Open Text Corp (OTEX) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Open Text Corporation first quarter fiscal year 2012 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, Oct. 26, 2011 at 5 PM Eastern Time. I will now turn the conference over to Mr. Greg Secord, Vice President, Investor Relations.

Thank you 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 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 a conclusions while making a forecast or projection as reflected in the forward-looking information are contained in Form 10-K and Form 10-Q of Open Text as well as in our press release that was issued earlier today.

Before we begin, I'd like to announce that Open Text will be hosting an analysts day at our Content World Conference in Orlando, Florida, on Wednesday, Nov. 16. The analyst day agenda will feature product demonstration as well as executive presentations, with an overview of sales and operations, our product roadmap, as well as profiling other strategic areas of the business. As in previous analysts days, the program will be integrated with the conference itself, and the participating analysts will have full freedom to interact with the conference attendees and customers on site. More details are available on our website or by contacting our Investor Relations group. With that, I will turn the call over to Paul.

Thank you, Greg. Turning the financial results, I will highlight our first quarter of fiscal year 2012. Total revenue for the quarter was $288 million, up 32% compared to $217 million for the same period last year. License revenue for the quarter was $65 million, up 53% compared to $43 million reported for the same period last year. Maintenance revenue for the quarter was $162 million, up 25% compared to $130 million in the previous year. Services and other revenue in the quarter was $61 million, up 36% compared to $45 million in the same period last year.

Gross margin for the quarter before amortization of acquired technology was 72%, compared to 73.3% in the typical last year. The decreases is primarily related to the initial write-down in maintenance revenue of $2 million due to the acquisition of Metastorm and Global 360. Free tax adjusted operating margin before interest expense and stock positions was $73 million this quarter, compared to $62 million in Q1 last year. Adjusted net income increased 18% to $59 million this quarter from $50 million in the same quarter last year. Adjusted earnings per share was $1.01 on a diluted basis, up 17% from $0.86 per share the same period year ago. The sequential effect of foreign currency movement on adjusted earnings per share for Q1 was a positive $0.02.

The adjusted tax rate for the quarter is 14%, the same as it was last fiscal year. Net income for the first quarter in accordance with GAAP was $35 million, or $0.60 per share on a diluted basis, compared to $22 million or $0.37 per share on a diluted basis from the same period a year ago. There are approximately 58.6 million shares outstanding on a fully diluted basis for the first quarter.

Operating cash flow was $45 million, compared to $49 million in the same quarter last year. The overall decline in cash flow is primarily due to the impact of slightly higher DSOs, 45 days in the current quarter versus 43 in the same period a year ago, as well as one-time cash payments due to costs related to acquisitions in this quarter. On the balance sheet at Sept. 30, 2011, deferred revenue was $261 million compared to $266 million as of June 30, 2011, and accounts receivable was $144 million compared to $155 million at the end of last fiscal year. Day sales outstanding were 45 days as of September 30, 2011, compared to 49 days at June 30, 2011, and 43 days at the end of Q1 fiscal 2011.

In July, 2011 we announced our acquisition of Global 360. Total consideration paid was approximately $250 million in cash. We recorded an accounting adjustment of $3.7 million to the acquired deferred revenue from Global 360. In addition, in September 2011, we acquired Operitel Corporation, an Ontario-based company specializing in learning portal solutions for approximately $6 million in cash.

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%. Our recent acquisitions continue to have an impact on the overall operating margins in FY 2012 as we continue to bring them up to Open Text operating model. We anticipate that this will improve for the year, but will not be fully on target until fiscal 2013. The full details of our operating model are also available on our website.

Last quarter, I mentioned that we will be raising new debt in the amount of $600 million. During the quarter we proceeded with this transaction, and are nearing completion with the expectation that we will close within a couple weeks. We have gone (inaudible) by way of term loan A and expect the pricing to be within the range of LIBOR plus 2.25% to 2.75%. Of the proceeds, approximately one-half will be used to pay off the existing term loan B of $285 million, and a revolver of $48 million which was drawn to complete the closing of Global 360. That would turn the call over to John.

Good afternoon, everyone. I'm pleased with our performance for the quarter, with over 52% increase in license revenue year-over-year, and a 17% increase in adjusted earnings per share, we delivered strong value to our shareholders. By concentrating on existing install base and focusing on new sales in emerging markets, we have a good balance of opportunities in the pipeline. Even in this tough economy, we remain comfortable with our pipeline and margin targets for fiscal 2012.

As Paul mentioned, in the quarter we generated $65 million in license revenue, with North America responsible for 51% of revenue, Europe 41%, with the remaining 8% primarily coming from AsiaPac. While we are still navigating the economic challenges of global IT spend, we're seeing particular pick-up in emerging markets, with areas like China being well-served by our partners and territory-structured Brazil flourishing under our own internal sales team. Overall, we closed the quarter with a combined sales force of approximately 425 quarter-carrying execs.

In Q1, we saw license revenue broken down by vertical as 19% from business services, 19% from technology, 14% from public sector, 12% from financial services, 10% from base materials, 7% from consumer goods, 7% from healthcare, 4% from industrial goods, 4% percent from utilities, and 4% from conglomerates. In the quarter, 47% of our license revenue came from new customers, and 53% from our install base.

Taking a closer look at transactions in the quarter, we had 15 transactions over $500,000, an additional 7 transactions over $1 million. This compares to 3 transactions over $500,000 and 2 transactions over $1 million in the same period last year. Examples of significant wins include the global engineering firm Hatch, a long-term customer of Open Text's. They've extended their investment in content server as the main project repository, serving as the primary platform for customer collaboration during active projects. Hatch has also extended their solution to include content life cycle management.

The EEds Group, a global leader in aerospace and defense, purchased Open Text's extended ECM for SAP solutions and employee-filed management for SAP solutions. These solutions will help the group make processes simpler and more integrated. Klockner, European's largest independent distributor of steel, purchased several Open Text solutions, including e-mail management for Microsoft Exchange, application governance and archiving for Microsoft SharePoint, Open Text expanded ECM for SAP solutions, and vendor invoice management. The main objective for the purchase were to increase efficiency in a centralized architecture and to fulfill international compliance requirements.

We are also pleased to announce Citizenone, a social collaborative platform for research and development in South Africa, now uses Open Text Social Workplace. Citizenone was established in collaboration with the South African Academy, Academic CIO Forum and Center for Chief Operating Officers Research in Africa. In addition and conjunction with Commonwealth Secretariat, we announced plans to introduce Commonwealth Connect, an innovative cloud-based social media portal. This will be introduced to the heads of Commonwealth at the government meeting taking place in Perth this week. This is similar to our G20 application. License revenue from partners and resellers was approximately 44% in the quarter. SAP continues to track at just over 10% of our annual license revenue.

Speaking of partners, we had a few announcements related to Microsoft this quarter. We announced the availability of a new version of Open Text e-mail for Microsoft Exchange, featuring proof support for large or geographically-dispersed environments. This enhanced records management capabilities and easier and faster administration. We also released Legal Content Management for Microsoft SharePoint, designed for law firms and corporate legal departments using Microsoft SharePoint 2010. At Oracle this month, we had lots of partners and prospects showing interest in our Fusion stack. We continue to see growing demand for Open Text content access and accounts payable for Oracle applications. The pipeline remains strong for these new business areas.

The consolidation of the Metastorm and Global 360 is going well. As mentioned on the last quarter call, we expect some typical disruption in first-year license sales. The license revenue run rate for both Metastorm and Global 360 business are expected to decline in about the 10% range for the first year. However, once the consolidation is complete, we expect the BPM business to return to normal growth rates in fiscal 2013.

As Paul mentioned, in September we acquired Operatel, a small company based in Ontario, Canada, specializing in learning management systems and enterprise learning portals. Operatel's solutions include social and mobile learning management. Turning to our outlook for FY 2012, the industry analysts continue to tell us that they expect ECM license revenue to grow in the 7% to 11.5% range over the next few years. Overall, we remain confident in our pipeline and are happy with our current operating model. With that I'd like to open the line for questions, Operator.

Scott Penner, TD Securities.

The contribution for partners, 44%, is obviously pretty strong versus the last quarter, for sure. Just any color as to whether -- as you said SAP is still about 10%, whether that uptick is related to more so for Microsoft or Oracle?

Quite a bit for Microsoft, Scott, as well as also we did quite a bit with some of the systems doing various like Accenture and Deloitte.

And that uptick, is that related to primarily to the Global 360 acquisition?

No, it's pretty much across the board, Scott.

And then the similar question on the new name customers, 47% is a higher number than we've seen in some while. Any color as to what these new customers are interested in?

So some of that, Scott, was from Global 360 and Metastorm. But also from our partners like SAP and Microsoft. And again across the board, some of it was around compliance, but others would be more on the productivity efficiency side of things. We have a pretty good balance between the 2.

Paul, do you have the contributions from Metastorm and Global 360 handy there?

Yes, so, Scott, we no longer report Metastorm, so we won't be announcing it here. The Global 360 contribution had $18.3 million revenue, and before special charges, so on adjusted EPS, (inaudible), so it was accretive already this quarter.

And then I was also going to ask about the cash impact of both the deferred revenue write- down and then the cash impact from charges in the quarter?

Yes, the revenue write-down, isn't a cash impact, as you know, it is an accounting adjustment of $2 million. The cash impact for restructuring this quarter was about $6.5 million. And Q2 we expect an additional accounting charge of about $15 million and the cash would flow out from that. So 2Q, about $8 million and about $5 million for each of the next 2 quarters in the fiscal year for cash.

And that charge of $15 million, will that pretty much clear out what you expected?

Yes, that will, yes.

Just lastly John, any comments around seasonality for Q2 over to Q1, which has typically been a pretty big quarter? What would you say about it?

I think probably the most thing I'm pleased with this quarter is this Q1 is really getting us back to the typical seasonality that we had before. As opposed to last year, where it was much bigger swing, I think we are now back to our more traditional model of where we are literally 25% to 30% would be in Q1, where we go down in Q2, 5%, 10%, in Q3 to Q4 we would go up 10% to 15%. Q4 would be up.

Sorry, John, we are out of sequence of 1 quarter.

Sorry, Scott, we're out of sequence. The 25% to 30% is for next quarter, so the typical seasonality, 25% to 30%, is what we would continue to think about.

Right. So 5% to 10% down in Q3 and then, sorry, John, Q4 would be?

Up 10% to 15%. Sorry on that one. But year-over-year it would feel pretty comfortable.

Thanos Moschopoulos, BMO Capital Markets.

Just on the last point regarding the license, the seasonality for next quarter, does that factor in the fact that Global 360 should be down?

Yes, and Global 360 down is somewhat impacted already in this quarter. But, yes, again, as you know, we don't have specific guidance, but we already spoke about Global and Meta been a 10% reduction in license revenue in the forward 12 months after acquisition and we are still in that same view.

And I realize this is probably pretty small, but what was the contribution of Operatel in the quarter?

Definitely small, less than $1 million.

Europe looks like it performed well, what are you hearing in Europe from the field as far as your pipeline there, just given the current macro environment?

Germany looks to be very strong, as does Scandinavia. UK government a little weak, but we've actually seen some good move in the commercial side of the UK. And then within Southern Europe, France is looking okay, Spain, Portugal, a little weak, but Italy also doing okay. So given our mix in Europe, the strong German and Nordic offsets the weakness in the UK government.

And on a related question, are you seeing any weakness at all in the public sector of financial services segments?

In Europe?

No, just globally. It looks like public sector did well in the quarter, financial services seems like it may have been a bit down as a percentage. Going forward, how is the pipeline looking there?

On the government side, we particular did very well this time on the US government, which is for the first time in a while been strong. Obviously it's their year-end budgeting. On the financial services was down a little bit, but were still seeing good pipeline in that space on a global basis.

And then last 1 for me, can you apply some more color as to the Global 360 and Metastorm integrations are proceeding. I believe last quarter you talked about how it might take 2 of 3 quarters to fully integrate at which point license growth should resume. Is that still the expectation, is integration there fully on track.

Is on track. It is on track well both from a technical integration as well as the sales force and marketing integration as well. We are very pleased with that. As we mentioned, we did announce someone coming in from the outside heading up that group, and he's taken on that role now and things will be progressing very smoothly.

Mike Abramsky, RBC Capital Markets.

The number of large deals is jumping out. Can you talk a little bit about what's going on there. Is some of that some of the deals that might have slipped from the last quarter, are there some big deals in there of size, are they multi-year, different types of opportunities? Can you give us a little bit of color on that please?

Yes, Mike, so 1 was a slip for the BPM side of the Q4 that I think we'd mentioned last year from a European bank. That did come in. But we are seeing in general some sizable deals on a global basis, and with them are not only license but professional services and training as well with that. And so I was very encouraged with the $500,000 to $1 million size, the 15, that's quite a large, we haven't seen that many in quite a long time. And the pipeline seems to be very similar. Again we will try to keep these chunks so they are not so big, but we are seeing more large deals in the pipeline.

And how do you feel about a revenue lumpiness risk and/or deal slippage risk, given the environment?

I think that is a we've been trying to work on, Mike, is almost discounting the big deals and trying to build a pipeline that's big enough to hit our seasonality without the big deals. And on the forecasting, we've been very pleased with the sales teams, their forecasting for the last 2 quarters have been very accurate. So we will continue to work on that. So on the economy, we haven't seen it yet. On the bigger deals, obviously, they have been taking longer, but we built that into the model anyway.

When you talk about expected seasonality, there could be some upside to your outlook in the sense that you're being conservative about trying to include some of those larger deals?

We are being conservative given the economic outlook. So I feel very comfortable in the pipeline. We've got a very healthy still-growing pipeline, but given the situation out there, we are being cautious.

When you still call for the margin impact coming off and synergies coming in on your acquisitions over the next 2 or 3 quarters, and starting to get back to normal model of 2013, what are some of the assumptions on that? Do you have good visibility into that?

Mike, this is Paul. The assumptions are according to our own integration plan and synergies, which, as you know, we have reasonable experience there. So as John said, we are tracking to out plan, so our confidence of getting into FY 20113, getting these acquisitions on the operating model is still good.

And again from the technical side, we haven't seen any issues. It is pretty much going as planned. Putting the 2 sales forces together and getting them focused on areas of where they've got strengths is going to plan, so while we do this organization, obviously is a disruption, but I think going forward we have a pretty good marketing plan as we come into FY 2013.

Richard Tse, Cormark Securities.

John, just following up on the integration question on 360 and Meta. Can you give some specifics in terms of how you plan on attacking the current installed base?

So if you remember, Richard, Global 360 is more content-centric and has been more in the financial services area. And the Metastorm is much more of the process-centric, focused more in the healthcare, pharmaceutical etc. As we put the 2 together, providing what we believe is probably one of the best functional, within the BPM space, the best functional products on the market, we will be jointly going after both of those markets with this additional functionality for both of them.

Would your existing salespeople be selling the entire Open Text product line then? Or is it going to be a special group for these BPM products?

Today, it is a special group that sell to BPM products, as there are really selling more to the functional managers, not to the CIOs. But obviously we will be doing joint selling into our call base where we have strong relationships.

And when you look at the core base, what you figure the penetration rates for these type of applications? Is it next to nothing?

Today?

Yes. There's not a lot of overlap to that. So we've identified about 10 key accounts in Europe and 10 in North America, and we feel the initial interest from our core base has been very positive. And then just one last question on this Oracle partnership. Looks like they've been ramping up efforts in content management again recently. Can you give us a bit an update on that partnership that you have with them and whether it has changed in any way?

We don't really see they've been ramping up on the content management, in fact, the Stellent product doesn't seem to be doing too much. On a Fusion side of things, the product that we've been working with them on is going well, as well as the applications that we are selling on top, like the (inaudible) voice management, etc, seems to be going well. These things just take time to set up. I'm assuming you're talking about some of their recent acquisitions, we don't see them in this group at all.

Stephanie Price, CIBC World Markets.

Can you talk a bit about acquisitions Your cash flow in the quarter was strong again. Are you planning on taking a bit of breather while you integrate Metastorm and Global 360, or what should be thinking there?

So obviously Global and 360 put together are sizable acquisitions, but we do see, like Operitel, there's a number of tuck-under that we could see that would have minimal impact on the core group, if you will. So I think you will still see us doing some.

And in terms of geography, you talked a bit about Europe, can you talk about where you're seeing the most momentum right now, and if you have any concerns in any particular Region?

Momentum definitely would be a Latin America, particularly Brazil. As well as we are seeing some in China and AsiaPac. The only concerns we would see would be UK government and what else? As we've seen with the Canadian elections, so the Provincial elections, we've seen a little bit of slowdown there, but would expect to see that pick up as they are looking at their year-end budgeting.

And in terms of the pipeline, can you talk about it by vertical? In terms of where you are seeing strengths and weaknesses?

Yes. Strengths we are seeing, we are actually seeing government pick-up in pipeline -- looking out into the future quarters. Financial services also, but we are probably seeing strength in manufacturing, high-tech, that area as well. Telco's within that group.

Tom Liston, Versant Partners.

Just picking up on, I think it was Richard's question, on Oracle. Certainly in vendor invoice management, other areas, you will do well, but they are definitely being aggressive in the Web center offering that they have, specifically going after Documentum. Didn't seem nearly as broad [as ECM], but can you comment on they're trying to work the Web center. And some of the commentary from some of the industry participants worry about pricing pressure evolving over the whole ECM sector because they're making some noise and racket trying to capture those Documentum customers. Can we get some more color on that?

Obviously the key area that we work with them on is the area of tying their structured applications, things like that vendor and invoice management to the unstructured data. On the Web content experience, we are not doing as much work with them in that area. But from a competitor standpoint, we are not seeing much of them in this area either.

Is it too early to see if there's any pricing pressure as a result of there the noise they're are making?

Certainly so far we haven't seen pricing pressure.

And moving over to services line. Certainly it was pretty robust, seemingly ahead of most expectations, and certainly margins improved as I think you had previous commitments with some of the acquisitions that were lower-margin. Can you just walk through what was going on in the services side and obviously you've seen an improvement there?

Right, your exactly right. As we do these acquisitions, there usually is some clean-up, but we were also saying we do want to get it over the next 2 or 3 quarters back to our normal area. We have made progress this quarter and professional services in general we are seeing a pretty healthy pipeline. In fact, in some areas we are kind of out of capacity, we are having to look at beefing up our organization in that area, as well as with our partners.

Finally, Paul, just on deferred revenue year-over-year, and it certainly changed sequentially. Can you walk through that? It obviously looks weakish, but I suspect a lot of it's with Global 360 and timing around collections. Can you walk through that and then just remind us of your renewal rate in the quarter?

Yes, so deferred revenue balance, typically they do decrease through the quarter and their pick-up is at the end of Q3. So that's because we have a high percentage of renewals occurring at the end of a calendar year, which creates a higher deferral. So it is kind of normal if you track on a sequential quarterly basis it to come down. And of course there's a bit of an addition actually this quarter with Global 360. So it is in line, and then in terms of renewal rate, we are still tracking at the low 90%, in the 92%.

And so Global 360 would be a similar collection period? Seasonality.

Yes, it would have the same seasonality, right.

Kris Thompson, National Bank Financial.

Just in your guidance, John or Paul, can you talk about the revenue you expect from the big deals, do expect that to go up or down sequentially?

Kris, you mean the number of large transactions, Kris, is that the question?

No, I mean the total revenue from the large transactions. Do you think that is going to go up or down sequentially?

On a non-guidance basis, it would be hard to give you much color on that. As John has said in the past, that in many times trying to parse out a transaction over time, and sometimes, we just saw this quarter, if you still come through in the 7-fgurwe deal and certainly a number over the $500,000. I would say that though our distribution revenue from large and small deals wouldn't materially change.

I'd say in other way, Kris, if I look over the next 2 or 3 quarters, I wouldn't see it materially change. It might as we start looking at next year, but we'll obviously take a look at it then. But I think certainly this year, I don't see it.

What I'm try to get that here, is I'm just wondering if some companies that you are dealing with are flushing out their calendar year-end budgets a bit early this year because they might get them cut right off next year if the economy still looks kind of crummy.

Good point. We did see a little bit of budget flush, not necessarily tied to big deals, just in general. But a little bit more than usual, but it wasn't really tied to big deals. But you are right, I think people, IT organizations, may be doing a little bit of that.

Just on the market here with HP finally closing this Autonomy deal. I'm just wondering if your getting inbound calls from prospective customers wondering if there's going to be some distraction there, if there's an opportunity for you guys with that whole integration going on?

So before the acquisition, we didn't see them that much anyway. Maybe more in the Web content site with Interwoven, but we certainly didn't see them in the ECM space. But our assumption is there will be disruptions, particularly with what's gone on, and we would see some opportunities there, particularly in the Web content management space.

And just a couple updates here on the CapEx. I think you guys are almost through you're CapEx for the Waterloo facility. What did you spend in the quarter and how much is left, if you don't mind?

I think we spent about [$6 million, $7 million]. We are finished now, Kris, so there'll be no more CapEx for the Waterloo building going forward.

And on the credit facility, I missed that. You said LIBOR-plus, you're on a scale up to 275 basis points?

Yes, between to 225 and 275 is there the pricing will come in.

I think last call you said you expected to be around 4.5% with your interest rate swap. Is that your target?

The slight difference would be that the previous discussion we had, we assumed we were going to go with term loan B, which is a 7-year transaction, in which we would immediately put some fixing in place. This term loan A is a 5-year transaction with some amortization. So we might not fix it right away. So I would lower the all-in rate from what we said before for the term loan A.

And just last, the average deal size, is it still around $300,000?

That's correct, yes.

Sera Kim, GMP Securities.

From emerging markets, what were the drivers of growth in terms of product offerings? Was it more on the compliance side or the other areas?

In the emerging markets was more on the productivity side, particularly around things like digital Asset Management, Web content management, etc.

And what percentage of license sales is from the emerging markets? I'm just wondering how that compares to a year ago.

The emerging markets has pretty much grown about 300%. But it still within that, maybe 4% or 5% total.

So the increase, the 44%, the percentage of revenues from partners, was the increased more related to the partnership relationship with Microsoft and others relative to the emerging markets?

No, it was pretty much across the board. It was probably more to do with systems integrators in this particular quarter.

And earlier you mentioned that there were some areas we you are already at capacity, is that on the professional service and training area, or are there other areas where you are feeling pinched?

That's right, it is professional services.

More for clarification, sounds like you have some good visibility and there's some larger deals that are in the pipeline. Is this business that's already been booked and already firm commitments, so it just a matter of deploying and recognizing the revenue at that point, or is there still potential that things can get delayed?

Some of it is, maybe one-third of it where it is already done and is just a sequencing. Probably two-thirds would be, even though their existing customers, new projects they are initiating obviously could be delayed, but as we said, we've got a healthy pipeline so we are trying to build in the potential for delays anyway.

And in terms of your pipeline, are you still continuing to see growth in the productivity-related and the newer social-media-mobility-type applications, or has the demand gone back to more compliance-related stuff?

The mobility end is really new anyway, and we are seeing quite a bit of pick-up in that, but it is still fairly small from a revenue standpoint, but we are seeing lots of interest in that area. So the bulk of the revenues are still in the compliance/productivity of our core products.

Can you give a breakdown compliance versus productivity?

It would be guess, but I'd say in the 55%,60% range would be compliance, the rest would be productivity.

Pardeep Sangha, PI Financial.

If I could get some color on the competitive landscape. You did make a few comments already about not seeing much of the economy, but what else are you seeing in the market right now, and who are you seeing when you're doing RFPs and things like that?

Obviously it varies a little bit based on whether it is Web Content Management, ECM, but also a little bit geographically where we might see some small locals compete, but it still the traditional EMC, Documentum, FileNet, IBM. Would be I would say the majority of the key competitors. And then whether if it were something like Web Content Management, you might see the old Interwoven folks.

And another question with regards to cloud-based solutions, and can you add a bit more color there in terms of what you are seeing in industry and customer demand for that? Or is it really quite a bit of your demand seems to be on-premise offers still, are you seeing a shift there at all?

We are seeing a shift in interest, that there's a lot more interest in our cloud offerings. From our customers, we are seeing a lot of hybrid, where they are looking at both public cloud tied to private cloud tied to in-house products that they've already got.

So often an example I use is Hoffman-La Roche, where in-house their R&D of drugs, R&D is all done in the private cloud in-house, and then their clinical trials are tied to a public service and the 2 are obviously connected together. And we are seeing a lot of people interested in that. Governments that are interested in clouds, it is always usually security is a key issue, so multi- tenancy they are steering away from.

Eyal Ofir Canaccord Genuity.

I want to touch base again on emerging markets. We talked about have a total of 425 sales execs across the company, how many of those are actually not in America and emerging markets?

I missed the number that you quoted?

I just gave the total, but I am wondering how many of your sales execs are sitting in --

I'm sorry, I missed the sales execs. On the emerging markets, it is probably less than 10. In certain areas like Russia and China, we do work with our partners. So it would be a partner group who wouldn't be considered -- our people that are working with the partners would not be considered part of that 425 quarter-carrying. In Latin America, which is the majority, that's where the direct part of that 4 25 are.

How has that changed over the last year? Have you had less than year ago or is it about the same?

It is about the same as a year ago.

In your pipeline you talked about having some momentum in the emerging markets, is more than 4% to 5% of your pipeline from emerging markets?

It is about 4% or 5%.

So it is the same level as recurring revenue? Maybe growing a little bit, if we looked a year back, it was 6%, 7%, and now we are looking at 8%. And I would see that growing. So it's about 8%?

The emerging markets are part of the AsiaPac as well. So it is in that other, if you will.

So it's basically all the emerging markets lumped into --

Right.

That the trends are still positive. So you have 8% of your pipeline emerging, and about 4% to 5% of your revenue is from emerging markets?

Correct.

And just touching back on BPM, obviously the you hired a fairly well-seasoned exec to manage that business for you. What was the thought process to go external of Metastorm and Global, and can you just give us some feedback of what the customers have said so far with the decision and what the reaction has been internally?

The outside executive that we hired, his background was from one of the original founders of what morphed into Global 360. So he's very well-known in the industry, known and liked with the Global 360 folks. But also with the Metastorm, which was a smaller group, I think that group, given both the dot-net-based, the relationship seems to be going very well, both from an engineering level as well as a marketing and sales level.

And he's only been there a little while, so has he given you having any feedback yet in terms of what the team looks like and the capabilities that he's got? Is he couple with it as is, or do you guys need to make some changes, not internally but also since you're looking externally to maybe acquire additional capabilities?

Yes. So on the development side of things, the engineering side, very strong teams from both sides. What we've seen from the sales teams, we are also seeing good productivity, they complement each other in many ways. So we are not seeing a lot of overlap where we'd need to take people out. And at this point we don't see a need for a lot of any more, maybe 1 or 2, there might be, but at this point not a lot of external people that we'd need to bring in.

And in terms of the technical capabilities, you've got everything you need in-house? You don't need to go and do another acquisition.

Yes. And as I mentioned, he knows these people from previous life as well.

Blair Abernathy, with Stifel Nicolaus & Company.

John, could you just provide us some with more color on what your seeing with your social media products? In particular, are you selling this more into your existing base or is this actually helping to draw in new customers to the business? We've obviously seen a couple of the headlines about this picked up in government areas, but I'm looking for a little more broad-based color on it.

Is a couple of things, Blair, 1 is that, obviously some of this is fairly new, beta testing as well as getting customer feedback from our existing base. We see it being used particularly in things like the G20, where it is almost like event management, where an event is coming together, the coordination event, there's the running of that event, then the follow on from that event. And we are seeing a lot of interest in that. Not only from the G20, but as we said, the Commonwealth are doing similar kind of thing. We are actually seeing companies that are using it for things like their sales event, or their user conference event, are using these kind of mobile apps to communicate with their customer base. So that's 1 piece.

The second piece we're seeing is also there's interest from Telcos, there's interest from device manufacturers that are also interested in providing applications to their customer base. So we almost see an OEM-type environment for this kind of product as well. Obviously early days yet, but we do see this as an opportunity for us.

Did social drive any of the Q1 deals over $500,000?

Can I get back to? Nothing comes to mind, but it might have done. I know there's social media in some of the bigger ones that are our existing customer base. But did it drive it? I couldn't tell you.

And Paul, just a quick one or you. Can you just clarify on the service revenue this quarter, I wasn't sure if I heard it right. Was there any 1-time increase in their service revenue this quarter and was there any hardware in the quarter?

Very small number of hardware, to answer that one first, about $1 million. But on the service side, no, not a 1-time transaction, as John said, Blair, we are building pipeline and we are pretty much at capacity. We had to do some subcontracting this quarter to meet the demand.

As well as we did have some clean-up from the acquisitions, but on the non-acquisition stuff the pipeline is really built solidly.

Are you looking to add to your service base?

We probably will in some key areas, like some of the emerging markets, they need more expertise in those areas. As well as certain areas and Europe, we need more capacity. And it is the kind of thing that's so product-related that it would be difficult for our partners like Deloitte and Logica, others, to be able to provide us with.

Ralph Garcea, Northland Partners.

2 quick ones, if I may. First, do see Microsoft over time being a bigger contributor than SAP, just given all the leverage they get on their products, selling your products alongside SharePoint, Exchange, etc?

It is a good question, Ralph, my initial reaction is, 1 is I am very pleased with the Microsoft partnership and revenues that, that is generating. But we do see also SAP is doing very well and continuing to grow. I'd have to think more whether I'd see one taking over the other. I think in some of these new things we talked about around mobility, etc. There might be areas more that we could do with Microsoft as well. But my initial reaction would be they are both doing well.

It is a good problem to have. And then just lastly, when IBM took over FileNet, you saw some incremental benefit from it on the services side. Do you think you'll see that on the Autonomy as the service guys that were helping them, seeing that HP has EDS, maybe cross the floor and join you guys?

I would doubt as much, Ralph, because as I said, autonomy, beyond the search engine, which we didn't really compete with them in that area, they only really had Interwoven. Their other stuff that they had was fairly small and insignificant. So other than Interwoven, I wouldn't see a lot of competitive uptick.

I think we lost him. Operator, can we go to next question please?

Mike Nemeroff, Morgan Keegan

This is Mike Anderson for Michael today. Just a couple quick questions for you. With respect to the number of deals that you were closing in more large deals, can you just give an idea of what the ASP was in the quarter? I think last quarter you said it was $300,000.

It was about the same. Maybe $10 more higher.

And with respect to the services and having doing some subcontracting, I didn't see in the release, and maybe I missed it, you used split out the margins for each of those lines. Can you just give an idea of where those landed?

Yes, the services margin is about 18%, Mike.

And one last question, just with respect the talent, when you guys have been in the market have you found the recruiting environment tough or have you been able to pretty much source what you need in terms of people?

It depends by Region, Mike. For example, Germany is tough. I think it is like 3% unemployment. Where as US is easier. Certain areas, like Brazil, where it is just we need more talent. No matter how many we recruit, we could with more.

We have no further questions at this time. Please continue.

Thank you, everyone, for helping us on this call. Again in summary, we think we've had a very good quarter. Pleased with both the top- and bottom-line performance. And we look forward to speaking with many of you at the analyst day Nov. 16. Thank you.

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