fourth quarter in accordance with GAAP, was $29 million, or $0.49 per share on a diluted basis; compared to $53 million, or $0.92 per share on a diluted basis for the same period a year ago. This decrease was primarily related to a 1-time tax credit last year, due to our corporate reorganization that we have previously discussed. There were approximately 58.6 million shares outstanding on a fully diluted basis for the quarter.

Turning now to our fiscal 2011 results, total revenue was $1.033 billion, up 13% from $912 million in fiscal 2010. License revenue was $269 million, up 13%, compared to $238 million last year; while Maintenance revenue was $561 million, up 10%, compared to $507 million last year. Services and other revenue increased 22%, to $204 million. Gross margin for the fiscal year before amortization of Acquired Technology was 74%, which remained the same as in the previous year. Pre-tax adjusted operating margin before interest was $285 million for fiscal 2011, compared to $254 million in the previous year.

Adjusted net income for the fiscal year 2011 was $234 million, or $4.02 per share on a diluted basis; compared to $178 million, or $3.10 per share on a diluted basis for fiscal 2010. This represents an increase of 32% on adjusted net income, and an increase of 30% in earnings per share. Our overall fiscal 2011 tax rate for adjusted earnings was 14%. On a go-forward basis for fiscal 2012, we expect the tax rate for adjusted earnings to remain at 14%. We reported GAAP net income for the year of $123 million, or $2.11 per share on a diluted basis, up 38%; compared to net income of $89 million, or $1.55 per share on a diluted basis in fiscal 2010.

On a year-to-date basis, operating cash flow was $223 million, compared to $180 million last year, an increase of $43 million. On the balance sheet at June 30, 2011, deferred revenue was $256 million, compared to $230 million as of June 30, 2010. And accounts receivable was $155 million, compared to $132 million at the end of last year. Days sales outstanding were 49 days as of June 30, 2011, compared to 50 days at the end of last year.

On July 13, 2011, we announced our acquisition of Global 360. The total consideration paid was approximately $260 million in cash. We expect this acquisition to be accretive to our operations in fiscal 2012. We will record an accounting adjustment in the range of $4 million to $5 million to the acquired deferred revenue from Global 360. We also anticipate special charges in the range of $15 million to $20 million. There is no change to our pre-tax 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 acquisitions in fiscal '11 impacted our adjusted operating margins by slightly over 1%. These acquisitions, along with Global 360, which closed at the beginning of this quarter, will continue to have a similar impact on the overall operating margins of fiscal '12, as we continue to bring up the Open Text operating model. We anticipate that this will improve through the year, but will not be fully on target until fiscal '13. The full details of our operating model are available on our website.

As previously announced, we anticipate that Open Text will raise $600 million of Term Loan B debt in September, subject to market conditions. Approximately one-half of those fees will go to pay off the existing Term Loan B, plus an amount to fully repay the remaining outstanding line of credit of $73.5 million, used to close the Global 360 transaction. Based on the new term debt of 7 years, we would expect to swap some of the floating rate interest to fixed rates, just as we did with the previous debt. I would estimate that an all-in rate, including the swap rate, would be between 4% and 5%.

Now, I will turn the call over to John.

Thank you, Paul. Good afternoon, everybody.

I'm pleased with our performance this quarter, and for the fiscal year. With a 30% increase in adjusted earnings per share, we delivered strong value to our shareholders in fiscal 2011. All regions showed strength, and even with the continued tough economy, our pipeline continues to grow. As Paul mentioned, in the quarter, we generated $80 million in License revenue; with North America responsible for 51% of the revenue, Europe for 42%, with the remaining 7% coming from AsiaPac. While we're still navigating the economic challenges of global IT spend, we're seeing particular pickup in emerging markets with areas like Brazil and China. Overall, we closed the quarter with a combined sales force of approximately 400 quarter-carrying sales executives, in line with last quarter. While compliance-based solutions were responsible for many of the large transactions, we continue to see an increase in productivity-driven solutions, particularly around Web Content Management, Digital Asset Management, and our ERP integration offerings.

In Q4, we saw License revenue broken down by vertical, as 23% from financial services, 14% from health care, 14% from service companies, 14% from public sector, 13% from technology, 9% from base materials, 5% from consumer goods, and 4% from utilities. In the quarter, 40% of our License revenue came from new customers, slightly higher than usual. Taking a closer look at the transactions in the quarter, we had 9 transactions over $500,000; an additional 5 transactions over $1 million. This compared to 11 transactions over $500,000, and 4 transactions over $1 million in the same period last fiscal year. On an annual basis, we had 30 transactions over $500,000, and 23 additional transactions over $1 million.

Examples of significant wins in the quarter include Munich Re, a long-time Open Text customer, who selected the Open Text suite enterprise-wide. This ECM suite will integrate with Munich Re's main business applications, including SAP and their existing SharePoint environment. A large cabinet-level department of the US federal government has extended its Open Text ECM deployment with several new solutions, extending their compliance solutions across the enterprise. Ryan Energy, an existing customer as well, also expanded ECM deployment with the purchase of Open Text document access for SAP solutions, content life cycle management, e-mail management, and case management framework. SAP, Oracle, and Microsoft all continue to report increasing partner demand for ECM solutions in archiving, records management, and compliance.

License revenue from partners and resellers was approximately 36% in the quarter; and 40% for the full fiscal year. SAP continues to track at approximately 10% of our annual license revenue. In the quarter, we were named a Microsoft Global Launch Partner for SQL Server Denali, a new cloud-ready offering that will support our core ECM products. At SAP Annual SAPPHIRE Conference in May, Open Text was awarded 2 Pinnacle Awards, 1 the Global Software Solutions Partner of the Year, and Global Enterprise Support Partner of the Year. We also introduced a new travel receipts management solution that will be resold by SAP. Sales of Open Text Oracle-related products are up 140% from last year, and we added several new and prominent customers this past quarter. We continue to see growing demand for Open Text content access and accounts payable for Oracle applications, which compliment Oracle's E-Business Suite, as well as PeopleSoft and JD Edwards applications.

In the quarter, we announced several government partnering initiatives. We signed an agreement with the Commonwealth Secretariat, to create Commonwealth Connects, an innovative Internet gateway to connect governments across the British Commonwealth, allowing members to share information and collaborate online. In the quarter, we announced the new major release of Open Text Social Workplace that offers full integration with our ECM suite. In the quarter, Open Text also joined forces with the Institute of Public Administration of Canada to launch a cloud-enabled collaboration and social media site. Based on our new Social Workplace software, the site will connect all levels of international public service employees. Our mobility strategy remains a focus, and with the addition of Wacom Technology earlier this year, we are building our wireless apps for a growing number of new mobility platforms.

We also see BPM work flow becoming an essential part of ECM deployments, where employees are reliant on the use of their mobile devices to perform day-to-day duties. In July, we announced our acquisition of Global 360, a prominent BPM provider, based out of Texas. This acquisition furthers our strategy to consolidate leading BPM technologies. As we integrate these functions into our comprehensive ECM suite, we will be focusing on distributing BPM solutions to an even larger global market. At this time, we're planning to consolidate; we expect some typical disruption in first-year License sales. The License revenue run rates for both Metastorm and Global 360 businesses are expected to decline in about the 10% range in the first year, unlike the usual 20% to 30% decline we normally see. However, we will be consolidating both the Global 360 and Metastorm into 1 operation, and expect these BPM businesses to return to normal growth in fiscal 2013.

Turning to our outlook for FY '12, the industry analysts continue to tell us that they expect ECM License revenue growth in the 7% to 11.5% range over the next few years. After examining these projections, we remain confident with our overall pipeline. We are happy with our current operating model. We continue delivering on our published annual margin on profitability targets.

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

(Operator Instructions) Mike Abramsky, RBC Capital Markets.

John, and just kind of referring back to a question you answered last quarter on your License outlook, you had sort of indicated I think that you were expecting a slightly higher, I think 20% to 30% quarter-over-quarter. You delivered about 17%. So I'm just wondering if -- and yet, you're still I think in a positive sense talking about sustained good pipeline opportunities despite the macro, so can you just kind of reconcile that a little bit for us?

I think some of the issue might be around the new acquisitions that we've done. So we get them on board, it should well be probably up to 20%. But our fall business was right on target to where we expected it.

Can you just expand on that a little bit, John? Just so we understand what the kind of, down step in license is going to be on -- is that just an interim, or is that kind of a bit of a steady state lower run-rate for now? And then you talked about the impact of consolidation on License run-rates, so can you give us some direction on that?

Actually, Mike, I think the -- it was just as -- as we're on-ramping the Company, it was just a short-term. What I actually see is this quarter, as we're going to the new Q1, I do see as we've mentioned before, getting closer to our original seasonality. So that I do see the Q1 should be picking up much more in the 20% to 25% range than it has in the past. So I would see certainly that was -- from the Metastorm side, I would see it picking up. Sorry, and the 20% to 25% would be down over Q4, and closer to 35%.

From Q4 to Q1 would be typically down 20% to 25%?

Right.

And that's on License?

Exactly.

So that's the kind of pattern. And where you are in the quarter right now, are you still -- how are you feeling about either the issue of deal slippage and lumpiness, which is kind of typically a factor for you, the risks of those things?

Right, no, as we said, I think we're back -- we should be back to our normal seasonality and it is looking pretty good.

Okay. And then lastly, on the margins, your sales and marketing expense was up to 26% of revenue. You had 23% in Q3, and 20% last Q4. So can you just give a sense of, is this a leading indicator for investment? Because typically, if you guys see bigger headwinds, historically you have tended to kind of pull back costs pretty quickly. So can you sort of give us some color on what is going on there?

Mike, it is Paul. That really has more to do with again Q4 seasonality, and I know you pointed out compared to Q4 last year, so even on a seasonality basis, yes, it is a little higher than we might expect, and that has to do with a few larger transactions, a little more skewing of accelerators on the overall sales team. So my answer to your question about going forward is no, you would see that normalize again to our operating model going into Q1 and through the year.

And what would that operating model, just remind us on that line?

21% to 23%, in that range.

21% to 23%?

Yes.

Thanks very much.

Tom Liston, Versant Partners.

Just on a theme, could you just comment overall on how StreamServe and Metastorm are integrating and it sounds like their License might have been slightly [lucrative on the top] but just an overall commentary on integration?

So StreamServe is doing very well. In fact, a little over target for the year. And the integration in general is going well. We're very pleased with it. On the Metastorm, as you may know, in the BPM side, they do have some larger transactions, and so if things slip, it can have an impact for them. We are working on smoothing those pipelines out for them, and so as I said, I believe it is just a 1 blip as we're coming on board. From an actual just integration and operations in general, it is going very well. I think we're right on schedule if not a little ahead of schedule on the integration. And it is a good team of folks that we see.

Do you think there was maybe some hesitation as you're acquiring for some of the bigger deals to see how things shake out?

Could have been. There was a couple of delays that we saw, and I think that probably was the reason why.

And on Global 360, 1 of the reports was talking about strategic BPM growth recently being in the 30% range. Could you kind of define that for us and help talk about the profile of their revenues?

Actually, I think the analysts Gartner, IDC et cetera, they're talking more in the 11% to 13% range, through FY '13. Which seems to be more in line with what their -- what we're seeing. But a healthy pipeline, I believe.

Okay. But you would see that obviously coming down a bit just as some --

Yes. So what we see is a little bit off that, as we integrate the 2 together.

To be clear, Tom, that was -- that was a subset of the business that they were talking about.

No, that's what I was trying to hone in on. Yes. For sure. And Paul. Just for clarity, typical operating margins of 25% to 30%, you say I believe you said about a 1% hit. Does that mean off of Q4 of 25.8% or the bottom end of the range might come in slightly below that in the first part of the year.

No, Tom, in this case, also I think about our operating model on an annualized basis because as you know the seasonality affects the margin. So there was the 1% I referred to in the gross margins, when I talked about the Services cost, and the other part that was brought up earlier about sales costs I would say that was about a 1% off, I would call it kind of a normalized, even seasonality normalized Q4, so reconciling that, I put those sort of 2 points back in on a normal basis.

Talking about our operating model, on an annual basis, I think you will continue to see us in the range that we have on an annual basis, because of the continuing impact of the acquisition is about 1% as I mentioned.

Okay. Very good. Thank you. I will pass the line.

Richard Tse, Cormark Securities.

John, historically you guys have been fairly aggressive on moving on the costs here in acquisitions. It seems like less so for the recent acquisitions. Can you elaborate in a bit more detail as to why that is the case here?

On the -- particularly on the BPM side, we -- so obviously we will do the usual back-office integration et cetera, but both, if you look at Global 360, and Metastorm, they're actually quite complimentary. One of the -- the Global 360 is more focused on the content, BPM from a content aspect. The Metastorm is much more of the actual process. They're both dot-net based. So putting the 2 codes together, we see that this is quite complimentary. The other piece would be from a sales force. They got good strong sales force, and we want to continue as we see that potential growth.

And with respect to the acquisition environment, can you give us a bit of color in terms of down the road, let's say 2 years from now, what are you going to be looking at in terms of acquisitions? Looks like you've consolidated the BPM market. What else is out there? If you could try to clarify that.

Actually, what I see is the BPM market, the workflow piece if you will, it to me is the glue to content. It is the connection to content. And so I would see us building applications in this space. So for example, Global 360 has had a lot of opportunities and customers in the financial service space. Metastorm has quite a lot of companies in the health care and medical space. So I would see us building applications around that, but you are correct, I will certainly see significant growth both internally but also from acquisitions in this BPM space. And related to BPM.

Okay. Great. Thank you.

Stephanie Price, CIBC.

Just following on that question, can you talk a bit more about the cross-selling opportunities that you can see between Metastorm and Global 360 and your existing operations?

Yes, again, as we said, with the different focuses on industry sectors, financial services, versus health care, et cetera, I do see an opportunity with the ECM products, with particularly with things like our Web Content Management, as well as our Repositories Archiving as an opportunity for cross-selling into both of their existing bases, where we can sell our existing products into those bases.

Great. And in terms of a pipeline, could you talk a bit about what you're seeing and if you're seeing any sort of impact from the economy right now and also US government spending?

Yes. So on the pipeline, as we mentioned before, this past year, we've really been focusing on looking 2 and 3 quarters out, with the goal of saying, with this quarter, we would want to see 2X in the pipeline and next quarter we would want to see 4X in the pipeline and beyond that, 8X.

We're getting pretty close to those numbers across the board. We are seeing in certain governments that they are having a tough time, so we are kind of switching resources away from that to other areas. But in general, so for example, the UK, because of some of the issues that they've been going through, through IT restructuring, et cetera had a tough time. Although what we have seen is in the -- their kind of security areas, their CIA equivalents, et cetera, they seem to be doing quite a bit of work. We are beginning to see opportunities in North America and the US. More in the state and local side. But we are seeing Canadian government is coming back strong, as well as some of these opportunities in places like Brazil, and the Commonwealth countries. For government.

Okay. And just finally, on larger transactions, can you talk a bit about the solutions and verticals that were driving the larger transactions and whether you're seeing any slowdown in those markets and people switching to smaller transactions?

Actually, this is the kind of -- the puzzling issue is we're seeing bigger transactions, and it seems to be across industries. So for example, 1 was major insurance company, it was a large 1, and another was a major health care company, or health care provider, if you will, and we're seeing other than manufacturing, high-tech manufacturing, and the government. So it seems to be across sectors, and it is not -- they're not getting smaller. Although we are intentionally trying to break these up into smaller multi-year transactions.

Okay. Thank you very much.

Scott Penner, TD Securities.

First of all, just a couple of clarifications, so when you talk about the seasonality of 20% to 25%, that is on the base of business in Q4, and then we add in what we believe on Global 360?

Yes, that's right.

And then are just on the Metastorm, I guess, Paul, in the past, in your filing, you've given the quarterly or annual revenue from StreamServe and Metastorm. Could you give that again?

I can. I'm just reaching for it. If you have another question, I will come right back to it.

Sure, maybe while he is doing that, I will give him lots of time here, John, and ask you, just in general, these larger transactions, it seems like over the last couple of quarters, you talk more and more about productivity-related solutions, and obviously, with the purchases of BPM, are these -- maybe if you could just give us a little bit of the idea of the relative deal sizes of some of the productivity-based solutions, and the sales cycles relative to some of the other solutions?

Yes, so for some of these larger transactions, we're looking in excess of $10 million over say a 2-year period. And it is interesting, in that looking at using legacy systems, but accessing those systems through some kind of web-based portal, if you will, still tying all of these systems together, so you're integrating with SAP, Microsoft Outlook, et cetera, and -- but also then including mobile access, where people can access corporate information on a global basis. So it is those kind of applications, where you are still using older or legacy systems, but using it in new ways that are giving greater productivity gains. So even like the SAP expense management, what we're seeing is significant abilities to process their expenses faster, at a much lower cost to a company for doing that. Is that the kind of question you are asking?

Yes, I mean the sales cycle, given that these are -- the profile and transactions seem to involve a lot more systems, are they, are they 12 to 24 months, I mean just some idea of relative to your other businesses.

To be honest, it is a mix. Some of the very large ones, obviously, are 12, 18 months, and 1 in particular was 2 years. But some of them, some of the ones we're seeing, because of the productivity gains that we can prove, the ROI, we're actually seeing a slightly shorter shelf cycle because it is clear they can do this fast because they're using existing legacy systems. They're just connecting those systems.

Okay. Yes, your StreamServe Q4 total revenue $13.8 million. And Metastorm's Q4 total revenue, $16.6 million.

Okay. So Metastorm looks to be, call it $2 million to $3 million below what the run-rate would be. Is that a good indication of the -- what impact that deal slippage may have had.

That was 0.2%, a good portion of it, correct.

Just a couple more things. Paul, you mentioned the margins on Services, and the rationale for that. Just how long is that likely to extend?

I would say it would be -- it would improve next quarter and probably be back on or sort of normal tracking say 17% to 19% by Q2. But you will see impact at the end of this quarter.

Okay. And lastly, just here on the acquisitions that you have done, obviously have a very strong presence within the Microsoft system. What initiatives beyond just being happier to work together are there under way to work a little closer with Microsoft?

And actually, Scott, even before this, we have seen the Microsoft relationship really picking up. Some of these large deals that we talk about are with Microsoft, and it is the field force within Microsoft, are working very well together with it. So I would see it obviously with these solutions as well, it picking up even further.

Okay. Thanks, guys.

Paul Steep, Scotia Capital.

John, you've talked a little about it. But maybe just go over Global 360, the timing and even maybe the deal size in terms of valuation seem lately out of character from the past. What is sort of pushing you to maybe move faster than in the past and take on 2 decent-sized deals, in a fairly short timeframe?

Right. So what we believe is, as I mentioned earlier, within the ECM suite, we see BPM as the glue to a lot of this, so it is -- we think that it will -- a lot of our customers will use a lot more pieces of the suite, with the glue of BPM. We see in this market, the current market, with budgets being so tight, that the ability to automate processes, reduce costs, and as I said, utilize legacy systems, but while accessing new web-based social media, et cetera, we see BPM being the catalyst for driving a lot of that. So what we believe is, is that given our customer base, given our partnerships, that we can drive the BPM of both of them better than they could if they had been a stand-alone company. And so again, given the kind of code base that we saw, we're familiar with both companies, we felt it was a good fit putting them together.

Okay. And in terms of timing, I'm just making sure we're all thinking -- since this seems to be a little bit of a divergence and it looks like you're going a little more for growth in these 2 deals, which makes sense. In terms of the time frame to roll solutions out, and sort of go maybe deeper into almost sort of a service oriented architecture market, and deeper into that, should we be thinking about revenue synergies more from this deal and --

Eventually, right. So one key thing to think about is if we had just done Metastorm alone, it would have been fairly easy to just integrate synergies with the existing base quickly. As we bring the 2 on, obviously the first goal will be to integrate the 2 together and get the synergies from the 2, and then the next step then would be to integrate and get synergies from the whole -- our whole customer base. So it will probably take 2 to 3 quarters to get those, that first step done. And then you will certainly see the growth that we believe you will see in this area more in the 11% to 13% range, fairly quickly. And as you pointed out, building applications, or application templates, around the BPM is a key goal that we will be going after. Both of these companies do have some of these on the shelf today, that we think we can activate and sell into our customer base.

So should we look for, just to tie this off and 1 last 1 for Paul. So should we look for a step-up, theoretically in 2013, in fiscal 2013, to CapEx, or I guess fiscal -- even into, likely 2013, is when you have a step-up, as you ramp to pack head count, to try to tackle more apps.

No, I don't think we would need to ramp up to do that. I think given our existing team, we can do that.

Okay. And last 1 then, for Paul, just to wrap up here, the $600 million term loan, where are you in the process, and if things sort of go astray in the next little while, have we got secured financing already in place, Paul?

Yes, I mean again, if markets remain a bit tumultuous like they've been in the last little while, and we need a little bit more time, that won't affect us, because if anything, we drew on our operating line, as I mentioned $17.5 million, but as you know, we're net cash positive every quarter. So we would be willing to enable to pay that down over time, and we still have over $100 million on our balance sheet. So it won't constrain our day-to-day operations. But clearly, we expect the markets, and we hope maybe is a better word to stabilize and we fully intend to go out and raise the $600 million.

Just as a backstep, the revolver which renewed in October is already basically pre-done.

Right.

You are sounding highly confident. I just want to sort of put this to rest.

Yes.

Awesome.

The renewal on the revolver is secure.

Perfect. Thanks, guys.

Kris Thompson, National Bank Financial.

John, just on the License 10% decline that you expect on the Metastorm and Global 360 deals. Is that business that you guys are targeting as less profitable and culling or is that just what you expect some of your required customers to abandon?

So Kris, usually as we said it is 20% to 30% where we do a culling, where we look at unprofitable areas that they might be in, et cetera. The 10% is much more of a -- just the distraction, as we're putting the 2 companies together, that there is not the focus that you would have while you are doing this. So it is -- we don't see a drop-off of customers, or it is really more of a -- just this normal disruption of the Business as we put the 2 things together.

Okay and in the past, I think you guys have suggested about 20% of your total revenues are compliance or regulatory related which is -- have some resilience to the economy here, and recessionary outlook. What is your revenue mix now, that you've done these 2 deals and you're talking about Web Content Management a lot more, you've got Nstein and developing mobile applications now. Are you getting a little bit more into a riskier revenue profile and kind of economic downturn?

We are seeing the compliance piece, more like at about 60% now. But on the new ROI, things that we're doing, the thing about BPM is that it is very sticky. So that we don't see this as a lot of risk. It is not like iPhone apps that are in vogue for 6 weeks and then you're on to something else. This is you're running your core mission-critical apps with it. So we see it as fairly safe. But to answer your question, we see it at about 60% this past quarter. Compliance.

Okay. That's great. And just I might have missed this, I'm not sure if you touched on the visibility, but last quarter, you said the pipeline was strong, visibility is improving, and I know the world has kind of changed in the last couple of weeks. Are you feeling the same way or are you a little bit less confident now?

From the kind of businesses that we're doing, what we're seeing is that the delay has been more in the governments like the UK government's had a tough time, and Italy, Spain, in Europe. Germany is doing extremely well. And then what we're seeing is between Canada and Brazil, Latin America, it is offsetting some of the slowness in the US government. But then on the US public sector, or on the private sector, sorry, it looks to be picking up.

Now, obviously, with what is going on, I'm sure people are stepping back and hesitating and wondering what is going to be next. So -- but in general, the pipeline looks very positive. And again, across all sectors, across all geographies.

Okay. And also, on the last call, I'm not sure if you mentioned your ASPs this call, but I think they were lower last quarter, around $250,000, and you mentioned that reflects pipeline of customers, taking a nibble, and then hopefully converting those into some larger deals. And this quarter, it looks like your transaction is greater than $0.5 million and $1 million is actually lower than the last couple, so are we going to expect to see some divergence?

It is around $300,000. It is the big -- the big deals are getting bigger. So it is kind of offsetting that.

Okay. Just 2 more for me. Paul, on the special charges for Global 360 -- the $15 million to $20 million, how much of that is head-count versus facilities?

Without, we don't have any specific details but typically it is about 80% head count, 20% facilities, if I look at past transactions.

Okay and for the Waterloo CapEx, how much of that was spent this quarter and what is remaining, please?

About -- in total for the year, perhaps that way we spent about $19 million and we have about $5 million left.

Okay. Thanks, guys. All the best.

Sera Kim, GMP securities.

For the Global 360 sales force, last quarter you mentioned Metastorm had a different sales strategy in terms of selling to functional managers versus CIOs, for the regular business. What does Global 360 sales force do? Is it different? So is that going to require more integration effort or is it pretty similar?

Pretty similar, Sera. It is similar, they go out to different vertical, slightly different verticals, so there is not a lot of overlap. But the kind of makeup of a BPM sales person from both sides are very similar.

Okay. And then do you see BPM as a way to drive more business in the traditional ECM offerings? Is that what the strategy is or --

Absolutely, yes. As I mentioned before, we see this as the glue -- all of this content that you're using, whether it be from your SAP systems, your website, your mobile apps, the BPM is the glue that pulls all of this together and automates many of these processes.

Do you think BPM could get to a size that is more -- to a larger size, similar to your the compliance based stuff or is it just kind of be the wedge to kind of get you to more --

I think if you look at the 2 companies alone, as we put these 2 together now, as well as with our customer base, I think they can grow to a significant size over the next 3 to 5 years. I see them being a large group. So as we're growing to $2 billion, I can see them being a significant piece of that.

Okay. Great. And earlier, you mentioned you wanted to chunk the business because you got to see these larger deals coming.

Yes.

Does that mean have you better visibility into fiscal 2012 than you normally would?

That's correct. So for example, as we did with one last year, what we did was we chunked it so that over 3 years, so for example, this coming October, they would be another $1 million worth of licenses, plus that is just part of the rollout of their enterprise. So obviously, we can -- the contracts are already signed, the commitment is already there, it is just as they pay their invoice, that's when we recognize the revenue. So obviously, that is much more visible.

Okay. So you have -- so the contractor signs, you have more visibility, but the only thing that could happen is maybe some of the deployments might get pushed up a little bit because of what is going on?

In this case, no. It is actually a firm commitment.

Oh, okay. Great. And then just last question, can you provide an update on Oracle, I think, in the past, you talked about them bringing in a couple of deals, but I think it was still in the early development phase. Have things progressed since the last quarter? And do you see the pipeline building through Oracle?

Right, so obviously, compared with SAP, and even Microsoft, it is still small, but it is progressing nicely. The work that we're doing on the source code that they provided us, is going -- is progressing nicely, and so we -- over the coming year, we see that that will continue to grow.

Okay. Great. Thanks a lot, guys.

Eyal Ofir, Canaccord Genuity.

First question for you John, obviously you guys had made 2 acquisitions here on the BPM side. Are there any other areas in your portfolio you think you need to expand on and continue to make acquisitions in?

As I think I may have referred to earlier, I think there are certain vertical areas, like financial services, or utilities, and where we could have domain expertise, or applications in those spaces, that would be kind of tied together with BPM, to provide a whole content management suite. So we see a number of opportunities in the space. We're also seeing, given the economic climate, we're getting a lot of inbound calls for people interested in being acquired by us. So there is quite an opportunity.

Okay. So this is not obviously the last move by you guys?

Correct. Right.

And then from the size, what should we expect? Is it going to be similar sizes or going to be smaller tuck-ins.

It would think it is kind of a mixture. It will be a mixture of tuck-ins and some medium size, larger size. The net of it is, there is plenty out there.

And obviously, you talked earlier about the relationship with Microsoft. With this acquisition, these acquisitions, obviously that relationship is strengthened.

Right.

In terms of where the market from the ECM standpoint is going to change at all for you guys because of these acquisitions?

Not that we see at this point. I just think 1, it provides a good platform for SharePoint. And obviously, that -- the SharePoint platform also allows us to then extend that platform with our products that are related to SAP, Oracle, Archiving, et cetera. And we think it will pull other products as well. As well as the BPM.

Okay. And final question from me, is you talked earlier that you are seeing a pickup in emerging markets for you guys. Obviously that is a new area that you've talked about over the last few quarters.

Right.

What kind of pickup are you seeing? And how big are these potential deals for you guys?

So if you took Brazil, for example, I think it was a 300% growth last year. And they are sizable. So for example, last quarter, one of the multi-million dollar plus deals was Brazil.

Okay. So now we're getting into some significant deals here.

Yes.

And in the pipeline, you're seeing similar opportunities, I imagine.

Yes.

Okay. And in your pipeline as well, can you just break it out in terms of the largest opportunities, how they look from a geographic standpoint?

It is fairly evenly spread. So if you look, traditionally, if you look for the past year, the spread has been roughly just over 50% from the Americas. About 40% from EMEA, and then APJ would be 7%. For the next coming year, I would see APJ growing slightly larger. But maybe getting -- certainly over the next 2 years I see them getting to the 10% plus because of China and other opportunities. And I think the other 2 should stay in line.

Okay. And the strategy remains the same -- primarily going into these emerging markets in Asia through your partnerships?

Correct, although in Brazil we do have a direct sales force down there, from the Vignette acquisition, they had a presence down there, and that has grown.

Okay. Perfect. I will leave it there. Thanks.

Derrick Wood, Susquehanna.

But Paul, I was wondering, could you give us a revenue breakdown on Global 360 by kind of Licenses, Maintenance and Services, and then you gave the expectation on the License cut for this year, you've given color on Maintenance and Services as well, so could you talk about that?

Yes, Derrick, so we just typically give ranges on our acquisitions on specifics, and what I would call in a fairly typical software model, of potentially in the lower range, and when I say, that I say if you look at our model, 20% to 25% License would be the lower end of the range for that, but higher in the upper end of the range, for Maintenance and then the balance is Services. That's on the revenue mix. As John has indicated, as we bring Global 360 and Metastorm together, because of the disruption that causes, we're looking at the combined License revenue of the business being down 10% year-over-year before we see that growing out in fiscal '13, and I think Services, we would find it slightly down as well, usually it bows in relation to License. Maintenance though should remain fairly steady between the combined operations.

Okay. That's helpful. And then the market for ECM, you talked about 7% to 11% and you guys tracking at or perhaps a little above. That includes some of your acquisitions or is that on an organic basis?

That is an organic basis, Derrick.

Okay. And then last question, on the margin side, you guys gave a fairly wide range. Just kind of trying to get where -- what you're thinking for this year. Is this going to be -- as you look at operating margins this year versus last year, are you thinking that being a year for growth and investments, and perhaps operating margins could come down, or are you trying to keep them flat, or are you still thinking you could be at an operating margin expansion mode?

That's a fair question, Derrick. And try to give enough information, but I will try to be clear on it. We don't see it contracting on an annualized basis. I think fairly steady, potentially slightly up. We're not going to over-invest, we're not going to change our operating model by starting to put expenses in the higher range, above the ranges that we gave in the model.

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

Brian Freed, Wunderlich Securities.

Just your acquisition philosophy. Historically you guys have tended to buy things at a fraction of revenue multiples. The last 2 have been multiples kind of more growth oriented. Is there any shift in your longer-term philosophy toward buying companies and driving EPS leverage versus the past?

No, not really, Brian. I think again, it is just like the size of the deals. It will be a mix. But I think over the time you will tend to see us more in our normal range that we have been in.

Okay.

So these are exceptions that we will get back to the norm.

And then my second question is around the competitive landscape. Obviously, you and IBM seem to be doing pretty well, ECM was down 7% year-on-year. Can you talk a little bit about what you're seeing from a competitive standpoint, particularly with Documentum. And if you see indications that they're regaining strength and will become more formidable or what is the issue there in your view?

No, we're certainly not seeing them gain strength. There seems to be a continued decline. IBM obviously within their IBM areas, with -- if it is a totally IBM shop, they would typically -- we wouldn't be brought into it, but if it's a non-IBM shop, we compete very well against FileNet, et cetera. And even an IBM shop, if it is an SAP shop as well, we have a very good chance of competing there. So we haven't seen a lot of change on the SharePoint, obviously, for the lower-end, is a good -- but for us, that is an opportunity long-term.

Okay. And then lastly, on the partner revenue front, this quarter, partner-driven revenue was a little lower than typical. Is that primarily a function of acquisitions you added on and do you think that will move up as they embrace some of the functionality your acquisitions will bring?

I think it was more reflective of some of the larger deals that we did. And I think in general, I think the 40%, 45% range, actually for next year is, about right.

Okay. Thank you, that's all.

Steven Li, Raymond James.

Hi, thanks. Paul, I might have missed it earlier, but what's the Services margin outlook? When do we see it back to a 20% level? Thanks.

By Q2, Q3, when you say 20%, I said we would recover some of it in Q1 and get back, to I think I gave more of a 17%, 17% to 18% range, is more historical, where we achieve operating margins versus at 20%. And that would be -- I'm expecting end of Q2.

Does that answer your question, Steven?

Yes, thanks.

Gabriel Leung, Paradigm Capital.

John, I was just wondering if you could provide a timeline of when you would expect the integrated BPM offering to sort of hit the market? And at that point, would you expect some of this margin compression you're seeing, you talked about several hundred basis points margin compression from the integration, start to alleviate? Thanks.

So on the actual -- the putting the 2 together, probably within 6 to 9 months. So 2 to 3 quarters, I would see us being done on the margin compression.

This is Paul. I think I'm indicating that for the full-year you would expect our margins to be pulled back by the acquisitions of -- the recent acquisitions. And see us now moving that toward a model in FY '13 that you would expect previous acquisitions.

Right. But it sounded like in the previous question, you still expected on a full-year basis, for the year adjusted operating margins, to at least stay steady with what you reported in '11, I think it was 27.5%, is that a fair assumption?

That's a fair assumption.

Okay, that's great. Thank you.

Okay. Thank you, everybody. And so in summary, we believe we've had a good year overall. Pipeline remains strong for FY '12. We would like to thank everyone for questions and look forward to talking to you again next quarter.

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